Creating a Software Development Budget (With Examples)

A software development budget is a predetermined amount of money a software development company expects to spend on a project from start to finish. The exact amount can vary depending on the complexity of the design, the number of features offered within the system, and other factors.

Few software development company endeavors succeed without clear budget parameters. With established financial constraints, stakeholders can assess their priorities and make essential decisions about a project’s trajectory.

A budget can also inform choices that arise as the project progresses, focusing efforts on available resources and helping to define key milestones. So, why do so many software development teams struggle to create and adhere to accurate budgets?

Cost estimation for large-scale products is difficult, especially when you can’t accurately predict what issues or delays may come up during development, particularly in back-end and DevOps processes. You also cannot fully estimate the return on your investment.

In all fairness, many aspects of the software development process are difficult to anticipate fully. However, many software development budgets could incorporate known cost factors or build in leeway for possible obstacles. Whether your software project is modest or ambitious, an irrationally optimistic budget can set your team up for failure.

We’ll cover the various costs a software development budget should include to assess future expenses better. We’ll also provide a step-by-step guide to budgeting for your next software development effort. These tips can help prepare you to forecast costs more accurately and plan your software development cost estimates accordingly, ensuring your budget aligns with your project goals.

Software development costs to consider

To budget effectively, you’ll want to assess the various expenses your project will entail. While costs are based on the project scope, the following areas are relevant in most software development efforts.

Labor costs

Your development team is your most essential resource, especially given the scarce tech talent available. Their compensation is an obvious element of the budgeting process. 

Keep in mind that compensation can go beyond salary or hourly rate depending on the classification of your workers. If they qualify as full-time employees, their costs will include the price of benefits such as healthcare, retirement, workers’ compensation, disability, and FICA.

In addition, a full accounting of labor costs should include all the professionals involved in the development effort. Besides coders, these professionals might include (but are certainly not limited to):

• Project managers
• Graphic designers
• UX/UI designers
• Content writers and editors
• Quality assurance (QA) testers
• Subject matter experts
• Developers with specific technical expertise

One way to prepare for these expenses is to seek qualified independent talent with the best-matched skills and clear hourly or fixed project rates.

Upwork allows companies to evaluate and engage independent talent for engagements of any length. Because you negotiate their rates upfront, budgeting for their efforts is relatively straightforward.

Software costs

Teams developing new software depend on various existing programs to perform, review, and track their work. Some applications can be quite expensive, while others cost nothing.

In constructing a budget, you’ll need to assess the costs of your team’s software tools, either at a per-user level or for the entire team. Remember to include ancillary tools such as project management software and QA applications, as well as any necessary application programming interfaces (APIs).

As artificial intelligence (AI) capabilities continue to expand and develop, you may also find opportunities to use AI when coding or debugging software to improve efficiency and reduce costs. This support can simplify some repetitive and low-level tasks while human coders maintain creative and decision-making roles, always having full accountability for quality.

Equipment and infrastructure costs

Your software development effort will often require your team to purchase new devices. This is especially true if the project ventures into a technical territory your team hasn’t explored.

Additionally, your project may need infrastructure changes, such as an upgraded server setup or expanded cloud storage capacity. These investments are often considerable and may extend beyond the initial launch of your software application.

Overhead costs

Software development teams typically generate overhead expenses, ranging from office rent and administrative costs to perks like snacks and coffee. Although they’re easy to overlook, include these factors in your development budget.

Of course, as many organizations adopt remote team structures, they can reduce overhead costs associated with physical offices. Similarly, engaging independent talent can drive down overhead, as these work arrangements don’t entail many expenses involved in hiring full-time employees.

Factors of software costing

We’ll go over a few more factors that could impact the cost of your software development projects, considering the specifics of your effort.

Type of project

Let’s examine some of the most common types of software development projects and the unique costs each one may incur.

• New software development. The project budget for new software development will vary based on the number of features you want to include and how much time it takes to develop and implement each capability. A minimum viable product (MVP) for a mobile app may cost as little as $5,000, while a full-scale app could require $150,000 or more to produce.
• Software modification. Software modification includes both hard and soft costs, such as time, effort, probability of success, and ease of transition for users. If you’re considering making changes, consider how well your software currently does what it’s designed to do and how any changes could improve its user interface (UI) and maintain future scalability.
• Software integration. The price of software integration depends on the number of systems being integrated, whether the design is prebuilt or custom, and other factors. Prebuilt integrations may cost only a few thousand dollars, while custom software development can be more expensive. Integration often involves working with various APIs and ensuring compatibility across the technology stack.
• Web development. An inexpensive website design project can cost as little as $1,000. However, more intricate web designs can cost as much as $145,000. The exact price varies based on the project’s time frame and the site’s complexity.

