If you’ve been reading our blog lately, chances are you’re interested in custom software. Recently we’ve written articles about what custom software is, the pros and cons of custom software, and how to get started with an MVP.
This may have peaked your interest a bit and it may have you considering your own project and which direction to go. In the early planning phases you might start to weigh out your options between the status quo, using a pre-existing application, or building some custom software.
There is a lot to consider when making your decision, but inevitably, one of the biggest criteria that will factor into your decision is cost.
Now, we briefly talked about cost in our Pros and Cons of Custom Software article and how custom software can be expensive. The question is, though, how expensive?
Invariably, when writing articles about cost you have to be careful. There are so many variables that factor into a given company and how much they charge and there are no blanket statements that apply to all companies. It’s probably a reason why most companies don’t talk about the subject publicly.
The reality is, for the same software output, you may pay someone $200.00 and you may pay someone else $20,000.00. The discrepancy can be that big. But you have to consider that for the same software output, you might not exactly be getting the same service. Sure you may end up with the same basic application, but what’s different? Does the person you’re paying have years of experience behind them? Do they have a team that will help you in case things go horribly wrong? Do they have processes that make the development cycles more efficient and less stressful?
These questions just scratch the surface of what can differ from vendor to vendor. But besides your project, you have to consider what the vendor has to account for. If the vendor is an individual working out of their home, they will obviously have way less to pay for than a team of 20 working out of an office. Any business owner will tell you how high costs can get.
Another factor is simply the types of clients that the vendor deals with. Some vendors deal with huge organizations that spend hundreds of thousands if not millions of dollars on custom software projects. These vendors will naturally price themselves for those customers. In some cases, it’s due to the fact that these types of customers have way higher demands, but in other cases, it’s simply what the client is used to paying.
So when thinking about the cost of custom software, you have to do a bit of thinking about anything you hear or read and understand that there is a LOT that goes into the number that someone gives you.
I can’t speak for other vendors and how they do things, but I can write about how we runs things at BiteSite. I would assume that most vendors follow something similar, but again, I’m only speaking from our experience.
The problem with Fixed-Price Contracts
When BiteSite started, our contracts and projects fit into two categories: fixed-price and hourly billing. For the Fixed Price contracts, here’s what our pricing process would look like. We would sit down with the client, discuss the project, sometimes breakdown the project into milestones, and agree upon a feature set. We would then take that feature set and estimate how many hours it would take, multiply those hours by our standard rate, and draw up an contract based on that number.
Because we had seen other companies do this, we thought this was the way to go. But after a few projects that went way over budget and after reading Thoughtbot’s Open Source Playbook - we had the confidence to say “This is not working out.”. (in fact, Thoughtbot taught me the phrase “Fixed-Price Bid”).
The problem with software development is that it’s usually best developed in an agile manner. That is, with shifting priorities, MVP philosophies, and incremental changes based on continuous feedback. When you put all those principles in place, software development is generally very hard to predict and map out exactly over a long period of time.
So if you come up with a contract for a 2-3 month project, there is an incredibly high probability that things are going to come up that you didn’t envision. In fact, if you’re a good agile developer, you welcome the unforseen feedback that causes you to shift course.
With that in mind, we abandoned fixed price contracts for all of our custom software projects and moved purely to a hourly based billing system.
Making our clients feel comfortable
So going to a hourly based billing system was great for us. Not only were we not going over budget, but we didn’t stress anymore about beating the clock. We did our work at a comfortable pace which in a lot ways allowed us to do better work.
So that’s all well and good for us, but what about the client? When a client approaches you about creating something for them, it’s hard for them to hear “We’re just going to build it, and charge you at the end of the month.”
With fixed-price contracts, they knew exactly how much they were going to spend. With hourly based billing, they were left in the dark and just had to trust us.
So to combat this, we married our hourly-based billing with a couple of other concepts:
- Rough Estimate: While we don’t do fixed price contracts, and we don’t stick to a specific number, based on what the customer is asking, we do give a rough estimate. For example, we’ll tell them that what they are initially asking for will take roughly 30 hours and multiply that by our hourly rate.
- Re-emphasize that the rough estimate is purely an estimate: Despite giving them an estimate, we still emphasize that software is unpredictable and that a lot of unforeseen development may come up.
- Transparency along the way: If money is a big concern, we let our clients know along the way how many hours we’re spending. We informally agree that if we’re coming close to the rough estimate, we can sit down and chat to make some decisions.
With these three things in place, it helps the client agree to work with us.
The last thing though, is that there has to be a trust between us and the client. In our first meetings, based on our interactions, based on our previous work, based on our reputation, there grows a trust that we will do our best work and not overcharge you. Once that trust is established - both parties stop watching the clock and dollars and start focusing on the project.
