How Much Does Software Development Cost & Why?

This article addresses the major challenges that arise when a company plans to develop a specific software solution. It will be useful for those directly involved in development, organization of development, or acquisition of software products, as well as for leaders and founders of these companies. Let’s begin.

The Allure of DIY Software Development: Does It Seem Like a Cost-Effective Solution?

Have you ever considered making your own furniture to save money? Odd as it may sound, starting your own development team from scratch is similar. In this case, the time, resources, and financial costs of software development are a hidden trap.

PwC’s analysis highlights the factors that hinder the adoption of technological solutions in companies (see chart).

What’s holding back disruptive tech?

Source: PwC

When developing new software, your focus should be on whether it meets business goals, how quickly it can be developed, who will work on it, and whether there are enough in-house people or if a new vacancy needs to be opened (essentially, all this can be highlighted, discussed, and validated during product idea evaluation sessions or product discovery workshops).

Based on this chain of thoughts, let’s uncover the next set of key questions to consider.

 

1/ Hidden Costs in Software Development: Do You Have Sufficient Resources?

The costs of custom software development include:

• Research, prototyping, and evaluating the idea.
• “Foundation” costs: such as hiring and educating the required professionals.
• Technology application costs including licences for software  “engines”, access to AI implementations and deep learning models and operational tools).
• Cybersecurity costs.
• Infrastructure and support costs.
• Legal protection, compliance with various regulatory and legal standards.
• Marketing costs for promoting the product or prototype.
• Continuous process analytics. eploy a robust analytics system is essential for understanding operations, identifying bottlenecks, and measuring effectiveness.

The expenses vary significantly among different technology sectors, influenced by whether functions are specialized or generalized, anticipated usage loads, plans for tailoring, modularity, and integrations.

Cost Estimates for Custom Software Products

Below, you’ll find simplified budget estimates that offer a clearer picture of the potential financial commitment.

• Budget estimates provided by FinModelsLab

Source: FinModelsLab 

• Uinno cites the cost of a custom software product at around $100,000.
• Azati’s Cost Projections for AI/ML Projects
  – Development of a prototype starts at $2,500.
  – MVP starts at $8,000 and typically costs up to $15,000.
  – A complete solution can range from $20,000 to $1,000,000.
• Cost Ranges by TP&P Technology:
  – A prototype: $5,000 – $20,000.
  – MVP model: $20,000 – $100,000.

 

Comparing these costs with the forecasted economic benefits of leveraging an established team’s infrastructure is straightforward.  By outsourcing development, these challenges/ costs cease to be your concern.

 

2/ Time is Money: Can You Afford Project Delays?

Custom software development involving preparation, development, testing, and launching is rarely straightforward. Here’s a simplified flowchart (and this is far from the most complex software solution):

Source: Uinno 

When discussing potential time costs and possible bottlenecks at various stages, keep in mind the following points that can severely impact  your project if not addressed early:

• Hastening the launch of new products to market can lead to errors in business analysis, requirements gathering, design, and tech stack selection, setting project on the wrong path from the start. This often results in frequent changes during software development phase, increasing costs and embedding numerous hidden problems that later manifest as bugs.
• Rewriting poor legacy code is an extremely costly and resource-intensive task that significantly drains resources and deters new developers (actually, legacy and outdated tech stacks is one of the key reasons why talented developers often refuse to join certain companies).
• Such haste also greatly hinders your future scaling and integrations. Choosing outdated technologies, underestimating essential functionalities, and integrating  external systems and solutions can complicate planning and inclusion in the model/system/infrastructure for future expansion.

Resources Allocated to Bug Resolution

This might seem trivial, but it’s crucial to examine these figures and calculations. In this context, time literally translates to money.

The cost of addressing bugs detected at different stages varies significantly. According to IBM’s SSI:

• Bugs found during implementation are six times costlier to fix than those detected during design.
• The cost of resolving issues identified during the QA/testing stage can be up to 15 times higher than those found in the design phase.

Source: IBM, ResearchGate

A worldwide developer survey revealed:

• 38% of developers dedicate up to a ¼ of their time to bug fixes, and 26% of developers spend up to ½.
• 26% observed substantial user attrition due to software bugs, negatively affecting their companies’ reputations and investment appeal.
• 20% noted that unresolved software issues frustrate their investors. (by Businesswire)

 

Let’s translate this in US Dollars:

• According to a StackOverflow survey, the average compensations for engineers are $140,000 per year in the US, and $70,000–77,000 per year worldwide.
• Given the time spent on bug fixing (25% to 50% of an engineer’s time), the annual losses per developer are:
  • USA – $35,000–70,000
  • Global average: $17,500–$38,500

 

And this is just the cost of mistakes. In the next section, we will calculate the total approximate expenses for establishing the team.