Size of project

The size of your project can directly impact the overall cost of completion. Let’s consider a few different project sizes and clarify what you could expect based on the project’s general scope.

• Small. Small software design projects are tasks usually completed by an individual or a small team. Some may take only a few hours to finish, while others may require a few weeks. They are especially common for startups developing their business processes for the first time.
• Medium. A medium project probably involves at least two to three individuals working together. The final product may take several months (if not a full year) to develop.
• Large. Large software projects can take multiple years for a full team to complete. They also require additional maintenance and support along the way. These projects typically involve complex frameworks and multiple iterations throughout the development life cycle.
• Enterprise. Enterprise systems are high-quality custom software development applications that cater to specific business needs. Large organizations often use them to support specific goals. Since they use large amounts of data and specialized integration features, they can be quite an undertaking and require a comprehensive road map to guide development.

Team size

Your project costs can vary depending on the size of your team. Some roles are essential for every project. For example, you won’t want to take on an assignment without a developer, a project manager, or a QA tester. However, if your project becomes larger and more complex, you may also have additional roles to fill.

In addition, you may choose to hire more workers to help with the job. Browse available talent online at Upwork to help fill specific needs or voids on your project design team. You can also post specific jobs to Upwork and receive proposals from interested individuals.

Software development approach

Many teams take different approaches to software development. Some teams practice the Agile Scrum methodology, while others use a waterfall or MVP system. 

Your choice could impact the final cost of development and the estimated timeline for completion. For example, creating an MVP to test out ideas quickly and tweak future product changes can be more efficient and cheaper than developing a full system upfront and finding major problems.

How to budget software development costs in 6 steps

Once you assess your costs, you’ll need to translate your figures into a working project budget for your software development project.

We encourage you to adapt our general suggestions to the needs of your development team and other key stakeholders.

1. Thoroughly define project requirements

You’ll want to understand the precise requirements for the specific project. Often, teams embark on the software development process with just a few broad requirements rather than a clear expectation of what they should produce.

Spend time learning about your stakeholders’ priorities. Then, speak directly to each team with a vested interest in the development project. Once you have a full sense of everyone’s ideal outcomes, hone in on requirements for an MVP that everyone can accept.

Share these requirements with your stakeholders, explaining the necessity of limiting the scope and the possibility of adding elements subsequently.

Budget around the must-haves to launch. Later, you can address nonessential but nice-to-have features.

2. Convert requirements to specific stages and increments

Once you establish what your software should include, plan how your team will approach it. This stage involves identifying the distinct phases of the project (e.g., “wireframe design” or “bug testing”) and structuring them from start to finish.

The workflow you plan for your team will depend on your chosen software development methodology. The most important thing is breaking down the project into clearly defined steps. For example, if you’re using the Agile methodology, you might structure your planning around specific sprints or time-boxed phases of product addition.

For each stage, note which professionals on your team will be involved, including independent talent who’ll be involved for specific purposes. Establishing a matrix of timeline and required resources can be a useful visual aid for this planning.

3. Review historical data for comparable benchmarks

Break down your software development project into specific stages and estimate how much work each segment will need. But before estimating, consider data from past projects to root your projections in reality.

For example, how many hours did team members need to develop a functional prototype in your previous software development project? How many hours were devoted to code review or bug testing? Review records from past projects to find specific answers and consult team members involved.

No two projects are identical: Account for case-specific details in applying precedent from past efforts. However, historical data should at least provide a realistic point of departure when planning upcoming projects.

4. Translate requirements to specific durations and costs

With your project divided into constituent stages and a historical context for what each stage will require, you’re now ready to begin budgeting costs in earnest. 

Start by estimating upfront costs like new equipment, software, and necessary infrastructure upgrades. These can be quantified relatively easily and typically represent one-time investments.

Labor costs are far trickier to budget since they’re more variable and difficult to anticipate. First, calculate the labor costs associated with a set duration of work by a specific team or team member.

For example, a week-long dedicated sprint by your four-person development team might equate to $9,000 in total compensation costs. On the other hand, 10 hours of work from an independent graphic designer might cost $400.

Next, use historical data to judge how many increments each stage will require. For example, creating an initial prototype might require three weeks of your development team’s time and 20 hours from the independent designer.

Once you calculate labor costs for each stage, combine them to forecast total labor estimates across the full project.

5. Assess and incorporate known risks

Some challenges in the software development process are difficult to anticipate, especially when they concern nuanced technical issues. However, you can predict possible obstacles at the beginning of a project and acknowledge them in your budgeting approach.

