Estimating the Cost of Software Development: Price Factors and Real-world Estimates From the ITRex Portfolio Share: ITRex Date Published 22 November 2022 Categories Blog Reading Time 28-Minute Read The cost of software development is determined by the size of the project, the development team, and the number of integrations used in the solution. Today, software is the backbone of all internal and customer-facing operations. But many business owners are hesitant to benefit from enterprise software development services as they don’t understand what determines the costs of software development. Also, some vendors are not transparent with their pricing system, making the entire process even more stressful. In this article, we explain which factors influence the costs of your software solution and how you can reduce the total price or add functionality gradually in a manageable way. We also detail our approach to software development cost estimation. You will see that our strategy is rather transparent, and maybe this will encourage you to pursue that software solution idea that you’ve been nurturing for a while. What you need to know about software development In order to understand where the total cost of software development comes from and how they accumulate, let’s look at how software solutions work under the hood, what your hosting options are, and whether you can reduce the price by reusing third-party components. Software solutions are multi-component by nature A software solution typically consists of several parts: Front end Front-end development focuses on the user-facing side of a software solution and aims to maximize usability and user experience. It revolves around the design users see on the browser screen, such as colors, buttons, text style, and navigation. A front-end developer, in tandem with a UI/UX specialist, validate that users can have a pleasant experience navigating through the application and can easily find what they are looking for. Typical front-end programming languages include JavaScript, CSS, and HTML wrapped in libraries, such as React, Angular, etc. Back end Back-end development deals with the server side of a software solution, builds its functionality and logic, and takes care of data aggregation, processing, and storage. Back-end developers are responsible for implementing operations, application programming interfaces (APIs), and databases. The back-end part remains behind the scenes, and it’s invisible to the users. Some typical back-end programming languages include, but not limited to, Java, PHP, and Python. Hardware You always need hardware, as applications run on it, and it heavily influences software development pricing. Your software solution will use processing hardware, storage, input/output devices, etc. If you are building a solution for a cyber-physical system that uses connected devices to accomplish its task, you will have to buy or build its hardware components. For example, an application that monitors food wastage in restaurants consists of a software solution, as well as an electronic weighing scale and a camera. Keep in mind that some devices are rather hard to connect, and it can take several months to write driver software that can link the devices. In one of our projects, we needed a custom USB camera to operate on the Android operating system. This manufacturer didn’t supply the associated driver software, and we dedicated a programmer to write it from scratch for this purpose. It took him five months to accomplish the task, and the total costs amounted to approximately $40,000. Software can be hosted in the cloud or on-premises You can host your software solution in the cloud or on-premises. The on-premises option introduces significant initial software development costs, while with the cloud you only pay for the computing resources you consume. Cloud hosting All the infrastructure is hosted in the cloud and off the premises of your organization. There is no need to make large upfront investments in infrastructure and maintain it on-site. You just find a cloud provider and “rent” resources, such as storage and computing power. You pay as you go, based on your actual consumption. If you want to scale, you request more resources, which will increase the payment, but it still gives you the possibility to expand relatively fast. Cloud vendors are also responsible for their product’s security and reliability. They hire highly qualified security experts and take care of backups and disaster recovery. If you’re looking to adopt cloud computing in healthcare or another highly regulated sector, you can search for a compliant cloud provider who is familiar with the specifics of your industry and will ensure compliance. On-premise hosting With this hosting option, your organization will acquire, install, and maintain the infrastructure needed to run the software product, including storage systems. This approach results in a higher total cost of ownership, as you will need to set up and manage the infrastructure. You will also need physical space to install the components. Hosting on-premises will also make it harder for you to scale in the future. But you will not be reliant on internet connectivity, as you can access all the resources locally, which also improves performance and allows for customization. This is a great option for companies that handle sensitive data and prefer to secure it locally. You have different software development options If you’re looking to streamline business processes with a software solution, you don’t always need to build an app from the ground up and pay the hefty price of custom software development efforts. Actually, you’ve got four software development options to choose from: Procure and customize a software-as-a-service (SaaS) solution