How to Plan Your Software Development Budget

Effectively planning your software development budget is an essential part of embarking on any software project. Failing to properly outline, maintain, and manage a budget is likely to lead to losses down the line. For example, failing to correctly allocate financial resources to your development team, may mean that they halt development until funds are released. Delays caused by such events can prove catastrophic for your project timeline and success.

Nevertheless, by properly analyzing your project scope and outlining a solid contingency plan, you can effectively manage your software development budget. Throughout this article, we rundown several ways in which you can effectively budget your project, overcome financial challenges, and offer insights into budget implementation.

If you’re considering investing in software development, this article will help you get started. Keep reading to learn more.

Key Components of a Software Development Budget

Software development budgets can be broken down into several key components. The following components make up most software development budgets and can be used as a basic guide when outlining your own budget. Understanding these core tenets will help you to accurately outline your software project budget.

• Personnel Costs: Personnel costs generally make up the majority of a software development project budget. For example, you are likely to require developers and managers as a standard. If your project is particularly complex, you may also need further personnel such as quality assurance specialists. You should expect the cost of a single developer to range between $85 to $150 per hour.
• Software and Hardware: While you might be developing your own software, this requires existing software and hardware, such as API’s and development frameworks. As a result, software development budgets must include considerations for software licenses and hardware upgrades. For example, when building a machine learning platform, you’ll need to invest in additional service space.
• Operations Costs: In addition to hardware and software costs, operational costs also impact software development budgets. Operating costs refer to essential services that facilitate development allowing your software to function once complete. For instance, cloud hosting services, cloud data storage, and API fees. In fact, over your software’s entire lifecycle, operating costs may account for 60% of total costs.
• Project Management: To ensure your custom software development process runs smoothly, budgets must account for project management resources. This means allocating funds to employing project managers, investing in management tools, such as ClickUp or Asana, and consulting with software methodology specialists.
• Contingency Funds: There’s no such thing as a perfect project. No matter how fastidious you are in managing the project and no matter how skilled your developers are, errors will occur. It is therefore crucial to have contingency funds that cover the cost of delays, bug fixes, and unforeseen challenges.

How to Plan Your Software Development Budget?

To plan your software development budget, it’s best to break the process down into several steps that allow you to dedicate ample time to each area. Remember, when outlining your budget and determining the overall cost of your custom software development, it’s vital that you consult hard figures.. This means working closely with your development team to extract accurate information regarding pricing and research each facet of your budget thoroughly. For example, you should ensure that you have a clear list of all operation resources and their associated costs.

Analyze Project Scope and Requirements

The first step in creating an effective software development budget is to analyze your project scope and identify your requirements. This means outlining what features you expect to see in your final project, along with how complex you need your system. For instance, many businesses opt to create the minimum viable product (MVP), featuring basic functionality allowing them to roll out sooner and save money. Once the software has proved profitable, they then return for further development. This approach forms a fundamental part of your software development plan, ensuring that each phase is aligned with your business goals and budget.

Feature-rich software products will cost more than MVPs, meaning you’ll need to consider this in your budget. In other words, the more features and complexity you require, the higher the development costs.

Getting the initial planning stages correct is crucial, as positive project management practices like this are 28 times more likely to save your business money than those who skim over the planning phase.

Define Deliverables

Defining deliverables means outlining exactly what you are paying for and what you expect from your development team. For example, when hiring a software development agency to build an enterprise-level project management tool, you may expect the following product deliverables:

• Software code
• Design options
• Software user manual
• Finished software (version one)
• Post-release support and maintenance for six months

Here at Idea Maker, we create a detailed project spec that outlines the product deliverables we expect to produce after discussions with our client. This detailed spec provides clarity, reassuring our clients about the transparency of the budgeting process and helping them understand where their resources are going, allowing them to allocate finances accordingly. This approach is a key component of our software development strategy, ensuring that each phase of the project aligns with strategic goals and budget considerations.

