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How To Budget For Custom Software Development [With Template]

February 17, 2023

by Hannah Hicklen

Custom software development is a big investment regardless of your business goals. Learn how to allocate your budget for your software development project and download our free template. 

There are many different reasons why a company would develop its own custom software. Some may want to build a proprietary solution to streamline their internal processes, while others may want to build software that they can market to their clients or customers. 

Regardless of what type of software you’re planning to build, developing custom software is a big project. Creating a budget is essential to ensure your business doesn’t overspend on development. Here’s what you need to know to create a realistic budget for your project. 

Create a custom solution to meet your business needs. Search top software development companies on Clutch. 

What Goes Into a Custom Software Development Budget? 

Regardless of what type of software you plan to build, most development agencies follow a similar development process known as the software development lifecycle (SDLC)

Rather than focusing strictly on the development stage of the project, business leaders should think about the entire process and how it impacts their budget.

Here’s what you can expect when working with a custom software development company: 

  • Analysis and planning. The analysis and planning stage is when the client and the development team determine how the project aligns with the company’s goals. They will then discuss their resources and availability to come up with a rough cost estimate and project schedule. 
  • Requirements. With a solid understanding of the project goals, the development team will outline the technical requirements for the software. As they solidify how they will accomplish each goal, they will create a project roadmap to guide the project. 
  • Designing and prototyping. Before beginning development, the dev team must design the software. This is more than just how the platform looks — the design process is focused on the functionality of the software as well. This means creating wireframes, mapping the software flow, and developing prototypes as needed. 
  • Development. Development can take weeks, months, or even years depending on the project's scope. While each software development team may approach your project differently, the primary goal is delivering a software product that meets the specifications outlined at the beginning of the project.   
  • Testing. As one of the most important phases of the development process, testing includes identifying, tracking, and fixing bugs. This ensures that the software performs well once it is launched.  
  • Product launch. Whether you're launching the software to be used internally, or plan on hosting several million users, the deployment is key to successfully adopting the software. Most developers will create a launch plan to ensure the success of the project. This includes a go-to-market strategy, fixing any bugs that appear during launch, and any necessary support or training.      
  • Maintenance. No matter how successful the development process is, the program must be maintained and updated. Many software development companies offer ongoing maintenance and support for a flat monthly rate.    

By keeping each step of the development process in mind while you’re budgeting, you’ll be able to accurately estimate how much it will cost to hire a service provider and make you more conscious about where your money is going. 

How to Budget for Software Development 

  1. Set a project cost limit
  2. Outline project requirements
  3. Get quotes from a software development expert
  4. Budget for several iterations
  5. Leave room for maintenance fees

Set a Project Cost Limit

When companies finally decide to invest in their development project, it can be a big deal. And a big expense. 

While it’s important to spend what is needed to get the product your business needs, that doesn’t mean that companies should throw all their money at the project. Custom software development costs can quickly spiral out of control if you’re not careful.

Instead, business leaders should set a maximum budget for their development project. With this number in mind, they can prioritize certain features and allocate the budget accordingly. 

To determine this number, companies should review their profit and loss statements, revenue, and other expenses that occur within a given time frame. This will provide the information they need to properly allocate their funds. 

Outline the Project Requirements 

The most important factor for how much a software development project will cost is the type of software and the complexity of the platform. 

For example, projects that don’t rely on open-source code, include complex feature sets, require more advanced algorithms, and need extensive backend processing are more difficult to develop than others. 

The only way to estimate how much the project will cost is by discussing your needs with your development team. Whether you have an in-house development team or work with an outsourcing partner, you’ll need to create a detailed requirement list in order to accurately budget for your project. 

