Why software projects are so expensive?

22 January 2019
Mikołaj Lehman

It’s not a ready-made product you can take from the shop shelf and throw into the basket. It’s something way more far-reaching and complicated. Software product you are planning to build will involve serious costs. How serious? Why are IT projects so expensive? Let’s decipher this complex puzzle piece by piece.

 

It might be a mobile or a web application or a more complex IT system. In each scenario, creating a budget is a must. Last week, we stripped the entire process of building applications. From the birth of THE IDEA across the whole business journey (and we mean EVERYTHING – disciplined research, competition, and market analysis, keyword search, validation and pitching investors – if you dare to tackle this fairly long piece – you definitely won’t regret it!).

Today, we would like to share some more financial insights with you.

From this article you will learn:

  • What aspects of a software project you will have to include in your budget
  • How to divide the project to stages as far as costs are concerned
  • SPOILER ALERT: how much would your MVP cost
  • What are the risks
  • What are the ways of financial settlements
  • and finally – how to actually create the budget for your project

Shall we begin?

Chapter One: What are the costs of IT projects?

Let’s break them down. What are the aspects of an IT project that you need enter to your spreadsheet.

1. The project team – people who build your software product

You need to assemble a squad of top-notch professionalists. The best possible option is to
outsource them. You need to find:

  • Developers. Seems obvious, right? After all, someone has to write the endless lines of code. (HINT – consider hiring a software house and you will score Back-end and Front-end Developers at the same time, not to mention a Scrum Master and a Proxy Product Owner).
  • UI/UX Designers and Graphic Designers. First of all, your future software needs to meet user experience good practices and avoid mistakes already at the stage of creating mockups. Second, the delightful appearance of an application is an enticing vision. That’s where a talented Graphic Designer comes in. In both cases, highly-qualified specialists won’t be cheap.
  • Project Manager. A maestro. Someone who pulls the strings and puts everything together. Hiring an experienced PM will also cost.
  • Marketing. Can’t live without it. If you don’t feel secure enough to take marketing on your shoulders, you need to consider two options: scouting for a freelancer or teaming up with an agency. Which one is better? It depends on the scale of the project. An agency will rather cost you more.
  • Sales. Monetizing your software product is a natural consequence. If you don’t do it with your own resources, you might also consider getting an outside Sales Team onboard.
  • Testers. Let professionals try out your application and find bugs as early as possible.

2. Partnerships – going outside

If you are happy enough to work in a bigger team and do most of the work with your employees’ hands, that’s great! However, if you don’t have the resources, the only solution is to outsource all the aspects – SEO / SEM, graphics, developing, social media – you name it.

It makes sense. Especially, if you’re a newbie and you are about to run your first technology project.

3. Tools and licenses

  • There are plenty of great tools which you can use in your projects. How to find them? It’s the Internet era – you should throw a rock and hit one.

They are available online, as a Software-as-a-service. Some of them are paid, and some of them are free, for instance, Slack or Trello. Both of them have become obvious and unquestionable elements of working in teams and inside projects.

  • Think twice about whether you really need a particular tool. Sign up for a trial and test it before you decide to buy it. You can always quit after the first, free month if you come to the conclusion that a tool is not necessary.
  • HINT – go to Google search and type in the name of the tool you’re looking for and add a word „alternative”. It would look like this: „Slack alternative”. Most likely, you will find listings of similar tools where you might find cheaper or totally free options. Choosing an alternative application will help you in saving a few thousands of Dollars / Euro annually.

4. Knowledge

It’s totally OK not to know everything (especially before the first take). Luckily, there are loads of professionals out there who got the bottom of the aspect and can teach you.

Consulting agencies or freelancers, business partners, subcontractors, or highly-experienced team members – by paying for specific knowledge you will increase the know-how of the project team. It plays a vital role if you’re deadly serious about your technology.

It’s about the synergy of knowledge. Ninjas involved in your project will raise the level high, but – to be honest – they will do the same with the price as well. And it can’t disturb you – their knowledge and experience is a cosmic fuel for your machine so it won’t be cheap. In fairness, it can be quite expensive. Despite that fact, put it down in your budget. Period.

5. Sales & Marketing

It’s far from convenient for marketers to jump to projects somewhere in the middle, or at the end of IT projects. Just like we wrote in App Marketing – when is the best time to launch, there’s no time to waste – marketing should kick off the very beginning.