Equally, you may also expect some project deliverables that help you understand the development process before the build begins. Project deliverables include:

• Project roadmap
• Project plan
• Gantt chart
• Test documentation (test plan, test cases, test report)
• Communication plan

The software ROI that you receive is maximized by clearly defining your deliverables. This is due to the flexibility and clarity it allows over your project scope. If you’re looking to save on costs, you can reduce your expected deliverables by, for example, omitting certain non-essential items such as test documentation or post-release support options.

Plan Your Resources Wisely

Your software development budget is ultimately determined by how you allocate your resources. As a result, you need to plan your resources wisely. This means first understanding what resources you have access to and identifying what resources you need to invest in.

For instance, if you’re building a finance application but are unclear on regulation and security requirements in your industry, you’ll need to speak with a consultant. The consultancy fees must be included in your budget.

If you choose to work with a software development agency, some resource concerns will no longer apply as they will have access to the primary tools needed for development. This frees your financial resources for investment in areas such as legal consultants. After outlining your existing resources, you’ll begin to see a clear picture of areas in which you need to allocate additional financial resources.

At Idea Maker, for example, we have in-house resources that are effectively managed by our experienced project managers. This means that our clients are able to pay us a fixed or hourly rate and leave us to manage resources without fear of exceeding budgets.

Select the Right Cost Estimation Method

While many costs are easily determined, such as ongoing license and subscription fees, others can be challenging. In more difficult areas of cost estimation, there are several cost estimation models that you might choose to employ.

• Analogous Estimation: This method of cost estimation is where you look at historical data and compare it to your current project scope. For example, if you’ve built a similar application in the past, you can use your previous costs as a baseline for the new software. However, this method can be unreliable when working on different project types and doesn’t account for project-specific contingencies.
• Parametric Estimation: Parametric cost estimation uses historical data and relevant mathematical models that consider project-specific variables. While this cost estimation method is more accurate, it requires much more data analysis time which can cost money in itself.
• Bottom-Up Estimation: Bottom-up estimation involves breaking your project down into smaller components and estimating their costs. For example, you may determine operational costs, then personnel costs and add them together to get your total costs. This is a cumulative approach.
• Expert Judgment: As the name suggests, this method of cost estimation relies on the opinion and judgment of experts. For instance, when consulting a software company you can ask them for a project cost estimation instead of working it out yourself. They will base this on key elements such as work hours and maintenance fees.

Choosing the right cost estimation method is important when creating an effective software development budget, as it will play a large part in its accuracy. If you have a history of software development projects, the analogous and expert judgment methods may be best suited to you. Otherwise, parametric estimation and bottom-up estimation are excellent choices.

Embed Risk Management in Your Budget

As discussed in our earlier breakdown of software development budgets, contingency funds are an essential component of your project. Risk management as a whole involves identifying potential challenges and making consideration for unexpected issues. Your budget should have enough flexibility to handle some minor increased costs, but you will also need to consider greater added costs.

Common software development risks you need to consider when budgeting include:

• Scope Creep: Scope creep is where your software requirements gradually become greater, beyond what you initially planned. This can have negative impacts on your budget, as additional features will incur further costs. A simple way to avoid scope creep is to implement a change control process, where all updates and additions must be approved before they are implemented.
• Resource Constraints: Despite thorough planning, you may encounter resource constraints that take a toll on your project budget and timeline. For instance, a developer could leave halfway through the project. To avoid delays, you may need to employ a new developer at a higher cost due to the expedited nature of their services. Cross-training team members is an excellent way to avoid resource constraints due to labor issues.
• Technological Risks: What if your hardware fails or an unexpected bug appears in your development software? You’ll then need to invest in additional technology to finish the project. Assessing the quality of your technology before embarking on a development project is a simple way to mitigate technological risks.

