Today, 83% of companies put great emphasis on cost efficiency and process optimization. Software development costs have become a major consideration for businesses of all sizes, from startups to tech giants. They are adopting new operating models to reduce development expenses and adjust to the ever-changing tech landscape.
Software costs account for every dollar spent at each stage of the development journey, from the discovery phase to deployment and maintenance. They are important for effective project planning and budget allocation.
This article explains what drives the price of building software from scratch, from hiring developers to maintaining the final product. It provides insights into how to calculate software development costs based on Neontri’s decade-long experience in building custom software solutions.
Key takeaways:
- The average software development cost is about 2.7x a developer’s base salary when you factor in everything – benefits, equipment, office space, and hidden costs like technical debt and knowledge transfer.
- Team location makes a huge price difference. US developers cost about 4-5x more than their peers in places like Poland.
- The biggest project expenses are usually direct costs (mainly salaries) and infrastructure (like cloud services, development tools, and third-party APIs).
Software development cost estimation approaches
Knowing actual software development costs helps companies make smarter decisions about how to build their products. Let’s see what this means for different scenarios:
Building in-house
When building an internal team, software development cost breakdown helps plan ahead the actual budget beyond just salaries. For example, with a team of three developers at $120K each, the real annual cost will be closer to $970K when you add benefits, office space, equipment, and management overhead. This helps prevent budget surprises mid-project.
Outsourcing development
This cost breakdown can serve as a benchmark for comparing outsourcing quotes from different vendors. Companies can use it to identify the most suitable outsourcing partner while avoiding overpriced and suspiciously cheap offers.
Team augmentation
Team augmentation provides a strategic approach to building distributed development teams. This cost assessment can help business leaders make informed decisions about which roles to keep onsite and which to distribute remotely. For example, they can keep senior architects local for hands-on collaboration while engaging skilled remote developers for feature implementation. Smart role distribution across locations helps organizations scale their engineering capacity without the full overhead of local hiring.
Factors influencing software development costs
Software costs represent the total financial investment required throughout the software development lifecycle. They include everything from initial planning to long-term maintenance.
Why is it hard to predict the exact cost? Because every project is different. It can be a simple mobile app for booking appointments or a complex enterprise system that handles millions of transactions. But whatever it is, the final price tag depends on three main things:
- How complex the project will be?
- How many people are needed on the team?
- What tools and technologies will be used?
Let’s take a closer look at the key factors determining the total cost of ownership software development.
Category | Description | Impact on cost |
Project complexity | The number of core features, complex business logic, additional security measures, and system integrations can increase development time and the total cost of the product. | High |
Team composition | If the project requires specialized skills (e.g., security, DevOps) or a certain level of developer experience, that can significantly affect salary rates. Team size, geographic location, and time zone also affect project costs. Moreover, larger distributed teams need more coordination, leading to management overhead. | High |
Technology stack | Every technology choice adds to the bill, whether it’s paying for cloud servers, database systems, or license fees for third-party services. | Medium-High |
Timeline | Rushed deadlines and frequent releases may require more resources, leading to higher development costs. | Medium-High |
UI/UX | Complex designs, custom animations, or accessibility features require more development effort and additional QA. | Medium |
Integrations | If a software project involves integrating third-party application programming interfaces (APIs), modernizing legacy systems, or migrating data, expect the final price to increase by 30-50% above the base cost estimate due to additional complexity. | High |
Maintenance | Software support and maintenance take time and need to be performed on a constant basis. This means a portion of developer hours must be allocated to updates, bug fixes, software performance monitoring, and documentation to ensure reliable system performance. | Medium |
Business requirements | Enterprise software needs special architecture designs to handle heavy usage, keep data safe, and comply with strict regulations. The costs add up quickly because these systems require additional security, backup systems, and audit controls. | Medium-High |
Travel expenses | In the case of outsourcing, travel expenses become a significant hidden cost factor. Face-to-face meetings for project kickoffs, important milestones, and training sessions mean regular flights, hotel stays, and daily allowances for the teams. | Medium |
Key considerations when calculating the cost to develop software
Companies often struggle to calculate the full cost of developing software. Whether building digital products in-house or working with external teams, understanding fixed and variable costs in software development is important for successful project execution.
Direct costs
The most visible costs in software development are the ones companies directly pay for. Developer compensation typically makes up the lion’s share of these expenses.
However, when calculating employee costs, the grand total goes far beyond the basic salary. Mandatory employment taxes, life insurance, health coverage, and paid time off can significantly increase labor costs. Potential additions like retirement plans, tuition reimbursement programs, dependent care assistance, and unemployment insurance drive costs further up. So, the average software development cost per hour at this point is typically 1.25-1.4 times higher than the engineer’s base rate.
Indirect costs
Indirect costs are the expenses that support the development process but aren’t necessarily a part of it.
One of the things that need substantial investment is setting up development environments. Engineering services require 11-23 square meters per employee, including common areas. Basic office setup costs include furniture, computer equipment, and an internet connection. On top of that, there are costs associated with the software development process. This includes development tools, licensed software, version control systems, continuous integration/continuous deployment (CI/CD) pipelines, and testing frameworks.
Companies also have to invest in management personnel to oversee the team and factor in non-billable hours spent on technology development and research. When all these factors combine, the final cost of a fully functioning, managed employee in a software development business typically amounts to approximately 2.7 times their base salary.