You can even sell the idea first. Bill Gates or Steve Jobs sold their products before they even had them produced.

Make a room in your budget spreadsheet for the outbound and inbound marketing activities. Build a list of your prospect and reach out to them with a proposal for using beta (or alpha) version of your product. Still, remember that marketing requires investing (time and money) and be ready for it.

6. The office – is it really necessary?

The costs of maintaining a physical office can smother your entire project. If you are a start-up, you don’t an office as such. Forget about it! Remote work has become a natural model of business collaboration. Bring together a team of 100% digital nomads.

SIDENOTE – At GMI Software House we all work remotely, and it doesn’t stop us from delivering projects on time. On the contrary, this labor model opens more business possibilities than if we had a rented office.

Chapter Two – How to divide IT projects into stages?

Prepare a project timeline and mark down all the milestones we mention below.

1. Analysis and product discovery

We took a closer look at it in our previous article. You will need to allocate financial resources in each stage:

  • Market analysis
  •  Competition analysis
  •  Analyzing the scope of the project. Transforming the initial vision into information architecture.
  • Analyzing and selecting the technology. It will involve preparing the technological premises and placing the pros and cons of a particular solution on XY axis with regards to time and budget.
  • HINT – You can turn on a savings mode right here. Instead of keeping an in-house team dedicated to analyzing your future application, please consider assigning above tasks to outside companies. Those firms can specialize in conducting researches on a large scale. The burden of digging to each competitor and their products and features is quite heavy. They can take it away from you and send you a full report.

Building your own team dedicated to spending long hours on exploring the market, will be more expensive than hiring a freelancer or an outside firm.

2. Concept, prototype, and project.

As we mentioned earlier, your software project will not resonate without a decent UX designer. This stage will split into:

  • Conceptual sketching and drawing mockups
  • Designing the architecture of a solution
  • Finally – developing a prototype

3. Testing

Before setting your application loose, you have to provide some tests. How does it look like?

  • Alpha Tests – these are the closed tests run with a small group of users. The common and proven practice is to reduce the costs of this stage by inviting members of family, friends and their friends, neighbors, and the lady from the grocery store around the corner. What counts – it’s a group of people we don’t have to waste time to break the ice with. Bonus points for nice and friendly atmosphere.
  • Beta Tests – just like the Alpha ones, the Beta tests are closed but organized on a bigger scale. You will give access to your application to testers. The group will grow to 200 strangers, or more. You won’t know them so the contact will be washed out of emotions. Yet, this group is your first serious audience you can potentially convert to first clients and brand ambassadors.

4. Audit

It’s about security checking and making your software bulletproof. What you need to fire away, is to find outside, FinTech company to conduct the audit. This partner has to verify the security settings regarding the server and the application itself. These services are rather pricey.

5. Production

At the very core of the project workflow, you will need to brace yourself for upcoming expenses.

  • Brand / Visual identity. Yes, we’re coming back to marketing. Branding is a thoughtful and complicated process that sums up ideas, brand claim, value proposition, logo, brand colors, and hopefully – a brand book. You might hunt for freelancers to take care of that, or let an agency cover it entirely. This might be painful.
  • Software development. Actual building and developing your IT product. Like in the case of brand identity, you can assign programming to freelance developers or signing a contract with a software house. The price will be scalable depending on the product, but also will go in thousands.

6. Deployment

Deploying a software product is nothing like launching a missile by hitting the big, fat, red button. It’s not a single moment, but a process.

Releasing an application means a series of actions, strictly connected to each other. IT aspects meet marketing activities, so it’s not that simple. Take it into consideration when planning a budget and a timetable. Do whatever it takes to double-secure the process because any slip will cost you more time and money.

7. Maintenance

  • Releasing the product is not the end of the costs. How expensive will be maintaining the application? Well, it’s all going to depend. Let’s take this scenario – a few thousands of users are on your app at the same time. What will happen then? Most probably, the costs of maintaining the server will not exceed the 1000 euro per month. However, if your software is rather a niche application for a smaller group of users, then there’s a chance to reduce the server costs to 40-70 euro a month. It all depends on the app architecture and the traffic on the app.
  • Make some room in the budget for the follow-up work performed by developers and graphic designers. The first live version of the app is not the end of building the product. Prepare yourself for feedback from your first clients and suggestions from your business partners. You will have to learn to react to all of the opinions and ideas. It will take time and additional money resources.
    How will it look like? Let us give you by the numbers – it will cost around 10-20% of your annual budget. So, if your app cost you 20 thousand Euro, so put aside from 2 to 4 thousand Euro a year just for maintenance and further iterations. This will let you keep your app rolling and react on all the inquiries like a freaking champion!
  • Now the moment you have been waiting for! The big question – how much does building application costs? If you take into account the average hourly rate in the CEE, that would be 30-40 Euro per hour.
    In that case, how many hours does it take to build an app? Glad you asked! If we’re talking about creating an MVP, then 500 hours is the rational estimation. This will give us a price between 15 a 20 thousand Euro.
    However, more sophisticated and structured IT systems will skyrocket the price. Instead of 500 hours, the dev team will need more than 2000 hours, so that will result in a final price of 70 thousand Euro and up.