For example, your development team may be able to identify junctures where their work may go smoothly or poorly, depending on the difficulty they encounter. Similarly, they may envision an approach they hope will work while acknowledging it may not.

Just as you projected the labor costs for your project’s timely completion, estimate the additional costs you’ll incur if these possible challenges pass. While the results may seem discouraging, performing these calculations is better than blindly hoping for the best.

6. Produce optimistic, realistic, and worst-case budget estimates

After calculating how much various problems might cost you, sketch out ideal, realistic, and pessimistic budget estimates. 

Your optimistic or ideal estimate should reflect the costs of your project if everything goes more or less according to plan. However, you should include a small contingency to account for minor obstacles in this estimate.

Your realistic estimate should include the costs of at least one of the possible risks you might encounter. If you’re required to produce just one final budget estimate, this one will likely serve as the best initial point estimate.

Finally, adjust your worst-case budget to include the costs of all known risks you’ve identified. Include the risks as if every possible challenge is destined to occur. While this approach may seem alarmist, it should help prevent a scenario in which your team commits to a project it can’t afford to complete.

7. Execute and measure performance

When you created your project plan, you laid out expected resources and expenses over time. Track your actual costs versus these anticipated costs throughout the project so you don’t have surprise overruns at the end. 

This will help you manage your budget while identifying the gap between expected and actual performance. Knowing what you need to work on will make it easier to get your project back on track.

On the other hand, you may have a favorable gap, with cost performance better than expected. In this case, you may be able to deliver the project early or for a lower final cost, delighting your client or allowing you to make a higher profit.

Your project planning should also include the work you’ll do after you launch your new software solution initially. As you implement your new plans, create mechanisms that allow for real-time performance tracking for any needed follow-up debugging or tweaks.

What is the cost of software development?

Before we wrap up, let’s consider a few example software development projects and the potential final cost. 

Remember that all average costs are simply ballpark estimates, and your final amount can depend on various factors, such as development time, the specific deliverables you desire, and how much outsourcing you’re planning to do instead of working primarily with in-house designers.

Example 1: resolving a bug

Imagine maintaining an existing software-as-a-service (SaaS) system and noticing a small bug. In this instance, the issue is relatively minor, and you understand what’s causing the problem. Since this project is small, it will likely only take one to two weeks and cost a few thousand dollars to complete.

Example 2: building a large-scale mobile app

Let’s say you want to build a full-scale iOS and Android mobile application for your organization. Your mobile app development project likely involves a moderate amount of data collection, location tracking, push notification capabilities, and various portal or administrative functionalities.

It’s unlikely that you can complete this project without a full-scale team and several months of work. Because of the time and human resources needed to design this app, you can expect to spend tens of thousands of dollars to finish developing your application. 

You’ll need to decide if you’ll develop for the two platforms simultaneously or sequentially, which will impact resource costs and timing.

Example 3: system integration

Perhaps your company is tired of entering data into multiple systems, and you decide to build a simple integration that can pass information quickly between the different platforms.

This midsize project shouldn’t take a significant investment of time, but you probably can’t expect to finish the work in a matter of hours. You’ll likely need to invest a couple of weeks in the design and be ready to spend somewhere around $10,000.

Decrease costs and upgrade talent

We hope the suggestions we’ve outlined bring clarity and structure to your software development budgeting process. 

By taking the time to understand requirements and risks, you can plan and execute your process with greater confidence. You can also use Upwork’s Free Website Cost Calculator tool to estimate costs associated with setting up a website.

As you form a budget, you’ll likely be eager to reduce costs, especially if you need to hedge for possible risks. You may need to augment your core team with independent professionals and specialists to access the skills you need.

If you need talent for an upcoming software development endeavor, Upwork is in your corner. Our platform streamlines identifying top professionals with the specific skills you need. You’ll find talented professionals who can help you in the following software product development roles:

• Project managers. Project managers can help you save time and money on your next design project by improving workflows, coordinating global teams, and keeping each team member on track.
• Graphic designers. Graphic designers can create illustrations to use within your application, as well as packaging and promotional materials to help you spread the word on social media.‍
• UX designers. You’ll find UX designers who can work alongside your product development team to improve the user experience. ‍
• Content writers and editors. Content writers can create well-written copy to help bring your ideas to life. ‍
• QA testers. Before you push your project across the finish line, team up with an experienced software tester who can help you identify issues and eliminate bugs.

Post your job requirements and allow experienced, independent developers to compete for the opportunity to aid your team. With Upwork, you can find the right talent for any role while keeping your labor costs within budget.