Planning Your Software Development Budget: Tips & Examples

When it comes to the software development budget, managing budgets for software development projects is a challenging feat. The traditional approaches used for years are becoming increasingly obsolete, making it difficult to accurately plan your department’s production monitoring budget and all the other essential pieces required to build an effective application that meets customer demands. Figuring out how to manage all of these complexities successfully is a challenge.

Benefits of Effective Budgeting in Software Projects

In the dynamic landscape of software development, effective budgeting plays a pivotal role in the success of projects. Through careful planning and strategic allocation of resources, effective budgeting ensures financial stability and enhances overall project efficiency.

Here are some of the benefits of a well-planned development budget:

• Streamlined Resource Allocation. Effective software development budgeting encourages meticulous analysis of project requirements, enabling teams to allocate resources optimally. By identifying the key components of the project and estimating their costs accurately, project managers can prevent overspending, minimize wastage, and ensure that resources are dedicated where they are most needed.
• Timely Project Completion. Clear financial guidelines help avoid delays caused by sudden resource shortages or unexpected expenses. With a comprehensive software development budget in place, teams can plan their activities efficiently, reducing the likelihood of setbacks and ensuring that the project is completed on time, if not ahead of schedule.
• Risk Mitigation. By setting aside contingencies, project managers are better equipped to handle unexpected events without jeopardizing the project's financial stability.
• Stakeholder Communication. Clear budgetary guidelines enable effective discussions about project priorities, goals, and potential trade-offs. 
• Financial Transparency. By documenting all expenditures and tracking progress against the budget, teams can identify patterns, inefficiencies, and areas for improvement. 

Key Factors Influencing Your Software Development Budget

When it comes to planning your software development budget, several critical factors can significantly impact the overall cost of your project. By understanding these key variables, you can create a more accurate and realistic budget that ensures the success of your software development endeavor. Let's delve into the factors that play a pivotal role in shaping your software development budget.

1. Project Scope and Complexity

The scope of your software project refers to the features, functionalities, and requirements that your software will encompass. A more extensive and complex scope often translates to a higher budget. For instance, building a simple mobile app will generally cost less than developing a complex enterprise-level software solution with numerous integrated modules.

2. Technology Stack and Platform

The choice of technology stack and platform can significantly impact your budget. Different technologies have varying levels of complexity, scalability, and licensing costs. For example, opting for open-source technologies can reduce licensing expenses, while choosing proprietary software might lead to higher initial costs.

3. Development Team Composition

The size and composition of your development team play a crucial role in budget planning. A larger team with diverse skills will likely require a higher budget. Hiring experienced developers and specialists can also lead to increased costs compared to junior developers.

In addition to developers, you should also consider the cost of other specialists:

• Project managers (19-45$\per hour)
• QA testers (28-35$\per hour)
• UX\UI designers (25-39$\per hour)
• DevOps specialists (61-73$\per hour)

4. Development Timeframe

The duration of your software development project directly affects your budget. Longer development timeframes often mean more resources, extended salaries for the team, and increased operational costs. Tighter deadlines might require additional resources to expedite development, potentially leading to higher expenses.

5. In-House vs. Outsourcing

Deciding between in-house development and outsourcing can significantly impact your budget. While in-house development might provide more control, it can also involve higher personnel and infrastructure costs. Outsourcing, on the other hand, can offer cost savings by utilizing external expertise and resources.

6. Third-Party Integrations

If your software project requires integration with external services, APIs, or software solutions, it can influence your budget. Some third-party integrations might come with licensing fees or require additional development efforts, contributing to the overall cost.

7. Regulatory and Compliance Requirements

Industries such as finance, healthcare, and government have strict regulatory and compliance standards. Meeting these requirements might involve additional development, security measures, and documentation, leading to increased costs.

8. Maintenance and Support

Post-launch maintenance and support are often overlooked but vital aspects of budget planning. Regular updates, bug fixes, and user support require ongoing resources and investment.

9. Project Location and Cost of Living

The geographic location of your development team can influence costs. Developers in regions with a higher cost of living might demand higher salaries, impacting your budget allocation.

By carefully analyzing and addressing these key factors, you can develop a software development budget that aligns with your project's goals, scope, and requirements. Remember that each project is unique, so a customized budget that accounts for these variables is crucial for a successful software development journey.

Budgeting Strategies for Different Software Development Models

 

Budgeting for software development projects can vary significantly depending on the development model you choose to adopt. Each model has its unique approach to project management, resource allocation, and budgeting. Understanding the nuances of budgeting strategies for different software development models is essential to ensure the financial success of your project. Let's explore the budgeting strategies for Agile, Waterfall, and Hybrid software development models.

Budgeting Challenges With an Agile Methodology

Organizations implementing a more traditional waterfall software development methodology can often rely on more traditional accounting and budgeting techniques. However, as modern development methodologies embrace more agile models, applying those same financial practices to an organization or constantly changing projects can be challenging.

Capital expenditures are funds that are typically used to purchase major assets or services that can improve your company’s ability to generate profit. These investments might include computer hardware, software, or a new office building. Unlike regular operating expenses, capitalized expenditures are not recorded yearly or quarterly but are treated as long-term assets. The cost is spread out over a period of time - usually between five to ten years - using a method such as depreciation.

On the other hand, operating expenses cover all the ongoing expenses required to run your business, including payroll, employee benefits, rent, transportation, etc.

