Economists, business owners, and probably all users too, are always trying to optimize costs. For company executives, the first point of a rational estimation and saving is software development costing.

Calculating the funds needed for software products is one of the fundamentals of a successful project launch. However, if you think that software development cost estimation is just about numbers and boring mathematics, you can be wrong.
It includes several other aspects that should be taken into account: hiring the right team, healthy relationships among its members, well-defined tasks, and figuring out all the possible risks in advance.

How to do it correctly? Will offshore product development be favourable and of high quality? What is the true cost of the software?

In this article, we will tell you: how to estimate software development pricing; how to consider a number of subjective variables in the assessment that can affect the success of the project.

What is offshoring?

Offshoring is the remote hiring of employees in absolutely different time zones. For this kind of work and optimization of funds, you can even hire an expert or team from another continent. Offshoring, as a type of recruitment, enables reducing costs in various areas. Primarily it involves human resources, team maintenance in another country, and taxation.
In general, the average hourly pay for offshore development will be approximately 30 USD. That is why this type is usually the cheapest compared to outsourcing or in-house development.

We have just mentioned the pros. If to be frank and open about the cons, the first and foremost ones will be time zones and cultural differences. You will have to organize the meetings adjusting to the time zones and considering the language and mentality of the country you cooperate with.

Cost of software development

In this article, we will explain how to estimate the development costs accurately.

To start with, you should know that there are two types of payment for software development. The first one is a fixed price, and the second one is time and materials.

Fixed price involves a fixed payment for the entire project. You agree with the team on a specific price and a specific job that should be done for a fee.
Time and materials is a contract based on the time spent working on the project.

Which type to choose: a fixed price or an hourly rate?

In fact, it all depends on the number of capabilities, time, and finances you have for the project. If the work on it takes a long time, it is difficult for the team, but the product is profitable, it is better to choose the type of time and materials. This contract, by the way, is quite flexible: if the project idea needs some changes in the future, you can implement them without problems.

If you already have a calculated budget and a clear algorithmization of tasks for the team, the best (and, of course, more economical) option will be a fixed price contract. At the same time, do not forget that you should have a long-lasting and detailed planning phase because it is rather hard to make on-the-fly changes in such a project. After all, it will be more complicated to agree with the company, which will work as a contractor, for additional hours on development, which are included in the fixed salary.

5 Ways to estimate the cost of software development 

1. Make a detailed description and formulation of the requirements needed for the project

If you are one of those customers who can say in the middle of the project: I have seen a specific function on a site, and it looks great! Shall we add it? - Actually, it is time to get over it. You must clearly state the requirements for the project and the technical results. Otherwise, it will lead to a loss of control over the costs and schedule of the project. 
The software development team must receive exact and comprehensive technical tasks. If you need to change something in the product, consult with the contractor. How to provide additional features to the program? And how to meet the deadlines?
Therefore, if you plan some changes in the project, you have to approve the budget and determine a time frame first. In this way, it will be better and more appropriate than adding "amazing buttons/functions/animation" in the middle of the project.

2. Divide project requirements

Divide the project requirements as small in amount as possible. Describe each task so clearly and comprehensively that one developer can do one function.
Any requirement that cannot be divided into exact step-by-step stages might be disorienting in performing an accurate assessment (with some exceptions).

3. Build a good software development team

A team is not just the developers who work on the technical part of the project. In reality, it is a broader concept. If you want to assess software development cost precisely and in total, provide supportive roles and requirements which will help work on the product.
If you want your project to be successful, your users need to have the possibility to use the app effectively. User experience (UX) and user interface (UI) are the things that will make the project successful and desired in the market. But for this, you need designers, business analysts, and project managers in your team.
This type of organization will simplify the development process for workers and help make the project a functional and sought-after one.

4. Continuous iterative testing and quality assurance

Testing at each stage is a kind of insurance for the product, especially if you have chosen the contract of time and materials. You should test a particular code in a risk-free environment at each stage of software development. So, you can be sure that the product will work without interruptions and disruptions.

If you do not test the elements (and do not conduct user testing in the end), the search for errors may become similar to archaeological excavations in the future. Firstly, you have to disrupt the whole program to understand where the bug is. Secondly, it can take a long time. 

5. Identify problems before they occur

Your assessment of the cost of software development must include the possible risks and level of team development. These indicators should identify those members of the development team who, for various reasons, do not keep up with the pace.
If a product is being developed too slowly, you have to check where the pain point occurs, whether it is due to vague requirements or a lack of good communication between different specialists. 
The simple truth is that it's better to spot a problem early and fix or solve it as soon as possible than to explain later why you missed your goals.

How to increase income per employee?