This trust between client and vendor is something that should exist with any company you choose. Thoughtbot has a great article on this here.
So, how do we price?
With all that in mind, our pricing becomes pretty easy. For starter projects, we figure out a rough scope of features, we do a rough estimate of hours, and give the rough number to the client understanding that it can fluctuate.
After the project has some legs, usually it moves to on-going work. Our clients ask us for work to be done, we do the work, and bill at the end of the month for our time. If the client is concerned about cost at that point, we do an informal estimate of hours as well.
Stop skirting - what are the actual numbers?
Like I said, vendors vary heavily in cost, and even in our lifetime, BiteSite has changed its rates several times and will probably change them again in the future. WIth that said, as of the time of this writing, our standard rate for software development is $125.00 CAD + HST per hour. That is a standard hourly rate that covers all of our services. We’re a small team so our staff are jack-of-all-trades that cover everything from Product Management, to Design, to Coding, to Deployment - basically everything you need to get a software project off the ground.
When we start a project with a client, we usually like to scale down their big vision to an Minimum Viable Product or MVP. Because software can be very unpredictable to develop, it’s good to come up with a small product that can generate valuable feedback that we can build upon.
Our best MVPs have been in the neighbourhood of 30-50 hours of work. So a good starter project would cost anywhere between $3750.00 CAD and $6250.00 CAD + HST.
So as a rough start, we usually tell our clients that $5000.00 + HST is a good starting budget.
So what can a $5000.00 MVP get me?
So what does 30-50 hours of work look like? At BiteSite, we focus on Web Applications so let’s talk about those. Client features have a big range, but here's an example project to give you an idea:
- A web application
- that allows my staff to login and manage their account and profile
- that automatically calculates total vacation days an employee is entitled to based on their start date
- that allows my staff to request their vacation days
- that allows supervisors to approve vacation days
- that allows supervisors to customize how many vacation days each employee is entitled to
- that e-mails supervisors anytime someone has logged a vacation day
- that e-mails staff anytime their vacation is approved
- that summarizes total vacation days in a report
This is a very high-level description, but it’s a good example of a good MVP. If a client came to me with that description for a project, I would say that’s a great starter project that would probably cost around $4000.00 to $5000.00 + HST.
On the subject of the MVP, we try as much as possible to get our clients projects down to something in the range of 30 - 50 hours because we feel it’s a good spot when it comes to foreseeable development. Anything past that, we feel it’s better to develop something small now and see what happens later rather than plan out every single detail.
What happens after the MVP?
After an MVP is launched, it’s really anyone’s guess how much more you will spend. Depending on many factors including how much you're dedicated to the project, how much the software gets used, and how "on the mark" the original features were, your software could demand a lot more future work or very little.
If the software is very successful and you want to keep adding more and more to it, it’ll cost you more. Chances are though, it will also help you more and potentially generate revenue for you. On the other end of the spectrum, you may find that the MVP is perfectly fine and just needs a few tweaks every now and then.
We’ve had projects that have become very successful and demand full time work where over hundreds of thousands of dollars of development are spent every year, and we’ve had small projects that cost under $100.00/year of maintenance. After your MVP though, you start to get an idea of how much effort it takes to add to your product and if you don't - that should always be an open conversation with your vendor.
So when considering custom software, it’s a good idea to think about your initial MVP cost, and then the potential to fund it afterwards. While our clients may have way bigger budgets, we still encourage them to start with the MVP and go from there.
The fine print
This article is called ‘What does custom software cost?’, and while the majority of your cost will be spent on labour, I would be remiss to leave out the extra costs that a client is typically responsible for. When it comes to developing software, there are usually a lot of services involved that you’ll pay for. For example, if you want to develop an iOS app for the iPhone, you’ll have to pay $99/year to have it on the App Store. If you want to develop a web application, you’ll have to pay for the domain and hosting costs. So when considering your budget, don’t forget to discuss with your vendor any extra costs on top of the service labour they’re providing.
Like I said, I can only speak to our own company which is basically a $125.00/hr rate. Other companies will have lower rates and others will have higher. Some will do fixed price - but the fixed price probably factors in some hourly estimate of the project.
So if the price can vary so much - what’s the point of this article? First of all, I wanted to educate the market on where the price is coming from. Second of all, we at BiteSite want to be transparent about our pricing. It helps with our own projects and helps push others to be transparent.
Not to mention, I hate when I look around the web and can’t get a single answer to a question I have. If your question is “How much does custom software cost?”, well now you have a starting point.