Things get a bit more complicated for software development organizations, particularly during agile development life cycles. For most US-based businesses, according to the Statement of Financial Accounting Standards No. 86, “all costs incurred to establish the technological feasibility of a computer software product to be sold, leased, or otherwise marketed are research and development costs” and “shall be charged to expense when incurred.” Proving that your product is “technically feasible” requires that your organization has completed all “planning, designing, coding, and testing” necessary to meet the software’s design specifications and technical performance requirements.

 

Once production begins, however, the “costs of producing product masters incurred after establishing technological feasibility shall be capitalized.” That is to say after you’ve proven your software is technically feasible, all production-related costs (coding, testing, etc.) can be considered capital expenditures.

Finally, after your software is released to the customer’s production environment, all capitalization of costs must halt. Moreover, costs of “maintenance and customer support shall be charged to expense when the related revenue is recognized or when those costs are incurred, whichever occurs first.”

In other words, the actual period in which your team is developing and producing the software can be capitalized, while all other costs (including those for post-production maintenance and monitoring) are considered normal operating expenses.

Waterfall Budgeting

Waterfall follows a linear project management approach, where each phase is completed before moving to the next. Budgeting in Waterfall models is more structured and requires careful planning from the outset.

Phases and Milestones: Allocating Funds for Each Stage
In Waterfall, the project is divided into distinct phases, such as requirements gathering, design, development, testing, and deployment. Budgets are allocated for each phase, ensuring that sufficient resources are available at each milestone.

Addressing Changes and Delays in Waterfall Projects
While Waterfall aims to reduce changes once a phase begins, unforeseen delays or changes might still occur. Budgeting should include a contingency fund to handle unexpected issues without derailing the entire project.

Hybrid Budgeting

Hybrid models combine elements of both Agile and Waterfall approaches, providing a balanced approach to project management. Budgeting in Hybrid models combines the flexibility of Agile with the structure of Waterfall.

Selective Iterations: Adapting Agile Techniques

In Hybrid models, certain phases or components might follow Agile principles, allowing for iterations and adjustments. Budgets are allocated for these Agile-inspired phases, ensuring that resources are managed efficiently.

Maintaining Milestones and Predictability

Hybrid models retain Waterfall's focus on predictability and milestone-based progress. Budgeting for Hybrid models includes allocating funds for each phase, while also accounting for Agile-inspired iterations.

Calculating Overall Software Engineering Costs

Many of the standard accounting and financial practices used by the FASB — and via GAAP — can often be a bit outdated, particularly as they pertain to the rapidly-changing realm of software development. For example, the Statement of Financial Accounting Standards No. 86 document we examined in the previous section — while generally applicable to software development organizations — was originally published over 30 years ago in August 1985.

To cope with modern business practices, the FASB occasionally releases updated standards documents. One such document is Intangibles — Goodwill and Other Internal-Use Software (Subtopic 350-40), which covers the accounting practices for cloud computing arrangements and was published in April 2015. This document outlines some critical accounting scenarios such as software as a service, platform as a service, infrastructure as a service, and so forth.

One such intangible asset that is crucial to a robust and well-supported application after release is production monitoring software. Coming up with the appropriate production monitoring budget can be difficult, but the newer standards and accounting guidelines linked above can help. Here are a handful of tips to get you started on overall budgeting, which will help you determine your organization’s production monitoring budget.

Identify Your Key Decisions

Start by brainstorming a list of decisions you want to make with this budgeting process. A few examples might be:

• Begin development of project X or not?
• What is the budget for project X?
• Is it time to start advertising?
• Are we ready to launch production?
• How will we monitor our application after launch?
• With the critical decision points in hand, you can move onto the next step.

Break Down Software Features

Next, make a list of all the major features the application should have. For example, a tic-tac-toe knockoff might require:

• Players
• Turns
• Winning/Losing
• UI
• Art
• Music/Sound
• Leaderboards
• Cloud Syncing
• Production Monitoring

And so forth. All these features should be high-level concepts at first, but from each concept, you can start to break it down into smaller, more tangible pieces of functionality.

Budget Each High-Level Feature

Now we select a single high-level feature and break it down as much as possible, which will allow us to roughly estimate the manhours (and therefore cost) of implementing said feature. To illustrate, let’s break down the UI component of our tic-tac-toe game:

• Launch screen
• Main menu
• Buttons
• Score
• Game board
• Leaderboard
• Dialog popups
• Text/Localization

We can dig down as much as we want, but with our component extrapolated we can estimate the manhours or weekly work necessary to complete each sub-section:

• Launch screen – 1.5 hours
• Main menu – 3 hours
• Buttons – 1 hour
• Score – 0.5 hours
• Game board – 4 hours
• Leaderboard – 5 hours
• Dialog popups – 1 hour
• Text/Localization – 6 hours

These are just made-up numbers, of course, but with this estimate in hand, we can start to budget for each high-level feature. In total, we’ve estimated that our UI feature will require around 22 hours of work. We can now apply our weekly operating expenses for a ~22-hour period and come up with an overall cost for this feature. For larger projects, we’d likely use weeks or even months as our time period to estimate, but the same principles apply.

Let’s imagine we’ve determined that it’ll cost us around $15,000 to operate the company over the 22-hour period necessary to complete our UI feature. We can then make note of that on the high-level feature list and, once all features are budgeted, come up with a grand total budget. We won’t bother doing so for this example, but this concept makes it easy to determine which features are within budget, and which may need to be scaled back (or removed altogether).

Final Thought

Remember that the first version of your product, project should be as simple as possible (only the main functionality). The deeper you go into development, the higher the cost of a mistake. You don't need to perfect it. The later you get feedback from users, the more expensive the mistake will cost.

As usual, we remind you that such a SaaS MVP development can be done by the joint efforts of our team for the optimal time and budget.