Hidden costs
Hidden costs can account for up to 20% of the project budget. These software development expenses emerge throughout the development process and can impact the price of the final product.
- Technical debt. Taking shortcuts during development to meet deadlines can lead to future maintenance problems, such as introducing hard-to-diagnose bugs and creating poorly documented code that hinders onboarding new developers.
- Knowledge transfer. Maintaining comprehensive documentation, onboarding new team members, and smooth knowledge transfer might take at least 20 hours a month of tech leaders’ and project managers’ time.
- Scaling and maintenance. Performance optimization and security updates need ongoing investment. As software grows, expenses for cloud resources, data management, and system monitoring can increase.
- Legal support. Software development is closely related to intellectual property rights, licensing agreements, and compliance requirements. Legal expertise helps navigate these complexities but adds to the overall project cost.
Organizations should perform an analysis that considers all these factors to accurately assess software development costs. Such evaluation will help determine the required budget and resources and identify potential areas for optimization.
Software development cost breakdown
The development process typically starts with establishing the right team structure. To create a minimal viable product (MVP), you’ll need a balanced mix of expertise: two to three software engineers, a designer, a QA specialist, and a project manager. This team composition enables effective development while keeping costs manageable.
Understanding the cost structure when you build custom software is critical for project planning and budgeting. From initial staffing decisions to ongoing operational expenses, each element plays a huge role in determining the total investment required.
Coding
Software developers spend their time building basic functionality, performing code reviews, and conducting pair programming sessions. However, code optimization, refactoring, and technical debt management may require additional development hours.
These responsibilities command hefty compensation across global markets. According to SalaryExpert, software development costs in the United States are among the highest in the world, varying from $84K for junior specialists to $149K for senior engineers, with an average salary of $120K annually. Hiring a programmer in Australia will cost you, on average, $91K; in Canada, you’ll have to spend $83K. The average costs of software development in Western European countries are the following: Germany – $92K, the United Kingdom – $82K, and the Netherlands – $81K. At the same time, Polish software developers earn, on average, $27K per year. To understand global development costs and maximize your budget, read Offshore Software Development Rates by Country.

Design
Product design includes user research, persona development, wireframing, prototyping, and user interface design. Beyond that, designers’ time is also needed to create intuitive workflows, conduct usability testing, and iterate based on customer feedback. Regular design reviews and accessibility compliance checking require additional resources and expertise. In addition to that, organizations must also factor in substantial tooling costs for design platforms, such as Figma and Adobe Creative Suite.
Testing
Quality assurance requires a dedicated team to perform systematic testing, bug identification, and validation across multiple platforms and user scenarios. The cost of quality in software development encompasses not only the salaries of QA engineers but also the infrastructure expenses for testing environments, automated testing applications, continuous integration tools, and device labs for cross-platform testing. When combined with the time required for test planning, execution, and defect management, QA can constitute 15-25% of the total project budget.
Project management
Effective project management calls for experienced professionals who coordinate teams, track deliverables, and maintain communication with stakeholders. Their time is mainly spent on planning meetings, sprint reviews, and status updates, but resource allocation, risk management, and timeline planning also demand a lot of attention.
Quality project management comes with a price. In major tech hubs, PMs typically earn between $88K and $151K annually. The costs of project management tools, collaboration platforms, and reporting software can add another $10K-$15K annually to operational expenses.