Create an app using no-code or low-code development platforms Build an app based on pre-packaged software development libraries and SDKs And, finally, develop a bespoke software solution from scratch Let’s see how these options stack up against each other and when you should pursue them. Software as a service (SaaS) The SaaS development model stands for creating cloud-based applications that run on the cloud infrastructure. You only pay for the resources you consume without making large upfront investments. There is no need to install, configure, and maintain software locally, and everyone can access the application through the Internet. SaaS tools allow you to build software fast, but they might not be able to cover all your needs or give your website a unique appearance. For example, you can set up a patient engagement portal using Wix or Hubspot in a matter of days. But the licensing fees can be high, customization options rather limited, and the selected SaaS tool might lack some modules, such as supply chain management, that you will still have to build from scratch. No-code/low-code development The no-code approach differs from high-code (or traditional) development, as it doesn’t require any coding experience. No-code platforms offer a visual development environment where users without a technical background can build basic apps by dragging and dropping UI elements into the development canvas. However, this development method is only suitable for applications with limited scope. Customization options are rather limited, and legacy systems can’t be involved. This approach helps non-technical users create prototypes to convey their product vision to the technical personnel. It’s also possible to build full-blown applications for a relatively small audience. Low-code development is the middle ground between no-code and traditional development. You can create a basic application using visual elements, but you can also customize and add complex functionality by accessing the source code. As a rule, low-code platform vendors provide extensive documentation and tutorials. Pre-packaged libraries A library is a pre-written code that aims to solve a specific problem or provide functionality, such as user authentication or establishing a connection with a server. Developers use libraries to add more functionality without actually writing the entire code for it, reducing software development costs. Incorporating existing libraries will decrease time and effort needed to build software applications. But libraries are third-party components written by someone else, and they might open security vulnerabilities in your solution if not tested properly. Custom development from scratch In this software development approach, an application is built from zero, and it is fully customized to the business needs at hand. This is an effort-intensive method, but the resulting solution is likely to be reliable and lead to customer satisfaction as the solution would be designed to address their specific needs. The software development process spans several stages — from mockups to a full-blown solution Creating an application — either using pre-configured components or from the ground up — is a process that spans several stages. The cost of software development will depend on the stage you’re currently at — and the version of an application you’re aiming to build. Let’s explore. Mockups A mockup is a static design of an application. It contains the solution’s features and design elements, but it’s not functional. For instance, it includes a call-to-action (CTA) button in the correct shape and color, but nothing will happen if it’s clicked. You can view mockups as visual drafts of a software solution where designers experiment with how different colors and shapes work together. The team can design several mockups to test different styles. Proof of Concept (PoC) Proof of Concept is a small activity performed internally to validate the project’s idea, prove its potential, and demonstrate its viability. The goal of PoC is to show whether it’s possible to develop the required functionality in the real world and reveal possible obstacles in the way. It also shows which technologies and budget you will need to build a full-fledged product. This phase is more about the idea rather than the actual product. Minimum viable product (MVP) An MVP is an early product version that implements all its core features. It’s good enough to be released to the market and to elicit feedback from early adopters. The development team can use this feedback to further improve the solution. Full-blown solution This is the final software product with all its features and functionality. However, the process doesn’t end with the solution rollout. You will still need to maintain the software, gradually add new features, and issue updates. Factors affecting software development costs Now you know what it takes to create a software solution. The question is, how much does software development cost? The answer is largely determined by these eight factors. B2C vs. B2B software products Internal vs. external applications Target platforms for your software solution Technologies involved Industry Project size and type Team composition and engagement Number of integrations 1. B2C vs. B2B software products Businesses use B2B solutions either as internal applications or as a way to communicate with partner organizations. This software can serve a variety of purposes. For example, it can help with inventory management or automate some tasks and processes to increase, aggregate, and visualize data in real time. Salesforce and other data platforms are well-known examples of B2B applications. B2B solutions focus on the core functionality, rather than on the app’s visual component. These applications can be packed with features, increasing its average software development costs. B2C apps enable companies to interact with their customers, and advertise and sell their products and services. B2C software’s key features include presenting companies’ offerings, providing customer support, publishing client reviews, etc. Netflix and Amazon are two famous examples of B2C solutions. When building B2C products, the design and user experience matter as much as the functionality, because usability is key to success in this type of application. The user interface must be appealing, yet simple for everyone to use. This software type has a larger user base and faces more competition. You also will have to update it more frequently to keep up with trends and incorporate customer feedback. 