Software Development Cost Estimation Guide [Best Practice from experts]

How much does it cost to develop a software solution? Have you ever delayed the start of digitalization or implementation of new features because you don’t have information on how software projects are priced or how much you will spend to build a software product? Well, now you can find out the industry standards and best practices for software development cost estimation!

Software project cost estimation is an important way to communicate accurate, clear, and timely information that decision-makers can use to make cost-effective business decisions. However, why do so many cost estimates get it wrong?

Several factors are involved in producing precise cost estimates rather than just estimating some numbers on a page, but you don’t have to worry! We’ve created a complete guide to demonstrate how to estimate software development projects and succeed in keeping deadlines and budgets.

How to Estimate Software Development Cost?

The cost of developing software differs from project to project. Based on the complexity of your project, features you need, types of technologies, and type of programming languages to be used, software development costs can range from a few thousand dollars to multiple millions. Use the following steps to help estimate or price your startup’s project and hopefully avoid loss of money on software developer costs and save time.

The Discovery Phase

The Discovery Phase informs the roadmap, and it’s the point at which the business determines a specific problem that requires a solution. Start with the product description and its description in the marketplace. From there, you can begin to understand the feature set, technology stack for the product, outsourcing software development costs.

Evaluate the scope of work

To estimate software development costs, you first have to understand the work’s scope. Ask yourself: What is the minimum number of features to launch my product and get customers’ feedback? The scope describes the functionalities that your product is expected to have.

You can divide the development process into stages. For startups, it’s typical to start with a prototype, and then create a minimum viable product (MVP). After the release of the MVP, you will gather customer feedback, and the business model will be determined. Then, the product owner proceeds to deliver new features.

You can also estimate software costs through the scope of work by looking at similar projects that have been done previously. In this case, you need to check numbers to avoid bootstrapping in the future. Note that the benchmarking of a similar project may have some limits, as the tech stack and standards may have changed. Rates are changing from year to year, and they depend on team composition and developers’ location.

Determine tech stack and complexity

A software development cost estimation for complex projects is more likely to involve different kinds of programmers with variable skills sets — UI/UX professionals, designers, front-end developers, back-end developers, administrators, QA, product manager versus product owner, etc. Try to estimate the tech stack, level required, roles you need to boost your software product keeping deadlines and the budget.

Divide it into sprints and small tasks

You can get a general idea about the cost by dividing it into sprints and small tasks. For example, if you need to develop a new feature for an application, divide the cost of developing this feature into sprints, each sprint being one month. Then estimate these sprints. If you divide the total estimated system development cost into small tasks, you will have a rough idea of how long each task will take.

Estimate each project component independently

Software development is a complicated process that involves a variety of different skills. It’s easy to get overwhelmed by the number of steps involved, especially when you’re just starting out. It’s therefore, important to break down the work into smaller, more manageable pieces. The key is to estimate each task independently, so you can determine the software development cost breakdown per task and come up with a realistic budget for your project.

Make a cost breakdown

A breakdown of the software development cost can help you to estimate the exact cost of a project. If you take the main stages of your product development process, you can get costs to compare with an all-in-one developing company software costing estimation. You can estimate various aspects separately, including prototyping, UI/UX design, business analytical services and market testing, and frontend and backend development.

Calculate potential budget deviation

Usually, people think that the cost of software development will be fixed. However, some unexpected costs might appear after the project is budgeted and started. The best way to avoid budgeting issues and get your software product in time is to clear costs with some possible deviations and ways to smooth it out.

Factors Affecting Software Development Cost Estimation

Projects can be complex, and many things go into the process. Understanding all the factors that can affect your software development cost will help you plan your project accordingly.

Software development project cost estimation includes planning, which is analyzing the features, requirements, and budget for the development. Although this might sound very easy, it is highly critical because every small detail of a project has to be reviewed. Let’s take a look at the key components of software development cost factors and how they influence the price.

Type of Software Project

The type of software project you’re working on can have an impact on development costs. A web-based software application, for example, may require more labor hours to develop than a mobile application that runs on a smartphone. Likewise, a data warehouse application that processes large amounts of data will take longer than one that just displays data on a screen.

Scope of Software Project

MVP for a payment application startup or a bank application with a number of geographical branches. Simple landing page or multi-currency marketplace; simple CRM or 360 degrees marketing automation with AI and ML functions. A simple landing page price and AI chatbot development cost will vary greatly as the project scope will greatly influence software development cost analysis and the budget deviation.

Development Team Size and Hiring Model

If you’re working with an agency or a freelancer, you may have little control over those factors. But if your project is going to be outsourced (you can read how to choose an application development outsourcing model in our article), your cost saving and estimate accuracy depend on the reliability of your IT partner.

