Costing Software Projects

Costing Software Projects. How we recommend you look at new software proposals.

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Normally people think in terms of “let me tell you what I want and you tell me what that will cost”. This works great for tangible goods. You can compare the price and the quality of the two items and make a decision on what to purchase.

This is very difficult to do for intangible goods, like software. You can compare quotes, but how can you compare the quality of the proposed systems that haven’t been built yet?

Usually what you’re comparing are proposals or project plans. And those project plans can vary widely between vendors. The problem here is that the estimates will widely differ, and the project plans will vary widely (even if the requirements are the same). So comparisons now become difficult.

We suggest that the original request of “tell me what that will cost” is the problem. Instead you should be asking “here’s my budget, what can I get for that?”. What this does is hold one of the factors (the one you have control over) constant. So now with a fixed budget you can compare proposals and project plans from various vendors. This still is fraught with difficulty, but we believe this is MUCH easier than the former.

However, this introduces a problem: what is the budget? What should the budget be?

We have two methodologies that we recommend. For marketing projects we recommend starting with your overall marketing budget which is usually a percentage of your revenue. Then allocate a portion of your marketing budget to your web project. That portion might be small or large and is usually based on your industry and whether you are B2B or B2C. We have research on this that we feed into our free calculator that you can try on our marketing budget page.

For operations projects like ERPs, dashboards, and other business automation we recommend aiming for an 18 month ROI based on the labor savings of the project. So take the annual payroll for your employee, multiply by 1.5, multiply by the percentage of time saved, and that becomes your project budget. Alternatively if you are already renting software through a subscription then take that monthly expense multiplied by 18. Again, we have an online resource to do this math for you: operations budget.

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Written by Dan Dietz
Software Engineer / Co-Owner

Dan is a co-owner and highly experience software engineer with over 20 years of experience building web applications, leading software teams, and helping companies solve software challenges.