2. Internal vs. external applications Internal applications are used within one organization and address its internal issues. External solutions, on the other hand, are intended to serve the outside world. To build an internal application, you need to conduct a rigorous analysis of your own business, which makes your research scope limited to your own company. With external products, the team performs market research, which widens the investigation scope. This market study covers more use cases. Based on the sheer analysis scope and possibly outsider expertise, external solutions tend to have higher costs of software development. 3. Target platforms for your software solution When comparing mobile and web applications, mobile apps have higher average software development costs as they are more complicated to build. It’s possible to develop a web application using a content management system (CMS), such as WordPress, even without much technical knowledge. Furthermore, you can reuse website plugins that are rather reliable and have many reviews on which you can base your choice on, while mobile plugins are relatively new and unstable. Both mobile and web apps need back-end and front-end development. For web applications, both layers require similar technologies, while in mobile solutions both aspects use a distinct set of technologies. When building mobile apps that include maps, GPS, and other detectors, mobile developers have to deal with more difficulties as they are writing code for RAM-constrained devices, limited processor power, battery, and often limited connectivity. Typically, mobile developers are more expensive than their web counterparts. Here is an average hourly rate comparison from Upwork, which is a platform for freelancers and their fees are typically lower than full-time company employees. Embedded solutions are more complex on average than mobile and web apps. But they also vary in complexity from bare-metal firmware to proper operating systems capable of performing heavy computations. Embedded solutions introduce the following expenses: Hardware costs Costs associated with customizing embedded systems on the lower level, which are usually higher than those in traditional programming Device integration costs. Especially, if you are aiming to integrate devices that have not been integrated before. In this case, the development team will research the topic and come up with their own novel integration approach. 4. Technologies involved Your software solution can also involve innovative technologies, such as AI, IoT, and RPA. These technologies enhance your app’s potential but simultaneously increase the cost of software development. Each one of these technologies requires people with a specialized skill set, and niche professionals always cost more. If you are interested in RPA, you will need to recruit domain experts who will help the development team understand the processes to be automated. If you are looking to incorporate AI, you will hire someone who knows mathematics and understands how different machine learning models work. Let’s take a closer look at the additional costs each of these technologies can introduce. Artificial intelligence (AI) When we want to incorporate AI into a software solution, there are four possibilities, arranged from the cheapest to the most expensive. There is a ready-made AI model that can serve the purpose at hand. There is no need for additional training and customization. Developers only have to integrate the model and possibly pay a fee if this model is not open-source or you’re required to purchase a license. There is an AI model that fits our purpose, but we need to re-train it on relevant datasets. Meaning that, in addition to the integration costs, we need to acquire and possibly label a dataset, which is time-consuming. Note that training datasets may not be free to use for commercial purposes, which brings about extra costs. We don’t know which AI model will be the best fit for the problem at hand. We need to conduct extensive research to identify several models that can produce desirable results and train and test each one of them. We don’t even know if AI is the best solution to our problem. We need to research the potential of AI and some other candidate technologies to identify the best option. And then, we repeat the research from the previous step. For more information, check out our recent article on AI costs. The Internet of Things (IoT) IoT will introduce extra software development costs related to hardware and infrastructure. In the case of IoT development, a company will need to acquire devices — either consumer electronics devices or non-electronic objects enhanced with sensors. The non-electronic “things” may include legacy equipment upgraded using IoT retrofit kits or just consumer goods packaging enhanced with printed tags. It’s relatively inexpensive to create this type of equipment. But if we think of developing hardware from the ground up, it’s a