If the work brings enough motivation and new knowledge, the employee will perform the tasks well. The company can increase the income per employee by creating optimal working conditions.  You can achieve this by developing the strengths of employees, motivating each team member, and allowing them to learn every day.

This factor is also significant for estimating the cost of software development. The better and more optimal environment for employees, the better and more efficiently they work.

Additional hints and tips for accurate estimation

You should choose the type of cooperation with a contractor. Companies that do offshoring or outsourcing of software products can offer a guarantee to cover technical support, deal with the challenges that can arise when creating a project, and help with the transfer of ownership for work on the project (rights reserved). 

However, some customers need more from a supplier: for example, a contractor must provide further customer support, license management, or hosting. If you belong to the second type, you should also assess and discuss these costs with the offshore company beforehand. 
If you are only thinking about a project, first you can evaluate it in advance according to particular criteria:

  • product size;
  • product complexity;
  • the time needed to create the product.

If you have managed to get a rough estimate of the amount, you can move on to more accurate calculations.


If you want to estimate the costs of software development, you can use the model of COCOMO.
The Constructive Cost Model (COCOMO) is an algorithmic software cost estimation model developed by Barry W. Boehm.
In 1981 Barry Boehm described his model in the book Software Engineering Economics. It is a kind of model to estimate effort, cost, and make a precise plan for software development projects. 
In his research, Boehm analyzed 63 projects. He classified them by size according to the number of lines of code (from 2 000 to 100 000) and the programming language. These projects were based on the Waterfall model of software development.
The basic level estimates the effort and development costs as a function of program size. The size is determined in kilo lines of code (KLOC).
COCOMO can be applied to three classes of software development projects:

  • Organic mode: adequately small teams with sufficient professional experience and relatively soft requirements for development. 
  • Intermediate / Semi-detached mode: medium-sized teams with combined experience in development and combined requirements (both hard and soft).
  • Intered / Embedded mode:  such projects are developed considering a large number of restrictions.

Here are the basic COCOMO equations:
Effort = ab (KLOC) bb [Person-Months]
Development time or duration = cb (Effort) db [Months]
Number of developers = Effort / Development time [Person]
Constants ab, bb, cb, and db are provided in the following table. 
Calculation of software costs for the entire life cycle

Software lifecycle cost is a process when a product owner calculates all the costs necessary for the asset throughout its life cycle.
The concept of lifecycle cost can be applied not only in the IT field. It is also applicable in other business areas or everyday life. When you buy an apartment, you think not just about the cost of housing. You also consider the funds you will have to spend on repairs, purchase of furniture, and all communications.
That is how the product life cycle works. You should calculate the funds not only for the development of the project but also for its further support. There are six main types of costs that you need to address.

  • Purchase costs - the amount of initial investment;
  • Lifetime maintenance costs - all costs to ensure high-quality functioning of the product;
  • Lifetime operating costs - taxes, payment for certain communications required for the project: electricity, water, etc.;
  • Financing costs - all interest fees that you have paid during the lifetime of the asset;
  • Depreciation costs – taking into account the depreciation of asset value over the maintenance period;
  • End of Life Costs - costs related to the completion of the project.

Life cycle cost analysis image

Now, when you know the essential terms for analyzing and determining lifecycle costs, you should learn a formula to calculate the funds. However, there is no generally accepted formula: your costs may vary depending on the type, duration of development, project size, and so on.
The basic formula, which you can modify to suit the needs of the business, looks like this:
LCC = Purchase Costs + Lifetime Maintenance Costs + Lifetime Operating Costs + Financing Costs + Depreciation Costs + End of Life Costs – Residual Value

In many cases calculating the lifecycle costs of a product can become a significant benefit for a company. That is also a perfect opportunity to assess the choice between several assets analytically. In addition, cost analysis is a good beginning of project planning.

Offshore software development rates

Offshore software development is about delegating engineering and technical functions. If you are looking for a team in another country, you should also include the rates for product development while estimating the software costs.
For instance, the average hourly rate for a senior developer in the United States of America starts from 60 USD per hour. In Latin America, development prices range from 30 USD to 50 USD; in Eastern Europe, an hour of work will cost up to 50 USD.
In this field, Ukraine offers the best price. Here, the development constitutes an average market price of 35 USD per hour. If you are looking for an offshore team of software developers, contact us!

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Software development is an extensive process. It needs good developers and other professionals - testers, business analysts, project managers, and communicators. All these points are part of the costs that should be taken into account in the project.

Successful estimation of software development, when costs and risks of the product are right calculated, will help ensure a quality life cycle of the product. If you consider the set of requirements needed to fulfill, you can create a program, application, or web platform that will bring your business great success.