Considering risks throughout your budget makes it possible for you to stay on top of your project finances and avoid being blindsided. As 55% of project managers cite budget overruns as the top reason for project failure, adequate risk management is imperative. However, to fully mitigate disastrous budgetary issues, you’re going to need to develop a solid contingency plan.

Develop a Solid Contingency Plan

Like your software development budget, developing a solid contingency plan includes several steps. Outlining such a plan will protect your project budget and direct your team when unexpected financial challenges arise. Let’s break down the key steps of developing a solid contingency plan:

• Identify and Assess Potential Risks: Spend some time thoroughly investigating areas of potential concern and assess the risk. For instance, you may be uncertain whether your current business infrastructure can handle the volume of data needed for your development. In this case, you would ask yourself how likely your infrastructure is to buckle under pressure.
• Prioritize Risks: Once you identify potential areas of risk, you should then order them by priority. This means which challenges are most likely to occur and which are least likely. Prioritizing risks will help you to quantify contingency reserves.
• Develop Mitigation Strategies: After prioritizing a list of potential risks, you can then develop mitigation strategies, starting with the most severe potential risks. What solutions are available to you? For example, if you’re worried about server space, the simplest solution is to invest in more server space or scale back data processing.
• Quantify Contingency Reserve: This step asks how much will it cost to cover an issue if it comes to light using your chosen mitigation strategy. Using the cost estimation techniques we discussed earlier, you should spend some time quantifying the cost of potential risks. It’s advisable to determine a conservative, liberal, and mid-range figure for each cost.

Developing a solid contingency plan along with implementing risk management strategies as discussed in the previous section, puts your project in a position of success. Whether your budget overruns or not, you will at least have the protection of your contingency plan, allowing you to continue with a smooth development.

Refine Your Budget With Precision

By this stage, you will have created an in-depth software development budget, allowing you to confidently move forward with your development project. However, you should continuously monitor project progress and its impact on your budget, refining contingency plans as you go. Of course, if you’ve outlined your budget correctly, no major changes will be required.

Software Development Budget Example

While you can invest in professional budgeting software such as Sage or Xero, budgeting itself doesn’t have to cost any more than your time. For instance, you can create a basic budget using a spreadsheet. Below is an example of what your budget might look like:

How to Keep Your Budget on Track

By this stage, you should have the necessary knowledge to create an effective software development budget. However, it doesn’t stop there–you’ll need to keep a close eye on your budget to ensure you avoid overrun and to ensure that you don’t act on contingencies too late. In that light, let’s explore a few tips to keep your budget on track:

• Define Clear Budget Baselines: How much are you prepared to spend on your software development? Consider a worst-case scenario figure and set this as your project baseline. You should then plan your budget according to this baseline, with a view to spending significantly less.
• Regularly Review Budget: Regularly reviewing your budget versus actual spending allows you to assess how close you are to your baseline. If you’re spending too much, you might consider adjusting your budget or expected deliverables. Milestone-based budget reviews are considered good practice.
• Implement Transparent Communication: While some businesses may be cautious about sharing budgetary information with their employees, it helps to keep everyone on the same page and work toward a common goal of efficiency. If your project manager can see the status of your budget, they are better able to allocate resources appropriately.

Following the above tips will help in implementing your software development budget in practice, ensuring that you’re able to keep your budget on track.

Final Thoughts on Software Development Budget

Outlining an effective software development budget is crucial to project and financial success. By following the steps outlined in this article, you’re perfectly positioned for key budgetary wins. Keep in mind that a healthy budget requires thorough planning, ample flexibility, and continuous monitoring.

If you’re looking to develop enterprise-level software for your business and need help managing costs, you’re in the right place. At Idea Maker, we specialize in bespoke software development and have a team of expert software developers dedicated to delivering exceptional software solutions.. Additionally, our project managers are here to help you outline an effective development budget and manage it accordingly.

So, if you’re ready to build software that succeeds, schedule a free consultation with us today to get started.