different story with design and extensive testing. Regarding infrastructure, you will need to find a hosting platform that is best suited to your needs and pay hosting fees. Popular hosting platforms include AWS IoT Platform, Microsoft Azure IoT Suite, Google Cloud IoT Platform. They have different pricing options and offer some free perks. For example, Google grants $300 free credit to its new customers. For more information, you can read our blog post on how much IoT costs. Robotic process automation (RPA) RPA system implementation creates the following additional costs of software development: RPA vendor research to understand which provider is a better fit for the scope of your project. You can refer to our recent article that highlights the differences between four reliable RPA vendors — UiPath, Automation Anywhere, Blue Prism, and Workfusion. RPA licensing fees Integration of the selected RPA platform into your system RPA customization, if needed 5. Industry The type of industry that your solution will serve also affects software development prices. Products designed for heavily regulated industries, such as healthcare and the military, must be compliant with the sector’s regulations. Here is how this works. Compliance implies the presence of standards that every software needs to abide by. There is an extensive list of rules an expert will read and make sure that your software development team honors them at every stage — requirements specification, design, and coding. These subject matter experts are rather expensive to hire, and you might need to retain several professionals. Based on their expertise, these people know where compliance holes might occur and can fix the issue before it escalates. Also, the engineers and developers working on such projects need to understand how to design and implement the solution in a compliant way. And with all these precautions, you will still need to conduct regular internal product audits to verify compliance at every development stage, which will also increase costs. Finally, to build a product for regulated industries, you might have to obtain governmental approval, which means hiring even more niche experts who can take over the paperwork and communicate with governmental officers. These experts will also interact with your development team and interrupt their working routine. Sometimes the development team might even need to adapt and reiterate on some deliverables if it does not satisfy the compliance rules. 6. Project size and type Project type There are three main project types, each one requires a different amount of effort, and hence, has its own software development costs range. Software modification is about enhancing and upgrading an existing software application or adding new features. Software integration implies incorporating custom code or ready-made components, such as plugins and packages, into existing business processes. A simple integration can be completed in one day. Slightly more complex integrations can consume a few weeks. Integrating software that contains bugs and lacks proper documentation can extend to several months. New software development is about implementing custom software from scratch. This typically takes longer than the previous two project types, unless the application under development is rather basic. Project size Another factor that influences software development pricing is the size of the project. It can be classified as follows: Small-scale projects. This project type typically involves minor software changes, such as fixing bugs. The interaction with the client here is rather limited. Medium-scale projects. This is more than just a small tweak to the program at hand. It typically has a set of well-defined deliverables and includes building a stand-alone solution or tackling a complex integration. A web interface for an existing inventory system or a mobile app with a limited scope are examples of this category. Large-scale projects. These solutions require integration with several systems and will have security and database components. This category includes multi-party software that works on several platforms — mobile and web. Enterprise-grade projects. This type of projects normally has more rigorous security, error handling, and logging features, and it is typically built on an underlying framework. Support systems designed for these solutions can handle up to three concurrent infrastructure faults before the users feel any impact. The Uber mobile app is an example of an enterprise-grade project. 7. Team composition and engagement model The composition, seniority, and location of software development team members will also impact the total costs of software development. Team composition In every software development project, there are at least three roles — project manager, developer, and QA engineer. Other roles include business analysts, designers, architects, etc. For small projects, the same person can act as a developer and QA, or as a manager and business analyst. For larger projects, one role might require several people. Team members’ experience and seniority level is another factor affecting the costs of software development. Developers are typically divided into three seniority levels: Junior specialists have less than two years of experience. They perform simple tasks and require constant support and supervision. Middle-level specialists have up to five years of experience. They are more confident and independent in their work. Senior specialists spent five or more years working in the field. They operate independently, participate in the decision-making process, and mentor junior employees. Team location The hourly rate of different professionals depends on their location, as the costs of living and salary