Chapter Three – What are the ways of financial settlements?

In other words – how will you have to pay for developing your application? Will it be a fixed price?

Well, compare it to building a house. The final price is flexible because it depends on so many different goals, premises, and approach. There are dozens of variables that will have an impact on the final quote. You need to be smart and agile about making decisions and you can’t forget about watching your budget.

The same goes for the IT projects. You don’t buy a ready-made item from the shop shelf. It’s more than that. It’s about sitting around the project with partners, coworkers, and converting the preliminary vision into a product.

You need to bear in mind, that so many things can change along the way. New ideas, new suggestions, new solutions. If today we assume that our app will not use the Google Maps for navigation purposes, it doesn’t mean that after a month or so, we won’t have to build an API which can multiple the prices.

Building technology products come together with dynamic changes. The range of work is flexible, and so is the final price as a consequence. That’s why – the most reasonable way to agree on the financial settlement is Time & Material model (under one condition – that this approach will rely on solid working methods within the team or a company). This model is a good alternative for fixing a price upfront, because if you are stubborn on setting up the premises and the price for several months ahead, and then you change your premises – it will turn your budget upside down.

Chapter Four – What are the risks?

There are many things that can bring chaos to the table and make the project unpredictable and vulnerable to further costs. What are they? What kind of troublemakers we are talking about?

In a flash:

  • Unpredicted costs in the project. Making up extra features on the go may serve as an example.
  • Changes in the scope of the project. The situation when a vision doesn’t correspond with the features the application really needs. This discord will generate more costs like crazy! That’s why coming up with a coherent and logical strategy is a must. Otherwise, you will have to spend more money than necessary.
  • Underestimating the project and its complexity.
  • Lack of experience in running IT projects. This will most likely have a negative impact on the budget and disturb the project flow.
  • Coordination chaos. The lack of a competent and experienced project manager can really hurt the project and cause crisis situations.
  • Problems with funding the project. In other words – the unstable financial security of the project. You need to remember to secure a cash-flow and not to pause your project. Each break will cause more harm it seems at first. In real life, if you hired subcontractors in the process and they have to stop what they were doing because of the pause, you will have a trouble of getting them onboard again. Why? Because in the meantime they will switch to other projects. So, even if you reinstate the cash-flow, your subcontractors won’t return to work in your project just like that. It will take some time, and that will cause more time and money losses.
  • New, unstable team. If you decide to make a patchwork from a dozen freelancers that have never worked together, you’re risking that developing won’t be going smoothly. Saving money on hiring each of them separately will give you a headache later on. You might regret giving up on hiring a software house.

Chapter Four – How to make a project budget?

Time for some practice. In this final chapter, we are going to give a few tricks on creating a budget for your IT project.

  • If you haven’t done much budgeting before, the easiest way will be a traditional, good-old spreadsheet.
  • Create a timeline in the columns. Make it for two years, dividing it for months. Each column will represent a single month.
  • Then, go to rows. Type in all the stages, resources, materials that you will need during the entire process of building your application.
  • Next, move to the details. Fill each cell with a specific cost. Make sure to do it in one currency, because otherwise, you will have trouble with preparing reports.
  • Mark the costs that you have already paid a different color. Google and Excel spreadsheets allow entering the formula that will add the value of each cell according to the color.
  • Try to make a budget for a year or two.
  • At the beginning of each month, go back to your budget and keep your cells up-to-date. Analyze what you paid and whether the prices went up comparing to your initial estimations. Verify your assumptions and confront them with the actual costs you had to spend on particular assignments.
  • Finally, at the end of this article – we have a treat for you. It’s our FREE TEMPLATE for creating a budget for your software project. We hope you will make the most of it!

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