When developing software for a company or organisation, there are various factors that can affect its pricing and cost. This guide aims to explore these factors, so read on!
With software playing a huge role in many upcoming and existing businesses of this era, investing in the development of custom systems and programs is an essential cost to undertake. These software can automate repetitive tasks, reduce inessential costs, optimize your business’s overall workflow, and increase productivity. All this proves how software development shouldn’t be seen as an irrecoverable cost, instead, as an investment.
Accordingly, many companies and organizations opt to outsource this development work to be handled by a group of professionals or developers with experience and skill to turn this plan into a reality. Therefore, from the organisation’s side, it’s clear that they’ll need a rough idea of a budget they should allocate to fund the works.
However, with a lack of software engineering background, it may be challenging for a client to understand the underlying factors influencing pricing and approximate the project’s cost. Therefore, we curated this guide to explore 5 important factors that affect software pricing and the typical preliminary steps that are performed to appraise such a project.
With that said, let’s get right into it!
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Steps to Determine Software Development Pricing and Cost
When a client would like to construct a certain software, they can submit their requirements and plans to a number of software development companies to get proposals. Along with the job document, they’ll state the budget they’re comfortable working with.
Then, these companies will evaluate the job requirements and take into consideration a number of factors before submitting their bid or proposal with their calculated offer. Hence, the customer will engage with a number of other software development companies and each company will have to engage in a bidding war in order to land the software development contract.
These offers made by the developers are estimates of the cost of producing the system. In principle, they take into consideration the hardware, software, travelling, training, labour, other miscellaneous costs and profit as well. Usually, these companies have a standard pricing model for the price they charge and provide a price list for transparency.
Therefore, often there isn’t a direct or simple relationship between the development cost and the final quoted price that’s charged. Additionally, when calculating the charged price, other factors such as broad organisational, economical, political and business considerations are taken into consideration as well.
Along with that, the project risk and type of contract are noted as well. These reasons can cause the price to fluctuate between the different development company offers, causing the price to rise or dip. Only when both parties, the buyer and developer agree on the pricing on the outline proposal, will the development work begin. During this stage, negotiations take place between both parties to establish the project specification and arrive at a common ground.
That being said, the following are some pricing issues that affect the pricing of software:
Factors that Affect Software Development Pricing and Cost
1. Contractual Terms
Firstly, the system’s source code ownership is a determinant of the software pricing. If the customer requires the source code of the system, this can increase the software pricing. Therefore, sometimes, a customer is open to the developer holding the ownership of the system source code to cut the development cost as they only require the application and don’t need to revisit the source code or even make or release updates.
This allows the developer to reuse the code in other projects or systems and even for commercial purposes as well. However, companies with IT staff and developers of their own may prefer owning the source code exclusively, as they need to review and make changes to the source code themselves.
2. Cost Estimate Uncertainty
Additionally, if the client or buyer is not entirely confirmed with the software and there’s a lot of uncertainty in terms of its implementation, design and requirements, this can increase the software price as well. This is because uncertainty results in more cost, as the developers need to take into consideration all the expected events that could drive the price up. For example, the system may need extra security depending on its intended business environment, hence the company will need to employ more sophisticated security measures or even employ a cybersecurity specialist.
Besides that, the system may be expecting a high traffic of users, thus the developer should take precautions by setting up a proper traffic management system or invest in better resources, such as improved server CPU, RAM, etc., to prevent service crashes.
Typically, large-scale or long-term projects will have a considerable amount of uncertainty, since it’s likely that the customer can’t foresee or picture the entire final system at the beginning stage. Additionally, to reduce the amount of uncertainty in a project the developer can employ an agile method, which ensures that the system is being developed at a faster rate to prevent the system from occupying a long development duration. Additionally, an incremental development model can be employed to gain consistent feedback from users at every increment to ensure that the system is being developed to their liking and requirements.
3. Financial Health
Furthermore, developers with lesser monetary backing, capital or resources or experiencing financial difficulties, may offer a bid at a lower price in hopes of securing the software development contract. Plus, perhaps the customer highly values pricing as a key requirement and is comfortable with a less established and experienced development team completing the task. In that case, they’ll often go with these reasonably-priced offers in order to cut costs.
Small development companies like these, are often comfortable with taking home a smaller margin of profit than having no contracts and going out of business. Hence, that’s why the bid can be priced lower. Such companies value a consistent cash flow than profit, so they’re alright with completing lower reward jobs, especially if they’re experiencing challenging economic environments or times.
Typically, start-up companies charge lower for these software development jobs in order to remain competitive in the software development market by appealing to stakeholders with lower-priced bids. They do this to also gain more experience and testimonials so they can be more established.
Meanwhile, well-established software development companies have built this authority through a greater number of similar software development jobs. So, they have more experience and have higher bargaining power when submitting their bid. Thus, their bids for software development jobs will typically be high as the customer is paying for their vast experience and expertise.
4. Market Opportunity
Similarly, a development organisation that’s relatively new to a particular area of the software market may usually bid a lower price as well. This is because, they’re willing to accept a lower margin of profit and secure that software development contract, as they wish to first gain experience in that field and build reputation or authority. So, they can achieve this through referrals and testimonials from previous clients as well.
Thus, they can garner a greater profit later from future jobs in a similar niche as they’ve gained sufficient experience and expertise to develop new products and systems in that particular area. For instance, if a company wants to develop applications that utilise machine learning in the future, they can start off by submitting lower bids for such AI software development jobs. Like before, this is normal for start-up companies that want to build a customer base and a reputation in a particular area of software development.
5. Requirements Volatility
Lastly, if a system’s requirements are expected to change soon, sometimes the organisation may lower the initial price of the contract. This is to secure the software development contract. Finally, after the contract has been agreed upon by both parties, the developers may add additional charges for requirement changes or additions.
So, as a customer or client, it’s important to outline all the possible requirements first, as additional changes may be challenging for the developer to implement. Hence, causing them to raise the final price. However, there are ways to overcome this.
Firstly, before beginning production or construction, during the specification or requirements elicitation stage the developer will closely discuss with the client and stakeholders to identify the requirements of the system. After that, they’ll also figure out the design and workflow of the system.
Additionally, an incremental development model can be employed where the customer gets to use and interact with increments. As a result, this model is more open to requirement changes and additions. Regardless, after the initial bid, the developer will have to discuss with the client for requirements elicitation and determine whether there are additions and along with that the associated costs.
Also, sometimes for such systems with volatile requirements that can change at any time, the developer may take into consideration and spare additional cost in case of any changes or additions to the system. So, this in turn could be a reason to charge a higher initial bid.
Aside from the above, there are other factors that influence the pricing of a software development project, including the project complexity and size, system architectural components, resources utilised, tools and methodology employed, third-party integrations (e.g. APIs), development timeline, programmer team’s abilities and skills, etc. Projects differ in terms of these factors that have been discussed, thus contributing to their differences in overall cost.
That being said, this guide explores 5 key factors that can affect the pricing and cost of the software development project. We hope that this guide has helped you with understanding software pricing or even approximating the cost of your very own project.
Before we end, do comment down below, if you have any questions regarding this topic or if you have any additional information or experience to share regarding software pricing. We’ll love to hear it!
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