Google’s approach to early and continuous software testing is outlined in this book, which helps reduce costs and prioritize innovation. Below is a sample cost calculation for a medium-sized project based on Google’s data.

Source: How Google Tests Software

 

We often underestimate the detrimental effects until they are directly quantified. If you input your data into the table above, you might be surprised by the costs awaiting you.

Real-world Instances of the Costliest Software Development Mistakes

• Substandard software quality incurs over $2 trillion in annual expenses for American businesses, with operational failures accounting for $1.5+ trillion (CISQ). 
• Over the 25-year life expectancy of a software system, nearly 50 cents of every dollar are allocated to identifying and correcting software errors.
• A notable example is the battery management system bug of Samsung Note 7 smartphones, which cost the company nearly $17 billion.

3/ Talent Trap: Are You Sure You’ve Gathered the Right Team with the Right Expertise?

Let’s calculate the costs of assembling a team. Suppose you decide to operate with a minimal setup, thus saving on front-end/back-end developers and QA—which, as you’ve seen earlier, skipping testing is already shooting yourself in the foot—and instead, use just one Full-stack engineer.

Developers Salary in he USA. Source: StackOverflow

Developers Salary, worldwide. Source: StackOverflow

 

As previously mentioned in the bug fix cost section, you should budget $140,000 /year in the US and $70,000 -77,000 /year globally for each engineer you plan to hire. Currently, we are not considering distinctions such as Middle/Senior/Lead/Architect, although it’s hard to imagine, as the company grows, how the team would function without a department leader.

Suppose, at the startup stage, you also decide to forego DevOps (for the USA – $160,000, global average – $80,158.5), and the same Full-stack Engineer will deploy all the infrastructure and will perform cloud migration (or you may use DevOps as a service).

You might also skip hiring a Security professional (for the USA – $173,000, global average – $99,311). But it’s highly inadvisable to skimp on cybersecurity these days.

If you plan to leverage AI implementation (and who isn’t trying to jump on this hype train?), you will need a Data Scientist or Machine Learning Specialist (or more than one) – USA: $160,000, globally: $80,317.

AI Engineer Salary in the USA. Source: Glassdoor

 

 It’s hard to say for sure, but here’s more food for thought. A study of over 700 SaaS companies shows that engineering is always the largest department.

And while its relative size in the team composition decreases from one-third to one-quarter as the company’s capitalization increases, if you plan to scale the business, a micro-team will not suffice.

Some nuances regarding team building that you should also keep in mind:

• There is an ongoing talent shortage in the tech industry, making it challenging to find and hire experienced developers.
• Valuable developers or DevOps professionals, upon whom all processes depend, might leave, taking their knowledge with them and putting everything at risk.
• Factor in the additional costs of turnover, mis-hires, and re-recruiting, and consider the impact these can have on the company’s financial results.
• Remember the risks associated with relying on internal teams with limited experience or knowledge gaps, which can lead to costly errors (see the calculation above).

 

4/ Why Do We Often Overlook Opportunity Costs?

Opportunity cost may seem like an abstract concept, but it’s crucial not to overlook missed opportunities, as evaluating various tactical alternatives and selecting the optimal one is a fundamental component of any business.

In this context, opportunity cost refers to the potential lost benefits from foregone opportunities to focus on more priority directions and actions. It involves using one’s resources to develop a product in-house instead of concentrating on core business functions.

 

Conclusion: How Can Businesses Reduce Custom Software Development Costs?

Review each point detailed in this article and assess how specifically it applies to your company and the planned software solution.

To reduce software development costs, businesses can implement the following strategies and tactics:

1. Detail Project Requirements, conduct product idea evaluation and product discovery workshops: Clearly define the purpose and target users of the software, as well as how and who will use it.

2. Evaluate Internal Development vs. Contracting a Software Development Firm: Studies indicate that outsourcing software development can yield savings of 30% to 70% relative to internal efforts (info by InApp).

3. Start with Essential Features Only (adopt an MVP-like approach) and scale later.

4. Ongoing Enhancement: Consistently assess and improve the software development process to sustain cost efficiency.

 

Additionally, explore the topic of custom software development and various approaches to development more in detail in order to select the right development strategy.

 

In summary: If a software development system is set up smartly, it streamlines the entire process and enhances cost-efficiency, enabling you to concentrate on your core business without distraction.

 

Thinking of calculating or evaluating your software development? Fill in the request.

P.S. For those who’d like to dive deeper into the rabbit hole

A great article that serves as a summary of our discussion is about how Bluesky was built and the challenges they faced in planning, developing, and launching. We highly recommend reading it to fully understand the great responsibility for the development process and outcome.

Bluesky’s development, split into three phases

The architecture of Bluesky. Image source: Bluesky and the AT Protocol