Making Sense of Software Development Costs
As a business owner reading this, you are probably considering developing some software and therefore cost becomes a factor that you need to consider. However it is not always simple to understand the costs associated with software development. This is because there are once-off costs and also ongoing costs associated with the software development cycle. You need to know how to budget and plan for the costs. During years of calculating costs for software projects in my business, Noproblem Systems, I have learned a lot about how to approach this.
Firstly let me say that not all software development cost structures are equal and there are many possible combinations of what you might find out there, and therefore I will focus on the two situations that I most commonly deal with and the costs surrounding them.
I often deal with two scenarios:
Businesses that have a need for entries on their balance sheet to show investments that they have made and;
Businesses that need to show the amounts paid towards software development as an expense.
Balance Sheet Entries - Owned Software Model
When software development costs must reflect on the balance sheet, the idea is that the software adds some intrinsic value to the business, and therefore the money spent on the business makes the business more valuable. It might be argued that the software in itself could be sold as an asset. In my experience, selling the software off is rarely the case as mostly it is an integral part of the business. This is also the classic model of thinking about software.
Income Statement Entries - Rented Software Model (SaaS)
In more recent times, business owners started to realize that software is not a static entity that you spend money on once and then walk away since it needs to keep up with the times. This has allowed software developers to introduce a model called SaaS (Software as a Service) and this model is basically to rent the software you had developed, rather than to own it. The cost of the software is now reflected in the Income Statement as an expense rather than in the Balance sheet and this has advantages of its own.
But what does it cost?
Let us park the above two models for the moment and think about the costs. Of course without any specifics it is impossible to guess how much software costs, but here is a good ballpark:
Custom software development costs as much as a motor car.
Cars come in different models and sizes and all have different features. If they work, they will all get you from A to B, some with more luxury than others. The same with custom software development. You can have a small program that just helps you with a small detail, or you can have the all-encompassing Rolls Royce that has a built-in fridge.
But just like the car, it has running costs and that has to be brought into consideration also. Think of the monthly hosting and support as the fuel and tyres of the vehicle and then the ongoing development are services that the car needs.
Costs you can Expect on the Owned Software Model:
Development Cost This is all of the programming, business analysis and study, project management fees, etc. This is usually the biggest upfront cost and is usually payable in portions as the project progresses.
Hosting Cost Whether hosting the solution on your own infrastructure or not, hosting cost will be an ongoing expense.
Maintenance Cost This is the cost of making small programming changes to keep the system running. This is not to bring new features into the system.
Further Development When you need new features, further development cost will apply.
Cost to expect on the SaaS Model:
Set Up Cost There is some initial fee to pay in order to set up the systems. This may include some business analysis fees or other costs.
Monthly Rental The rental usually includes the hosting and maintenance and can be based on a flat monthly fee, usage or number of users or a combination of all.
Ongoing Development Instead of paying for such developments, your programmers will usually amortize the cost and the effect would simply be that the monthly rental is increased. I have expressed the costs in the currencies we most frequently work with.
A real world example
To conclude the discussion I leave you with one example project with its costs. Note that the prices are relevant for 2022 and may change in the future. I have expressed the costs in the currencies we most frequently work with.
Example Project - Nursery School Operations System
This solution allows a nursery school to keep track of attendance of the children, automated billing of parents, and external and internal activities. Each caregiver at the school has a tablet upon which they record attendance and when children are collected or dropped off for activities. In case of emergency the caregivers have quick access to medical information, such as allergies as well as parent contact information. Parents have a portal where they could leave messages to the caregivers, enrol their children or view their account balance.
(Note that these would be typical prices of, Noproblem Systems, and will be different at other developing firms. It serves as a guide rather than a quote. Please contact me for more information or clarity.)
Example of Costs of Fully Owned Solution
Software Development Cost
Cloud Hosting Setup Fee
Monthly Support and Maintenance Fee
From the above table it is clear that, after the initial investment, the operating costs are low. The advantage is lower operating costs.
Example of Costs of Rented SaaS Solution
Monthly Rental Fee
In the table above you see that the initial costs are low, but the monthly costs are higher. The advantage is minimal initial investment.
Every Project is Unique
Of course the project described above is fairly simple and each project is different. I hope I have shed some light on the complex subject of software development costs. Please contact me if you need more information or subject and if you have any more questions or visit my companies page, Noproblem Systems.
Jesus Christ is my King