expectations in some countries are considerably higher than in others. For comparison, you can see the table below compiled from Accelerance’s 2023 Global Software Outsourcing Trends and Rates Guide. It showcases the average hourly rate of software developers in different geographical locations. It seems tempting to opt for the cheapest workforce, but be mindful of time zone and cultural differences. It’s also a safer option to choose team members who can understand and speak your language, even if it increases software development costs. Engagement model The hiring model will also impact the costs of software development. There are three main engagement options: Fixed price. You pay a predetermined price for documented requirements and functionality. If you want to implement additional features, there will be additional charges. Time and materials (T&M). With this engagement model, you pay for human effort and materials as the development progresses. This model can accommodate adjustments over the course of the project. The downside is that you don’t know the total costs in advance. You can find more information on fixed price vs. time and materials in our recent blog post. Dedicated teams. This is a collaborative model where a software vendor allocates a dedicated development team exclusively for your project. You pay their salaries, and they dedicate all their time and energy to your application. 8. Number of integrations It’s likely that our software solution will not operate in isolation. Engineers will integrate it with external services, such as payment gateways, and with other applications used in your organization. When speaking of integrating with external services, some of them provide a convenient API that is easy to use, such as the PayPal payment portal. While other older systems make it challenging to connect with them, requiring more development time and effort. When you build an application for internal use, you want it to work with the other systems in your organization. For instance, your company might use human resources software to identify best-performing employees and a financial compensation program to reimburse employees for work-related traveling. Any new internal application will need to seamlessly share data with those. Simply put, the more integration you have, the more costly the implementation process will become. But sometimes even one integration can have a noticeable impact on software development costs, such as legacy systems and portals that lack technical documentation. Software development costs estimates from our portfolio Now that you know which factors affect the cost of custom software development, it’s time we gave you some numbers so that you can understand how much your application might cost. How ITRex estimates software development costs When a potential client gets in touch with us, we go through a standard set of procedures to help them estimate how much their solution will cost. Here is what we do: Ask if the client aims to develop a custom solution from scratch or build a product by integrating existing components. The first option requires a large upfront financial investment and is suitable for companies with a well-established strategy and a clear exit plan. The second option is a cheaper alternative when it comes to upfront payment, but it involves long-term licensing costs. This approach is suitable for startups with limited funding and in situations where time-to-market is critical. It’s possible to mix both options for more versatility. Clients can build most of their solution from scratch while still maintaining one integration-based component. Take as an example a telehealth portal with WebRTC (an open web framework that enables real-time communication) based on Amazon Chime. Amazon Chime provides front-end components and requires minimal customization efforts. However, as the number of users grows, Amazon Chime will become less cost efficient, and the client will need to replace it with a more appropriate WebRTC service, such as open source Jitsi Meet, which consumes extensive development efforts. Changing core components will result in additional development costs in the future. Understand the client’s business needs. We converse with the client to understand which kind of business they are in. We ask a set of questions, such as: Which services do you want to deliver to meet customers’ needs? How will you deliver these services and who will be involved in the process? Who is your audience? Who will receive these services? Answering these questions and considering the client’s budget and the desired time to market will help us find an appropriate solution that can actually generate revenue. Build a solution architecture and estimate the relevant costs, including monthly licensing fees, server fees, even marketing expenses can be counted. The discovery phase If the client comes with just a mere idea of what they want and without a detailed understanding of the software they need to build, we strongly recommend going through a discovery phase to identify the requirements and conceptualize the solution. The discovery phase will help you form a better understanding of what you need and communicate it clearly to the implementation team. We approach the discovery phase in two different ways, depending on the project at hand. Fixed-price projects. In this case, we conduct a very detailed analysis and aim to provide a rather accurate estimate. This is suitable for projects with a defined, limited scope that is unlikely to change during implementation. Fixed-price projects typically follow Waterfall methodology, which is rigid and makes it hard to incorporate any adjustments as the project progresses. The client will need to file a change of request if they want to