Few business endeavors succeed without clear budget parameters. With financial constraints established, stakeholders can assess their priorities and make essential decisions about a project’s intended trajectory.
A budget can also inform choices that arise as the project progresses, focusing efforts on available resources. So, why do so many software development teams struggle to create and adhere to accurate budgets?
According to expert estimates, just a quarter of enterprise IT initiatives reaches release within their planned budgets. As many as two-thirds exceed their initial budgets by 100% or more. For development teams, these cost overruns can call into question their efficiency, skill, and value.
In all fairness, many aspects of the software development process are difficult to anticipate fully. But many software development budgets fail to incorporate known cost factors or build in leeway for possible obstacles. Whether your software project is modest or ambitious, an irrationally optimistic budget can set up your team for failure.
In this guide, we’ll cover the various costs any software development budget should include to fully assess future expenses. Next, we’ll provide a step-by-step guide to budgeting for your next software development effort. These tips can help prepare you to forecast costs more accurately and plan accordingly.
Software development costs to consider
To budget effectively, you’ll first need to assess the various expenses your project will entail. While costs are based on the project scope, the following areas prove relevant in most software development efforts.
Labor costs
Your most essential resource is your development team, especially against a backdrop of scarce tech talent. Their compensation is an obvious element of the budgeting process.
However, a full accounting of labor costs must include all the professionals involved in the development effort. These professionals might include (but are certainly not limited to) the following categories:
- Managers
- Graphic designers
- UX designers
- Content writers and editors
- QA testers
- Subject matter experts
- Developers with specific technical expertise
One way to prepare for these expenses is to seek qualified independent talent with clear hourly or fixed project rates.
At Upwork, our platform allows companies to evaluate and engage independent talent for engagements of any length. Because you negotiate their rates upfront, budgeting for their efforts is relatively straightforward.
Software costs
Teams developing new software depend on a ton of existing programs to perform, review, and track their work. Some of these applications can be quite expensive, while others cost nothing.
In constructing a budget, you’ll need to assess the costs of software tools your team employs, either at a per-user level or for the entire team. Don’t forget to include ancillary tools, such as project management software and QA applications.
Equipment and infrastructure costs
Often, your software development effort will need the purchase of new devices for your team. This is especially true if the project ventures into technical territory your team hasn’t explored before.
Additionally, your project may necessitate infrastructure changes, such as an upgraded server setup or expanded cloud storage capacity. These investments are often considerable and may extend beyond the initial launch of your software application.
Overhead costs
Software development teams generate typical overhead expenses, ranging from office rent and administrative costs to employee perks like snacks and coffee. Although often easy to overlook, these factors should be included in your development budget.
Of course, as many organizations adopt remote team structures, they can eliminate overhead costs associated with physical offices. Similarly, engaging independent talent can drive down overhead, as these work arrangements don’t entail many of the expenses involved in hiring full-time employees.
How to budget software development costs in 6 steps
Once you assess your costs, you’ll need to translate your figures into a working budget for your software development project.
Below, we’ll provide a step-by-step guide to doing that. We encourage you to adapt our general suggestions to your development team’s needs and the needs of other key stakeholders.
1. Thoroughly define project requirements
To budget effectively, you’ll need to understand the precise requirements for the project in question. Often, teams embark on the software development process with just a few broad requirements, rather than a clear expectation of what they should produce.
Spend time learning about all stakeholders’ priorities. Speak directly to each team with a vested interest in the development project. Once you have a full sense of everyone’s ideal outcomes, hone in on requirements for a “minimum viable product” that everyone can accept.
Share these minimal viable product requirements with your stakeholders, explaining the necessity of limiting the scope and the possibility of adding elements subsequently.
To keep costs and timelines in check, you’ll need to budget around the must-haves to get you to launch. In the future, you can address nonessential features.
2. Convert requirements to specific stages and increments
Once you firmly establish what your software should include, you’ll need to plan how your team will approach it. This stage involves identifying the distinct phases of the project (e.g., “wireframe design” or “bug testing”) and structuring them from start to finish.
The workflow you plan for your team will depend on the particular software development methodology you choose. Whichever approach you choose, the most important thing is breaking down the project into clearly defined steps. For example, if you’re using the Agile methodology, you might structure your planning around specific sprints.
For each stage, note which professionals on your team will be involved, including independent talent who will be engaged for specific purposes.
3. Review historical data for comparable benchmarks
Break down your software development project into specific stages and then estimate how much work each segment will need. But before you start estimating, it’s wise to consider data from past projects to root your projections in reality.
In your previous software development project, how many total hours did it take your team members to develop a functional prototype? How many hours were devoted to code review or bug testing efforts? To find specific answers, review records from past projects, and consult team members who were involved.
No two projects are identical: You must account for case-specific details in applying precedent from past efforts. But historical data will at least provide a realistic point of departure in planning forthcoming projects.
4. Translate requirements to specific durations and costs
With your project divided into constituent stages and historical context for what each stage will require, you’re ready to begin budgeting costs in earnest. For simplicity, start by estimating upfront costs, such as new equipment, software costs, and necessary infrastructure upgrades. These can be quantified relatively easily and typically represent one-time investments.
Projecting labor costs are far trickier to budget for since they are more variable and difficult to anticipate. First, calculate the labor costs associated with a set duration of work by a specific team or team member.
For example, a week-long dedicated sprint by your four-person development team might equate to $9,000 in labor costs. On the other hand, 10 hours of work from an independent graphic designer might cost $400.
Next, use historical data to judge how many of these increments each stage will require. For example, creating an initial prototype might require three weeks of your development team’s time and 20 hours from that independent designer.
Once you calculate labor costs for each stage, you can add them to total labor estimates across the full project.
5. Assess and incorporate known risks
Some challenges in the software development process are difficult to anticipate, especially when they concern nuanced technical issues. However, possible obstacles can be predicted at the beginning of a project and transparently acknowledged in your budgeting approach.
For example, your development team may be able to identify junctures where their work may go smoothly or poorly, depending on the degree of difficulty they encounter. Similarly, they may envision an approach they hope will work while acknowledging it may not.
Just as you projected the labor costs for your project’s timely completion, estimate the additional costs you’ll incur if these possible challenges come to pass. While the results may seem discouraging, performing these calculations is better than blindly hoping for the best.
6. Produce optimistic, realistic, and worst-case budget estimates
After doing the math on how much various problems might cost you, sketch out ideal, realistic, and pessimistic budget estimates. Your ideal estimate should reflect the costs of your project if all goes more or less according to plan, although you should pad this estimate slightly to account for minor obstacles.
Your realistic estimate should include the costs of at least one of the possible risks you might encounter. If you’re required to produce just one final budget estimate, this one will likely serve you best as an initial estimate.
Finally, adjust your worst-case budget to include the costs of all known risks you’ve identified. Include the risks as if every possible challenge is destined to occur. While this approach may seem, alarmist, it should help prevent a scenario in which your team commits to a project that it cannot afford to complete.
Decrease costs and upgrade talent with Upwork
We hope the suggestions we’ve outlined here will bring clarity and structure to your software development budgeting process. By taking the time to understand requirements and risks in additional detail at the outset, you can plan and execute your process with greater confidence. You can also use Upwork’s Free Website Cost Calculator tool to estimate costs associated with setting up a website.
As you do form a budget, you’ll likely be eager to reduce costs, however possible, especially if you need to hedge for possible risks. To access the skills that you need efficiently and cost-effectively, you may need to augment your core team with independent professionals.
If you need talent for an upcoming software development endeavor, Upwork is in your corner. Our platform streamlines the process of identifying top professionals with the specific skills you need.