Hiring models can be in-house, remote local devs, or remote offshoring (outstaff). When you use offshoring, you can also use different types of payment models, such as time and material vs fixed price. Often, when startups see that they’re close to bootstrapping, they urgently seek an outstaff development team. Our practice shows that starting with outstaffing from the very beginning can save up to 50% of the development budget and help to keep deadlines. Most of our clients told us that time cost saving was the main reason why they hire developers remotely in the outstaff model.

With ProCoders, for example, depending on the complexity of your project, we can get started within a week once we have discussed requirements and expectations.

Other factors that influence the final costs

• Developers’ Location
  Location can make a big difference in software development costs, especially when you consider the cost of living, business expenses, taxes, etc. Hence, it’s cheaper to hire remote developers from offshore locations like Central Europe and India than in the United States or Germany.
• QA and developing process
  The QA and development process factor into the entire development life cycle, not just the design and coding stages. If you don’t do your due diligence in these areas, it’s likely that your project will go over budget or take too long to develop. To keep costs down, you should use a proven methodology.
• Developers Level
  This is difficult to estimate, but one thing is certain — the more skilled the developers, the higher the development cost. Usually, startups are trying to find some effective mix of developers that will guide the project, keep deadlines and budget and guarantee quality. Another tip we practice at ProCoders is some kind of level up with a rates downgrade. This means you will have a middle developer with 2 years of experience at a lower rate. As an additional value, our software development cost analysis can help you with project estimation and share some more tips on how to save development budget.
• Tech stack
  This concerns the frameworks you are working with, the programming languages you use, the development environment, and whether the app is open source or not. The tech stack determines how long it will take to develop the program and whether you might need to expand the development team later.

Software Development Hidden Costs

Setting costs is not as difficult in the software development process as correctly estimating software development costs hat are hidden and planning for any likely financial shortfall that might occur in your project.

The hidden costs of a project are those items considered as overhead or indirect costs that are necessary to complete the project but don’t appear on the project’s initial budget. They could be QA issues and additional testing, overtimes, delays and budget for additional onboarding and team augmentation. This section talks about common hidden costs and how they can apply to your business.

QA and testing

There are a lot of unexpected errors that occur during a project, but they don’t always happen at the start of a project. You can encounter problems at any stage of the workflow, with testing and verification, QA, and production. It’s important to have processes in place to prevent issues from occurring during development, especially if you’re working with multiple stakeholders across multiple teams.

Loss time

This refers to the cost of a product that doesn’t actually ship. It can be caused by a delay in delivery, which is expensive and time-consuming for you and your team to fix. It can also be caused by features that aren’t right for your customers or market. It also concerns time costs as a result of poor communication, poor expertise, or working in different time zones.

Expensive infrastructure challenges

Software developers need not only good equipment and proper connectivity but also bandwidth, storage space, and power supplies — all of which can put a big dent in your budget. However, you can mitigate these challenges by outsourcing your project to an offshore team such as ProCoders. You can benefit from a much lower software development price per hour in Central Europe. Then, you wouldn’t have to worry about equipment costs.

Budget to visit your business partners

You might need an extra budget for additional onboarding if the developers fail to deliver what is expected. In ProCoders, we smooth all these hidden costs and have already debugged our workflow for the level when the percentage of unexpected costs is very low.

Communication costs

Communication costs are a factor in all software work, particularly in this age where remote work is the norm rather than the exception. There’s a tendency for mistakes to happen, which leads to unnecessary miscommunication and lost time from employees who should have been working instead.

Maintenance

All projects have some sort of ongoing support or maintenance cost. They often show up in bug-fix patches or in enhancements added after the initial release. A better way of looking at maintenance costs is by considering them upfront — before any retrofit or upgrade is even necessary — and adjusting your project budget accordingly.

​​​​Software Development Budget Template

This software development pricing example template will help you build a basic budget for your project that includes the key aspects of a typical project. Note that these are estimates, and the actual figures may freely vary depending on the specific requirements of your project.

Process	Estimated % of Total Costs
Development (frontend and backend)	50%
Project Management	15%
Quality Assurance	15%
Legal fees	13%
Business analysis	10%
UI/UX Design	7%

Conclusion

Developing estimates for your software development projects can be challenging. However, what you need to do is to settle the basics from the outset, such as having a strong discovery phase. Then you consider various factors, such as the developers’ level, the tech stack, quality assurance requirements, etc. Likewise, remember to set an extra budget to cover hidden costs.So why not save that effort and outsource software development? That’s why ProCoders exists as a software outstaffing company, helping startups and SMBs to optimize their software development processes for greater efficiency. Let us help you build your next project. Contact us today to start.