expand the initial scope. Time-and-materials projects. This is a more common and cheaper approach. It delivers a rough estimate, which is not as precise as the previous one, but it offers more flexibility for clients to make adjustments during development. Here, we use Agile methodology, which is flexible and open to scope modification. Changes can happen for a variety of reasons. For example, the client might want to try something else after reviewing the initial version. Investors may want to integrate some other solutions that they are financing, or the entire market can shift. During the discovery phase, we provide a set of deliverables, according to the industry’s standards. Our team will rely on this material during the implementation phase. The client can benefit from this documentation internally, and show it to external platform providers, such as Google and Microsoft. Our step-by-step software development cost estimation strategy To produce a software development cost estimate, we follow the expert judgment method and give a range of worst-case and best-case scenario estimates. Here are the steps we take to come up with a price tag. Break down the scope. One or several business analysts break the project into manageable functionality pieces. Calculate the preliminary development efforts. Relevant technical experts add functional and non-functional requirements and evaluate the work breakdown structure from the previous step to determine how many work hours they need to put into this project. Incorporate additional expenses. This will cover aspects, such as testing, documentation, and management initiatives. Identify the team structure and build a timeline. If the project follows Agile methodology, we build a resource plan based on the number of sprints and the team members participating in each sprint. One sprint typically lasts two weeks. In the case of the Waterfall methodology, we establish a critical path showing the order of the critical tasks and specify which ones the team can execute in parallel. This is more effort-intensive, but the resulting estimation is more precise, assuming the scope doesn’t change. Account for additional costs, such as equipment purchase and licensing fees. We already have some development kits, equipment, and licenses acquired for common project needs, such as iOS and Android development. But for less popular platforms, the client needs to provide us with the proprietary equipment, which will result in additional expenses. Moreover, infrastructure, such as hosting, brings about additional costs that we transparently show. We supply an invoice to back up every expense claim. Add support and maintenance fees. We can offer our clients a post-implementation support plan for one or two years. This covers adding new functionality, making changes based on customer feedback, updating some components, etc. We charge a monthly fee for a predetermined number of hours. After these hours are exhausted, we apply the T&M approach to extra hours. If there are any critical blocker bugs, we fix this at our own expense during the warranty period, which is typically three months after the release. Estimate training costs. If the solution is complex or the client explicitly asks for training, we allocate time and resources to compile a training program and help users get accustomed to the application remotely or on-site.We would like to point out that we transfer all the product-related IP rights to the client, including the source code. How do we determine team members’ hourly rates? When determining the hourly rate for every professional, we take the following factors into consideration: The role within the project. Niche professionals, such as machine learning specialists, cost more. Seniority. We would like to highlight here that we avoid staffing the entire project with junior talent. Our typical staffing includes senior and middle-level professionals, but we carefully consider the client’s budget and demands, and compose a well-balanced team. We never allocate an entire team of junior specialists. We include juniors only if the scope of the project allows it and if there are enough seniors to supervise and guide their junior colleagues. Project duration. Multi-year deals result in more favorable rates. Tips from ITRex to help you reduce your custom software development price When turning to a software development vendor, give as many details about your project and business as possible. The more precisely you specify what you are trying to achieve, the less costly the implementation will be. Explain how you want the solution to look, its features, the target audience, etc. You can still make changes in the future, if you want. Pay attention to documentation and specifications as this will reduce development costs further down the road. Also, having a well-documented solution will make it easier to implement changes, if needed. When building an MVP, use as many pre-made components and services as possible. This will reduce development costs and speed your time to market, but increase the total cost of ownership. Yes, you will have to pay licensing fees later on, but at that point, you might already start receiving revenues. And you can make changes to the code later. Use Lean methodology when building an MVP as it focuses on core features and eliminates distractions, which will speed up the development process. Turn to a trusted software development vendor with established expertise in your sector. A vendor who has similar projects in their portfolio, so that they already have relevant knowledge and don’t need to learn everything on the fly. A trusted vendor will also give you tips on how to cut on software development costs. Originally published at https://itrexgroup.com on November 11, 2022.