Infrastructure and technology
Tech infrastructure includes both development and production environments. This includes cloud services, servers, databases, development tools, IDEs, and third-party services or APIs. Licensing fees for commercial software, development frameworks, and security tools must also be accounted for. Also, remember that regular infrastructure scaling and maintenance costs increase as the project grows.
Deployment
Moving software from development to production involves substantial operational investments, from establishing CI/CD pipelines and monitoring tools to managing production environments. While DevOps automation tools and practices require significant upfront investment, they can reduce long-term operational expenses.
Documentation
Product documentation is important for both the software development team and end users. Creating and maintaining comprehensive materials – including technical documentation, user manuals, API guides, and training resources – demands ongoing resources as software evolves.
The costs are spread across multiple areas: salaries for experienced technical writers, consultation time from high-level subject matter experts like the chief technology officer, and subscription fees for documentation tools (Confluence, Microsoft Office) and collaboration platforms. Additional expenses come from training programs to ensure team proficiency in documentation tools and standards.
How to reduce software development costs: Best practices
Custom software development costs can significantly impact a company’s bottom line, but there are several approaches that can help optimize spending. Here are the top five most effective cost-reduction strategies.
Leverage open-source software
Organizations can substantially reduce software development costs by incorporating open-source solutions into their tech stack. Modern open-source programs are often as good as custom software in terms of quality. What’s even better, they don’t require any additional investments.
Software engineers can leverage extensive libraries, frameworks, and tools already tested by global dev communities. This approach not only saves costs but also accelerates development timelines by building upon existing data and proven solutions rather than starting from scratch.
Minimize third-party integrations
Third-party integrations can decrease development time by introducing advanced features and powerful capabilities. However, they often carry baggage that is not visible at first glance, like hidden costs or extra complexities. Thus, business leaders should carefully evaluate the need for each potential integration and the impact it might have.
Tech companies should focus on external systems that provide clear value and avoid redundant or overlapping solutions. This selective approach reduces ongoing maintenance costs, minimizes potential points of failure, and simplifies the overall system architecture.
Implement Agile project management
Using Agile methodologies reduces development costs through improved efficiency and risk management. By breaking projects into smaller, manageable sprints and emphasizing iterative development, teams can identify and address issues early on when they’re least expensive to fix.
Regular sprint reviews and continuous feedback loops ensure that development efforts remain aligned with business needs. This will prevent the cost of rework in software development, feature bloat, and unnecessary scope creep that often plagues traditional development approaches.
Simplify the design
The design approach should prioritize clean, intuitive interfaces. Everything should be in logical places so it’s easy to use. Here are some tips on how to achieve that:
- Standardized components. These reusable blocks can work across different parts of the cross-platform app. They make it easier to implement updates and improvements, as changes can be made once and automatically reflected everywhere, saving time and money.
- No unnecessary complexity. Simplicity doesn’t mean sacrificing functionality. It means implementing features in the most straightforward way possible. For example, instead of having five different ways to save a file, have one clear “Save” button that works consistently.
- Focus on UX. When people can easily find what they need without getting lost or confused, they’re happier and get more done. Consistent and predictable interfaces allow users to navigate the software better, increasing productivity and customer satisfaction.
Consider software development outsourcing

Choosing the outsourcing route is a potent solution to optimize operations and drive financial advantage. By leveraging external expertise and tech talent, businesses can enjoy some great IT outsourcing benefits:
- Best price-quality ratio. Top outsourcing companies are constantly honing their skills in custom software development solutions and high-end services like GenAI implementation, third-party integrations, and data management. These firms invest in training their human resources, advanced development tools, and robust quality assurance processes. They achieve cost efficiency through optimized workflows, established development methodologies, and access to diverse talent pools across different regions.
- Easy team scaling. Changing the team structure in outsourcing is quite simple. Companies can add or remove a team member at any time, depending on their current project needs.
- Reduced operational overhead. Companies can significantly cut down on costs related to office space, equipment, software licenses, and HR management since the outsourcing partner handles these responsibilities.
Build your custom software with Neontri
Neontri is a trusted partner in custom software development. Our company worked with leading retail, banking, and fintech companies. Our team excels in complex technical implementations, whether clients need specialized skills for GenAI projects, big data solutions, or e-commerce systems development.
Our partnership model offers flexible scaling, deep tech expertise, and industry-specific knowledge. With Neontri, clients gain more than just technical resources; they get a reliable service provider who can deliver high-quality solutions while optimizing development costs.
Conclusion
The tech world is changing fast, and so are the costs of building software, whether you’re doing it in-house or working with partners. Understanding what goes into the price of a software product is crucial to creating a seamless project roadmap.
Thorough planning, careful vendor selection, and the flexibility to adapt to changing requirements are the keys to cost-effective software development. At Neontri, we know how to navigate these challenges because we’ve been through them countless times with our clients. As an experienced software development partner, we keep pricing transparent, offer flexible engagement models, and bring 10+ years of experience to every project.
Would you like to hear real examples of how we’ve helped companies optimize their software development investments? Contact us today for more tips from our experts!
FAQ
Why are software development costs so high?
The complexity of modern systems, the need for skilled professionals, and the time-intensive nature of the development process drive up project expenses.
What are the costs associated with integrating new software with existing systems?
Integrating new software involves expenses for compatibility testing, data migration, system updates, and potential downtime during the process. It may also require additional development to ensure seamless communication between systems.
Is custom software development more expensive than off-the-shelf solutions?
Custom software development is generally more expensive due to the personalized design and development efforts. However, it can offer better long-term value as it addresses specific business needs, eliminates unnecessary features, and reduces licensing fees.
What are the cost implications of using emerging technologies like AI and blockchain?
Emerging technologies often come with high costs due to the need for specialized expertise, advanced infrastructure, and extensive testing. However, they can also lead to long-term savings through automation, efficiency, and improved data security.

Alia Shkurdoda