Some of the most popular types of software for small businesses are:

  • Enterprise resource planning (ERP): software that streamlines daily operations such as supply chain management, project management, compliance, and even accounting. 
  • Supply chain management software: software that helps companies organize suppliers, vendors, retailers, distributors, and producers. 
  • Software as a Service (SaaS):  software that uses cloud computing to provide services to online users. The software providers host the application in its own servers, databases, or network, but it can be accessed by users through the cloud.  
  • Customer relationship management (CRM): Software that helps businesses connect with and manage potential customers. CRMs often offer workflow automations, task management features, and reports and dashboards to track sales.   
  • Artificial intelligence (AI) and Big Data: Machine learning and AI-based software can automate various processes and improve the efficiency of a business.
  • Internet of Things (IoT): IoT describes a network of software, hardware, sensors, and other types of technology. By connecting these features to create an IoT infrastructure, developers can collect and process data for real-world applications.

Regardless of what type of software you plan to build, you should include a list of all the features and functionality your custom software solution needs to have. 

With this information, you and your development team can create a project scope that includes the number of people on the team, the amount of time needed to complete the project, and they technology they plan to utilize — all of which will impact the budget for development. 

Get Quotes From a Software Development Expert

Unless your business has an internal software development team, it’s likely that you will need to hire a software development team. These experts have robust teams with experience building different types of software. As a result, they can ensure that your final product is perfect. 

These teams usually charge hourly rates for their services, which means that the overall cost of the project will vary depending on the scope of the project and the size of the team. 

Of course, this may increase your labor costs, but outsourcing can still be a more affordable option than hiring an internal development team. 

The only way to accurately estimate how much your project will cost is by asking for a quote from your service provider. Then make sure you know exactly what that entails — what services will they provide? Are they also involved in design? Will they also support launching and provide maintenance support? 

One way to reduce labor costs is by hiring an off-shore service provider. Rates can vary depending on the location of the development team. For example, companies located in eastern Europe or Southeast Asia often charge lower rates than those in North America or Western Europe. 

Budget for Several Iterations

As we discussed above, software development is often very cyclical. Depending on the development methodology your team uses, they’re likely to approach the project by working through design and development before testing the product. Then they will use the results from the testing to go back through and perfect the software. 

This is a really efficient way for software development teams to deploy a product and ensure its quality. 

That being said, software is rarely perfect after one iteration. Instead, companies must be prepared to go through and alter the product to ensure their clients get exactly what they want. 

For business leaders, this can impact the budget by extending the project timeline and increasing the labor associated with development. Therefore, if you’re making a budget, make sure you leave room for additional expenses or costs. 

Additional reading, ‘7 Software Development Models to Organize Your Team.

Leave Room for Maintenance Fees 

Finally, companies don’t simply wash their hands of the project once the software has been released. In order to keep the platform functional, developers need to provide updates and maintain the platform. 

Many software development companies will offer to maintain the software for a flat rate in their contract, known as a retainer fee. This can be paid on a monthly or an annual basis. Alternatively, you can hire an internal team to maintain the product going forward. 

No matter how you plan to approach the platform’s maintenance, it’s important to include these fees in your development budget. 

Software Development Budget Template

Software Development Budget TemplateDownload the software development budget template. 

Factors for Software Development Costs

The cost of developing custom software depends almost entirely on the type of software you’re trying to build as well as how complex it is. 

While it’s worthwhile to be fully invested in the project to get the final product your team needs, there are a few other factors may impact your budget. 

  • Type of software 
  • Complexity of the software
  • Security
  • UX/UI design 
  • Frontend features
  • Backend Infrastructure
  • Development methodology
  • Location of the development team

To get an accurate estimate of how much your custom software development project will cost, be sure to include all of these factors in your budget. 

Build Custom Software & Manage Your Expenses

While building a custom software solution can be an expensive undertaking, getting the product your business needs justifies the cost. However, that doesn't mean that you should go into the project without a budget in place. 

By outlining your requirements and setting an expense limit for your project, you can make sure that your budget is allocated appropriately. Carefully consider the design and everything your product needs to include to accurately estimate the project cost. 

Additionally, by factoring in several rounds of iterations, testing, maintenance, and more, you can ensure that your team isn’t surprised by any additional fees. Download our custom software development budget template to get started on your own project. 

Create a custom solution to meet your business needs. Search top software development companies on Clutch, then filter based on location, review ratings, and more to find your perfect partner.  

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