Understanding the costs of software development - and how to navigate vendor quotes

If you’re looking to develop custom software and want to know how much it will cost to get the right product launched, you’ll first need to understand how vendors do software pricing.

Unfortunately, comparing quotes to choose the right software agency or freelancer isn’t as simple as comparing auto repair shops or electricians. Common challenges can include:

• Quotes can vary by 10x or even 100x – you can get a $5k and $500k quote for the same job
• Quotes are presented in different ways – some are lump sum, others are based on hourly prices
• The process can vary widely by vendor – some are quick to share a number, others require a lot of information to get there

All the while, you may encounter conventional wisdom like the "Rule of Pi" (which states that when you get an estimate of what something costs or how long it will take to complete, you should multiply it by π) and “85% of projects fail to hit the budget”, making it hard to know which quotes to trust and what to expect.

So what’s going on here? With so much pricing inconsistency, how are you supposed to get an accurate number on the costs of your software development for budgetary planning? 

Below is a quick guide to thinking about pricing so you can better navigate the quotes you receive from vendors. 

Key concepts: price vs. value and fixed vs. capacity quotes in software pricing

Two concepts can be especially helpful for understanding software quotes: (1) price vs. value and (2) fixed vs. capacity quote structures. 

With price vs. value, if a vendor quotes you much higher than others, they’re probably not fleecing you. Chances are they have very different assumptions about the effort needed for the build and the quality of the product that they’ll deliver. Some vendors may include a lot more than you actually need, while others may skip things you really care about. The key is to understand what you're getting so you can choose the vendor that has the overall highest value to you.

With fixed vs. capacity quotes, software vendors will either quote you on a fixed-price basis or a cost-plus basis. Each model has important implications for how you think about a quote and manage your budget once you get started.

Below is a detailed breakdown of each concept so you can better navigate the quotes you receive. 

Price vs. value: deciding what you need most

1. Services

This is about the level of expertise and work the vendor puts against the project. Each service adds time and cost to your build, so you should only use the services you need. Review this checklist of services:

• Market research and concept validation: do you need someone to help you size the market, evaluate competitors, or do pricing/business planning? This is rare and will mostly likely only come from venture studios.
• Ideation and design thinking: do you need someone to help you think about the ideal user experience, survey users, or run small prototypes? This is also a bit rare, coming mostly from higher end design studios.
• Feature prioritization: do you need a product expert to help you translate your vision into specific requirements and figure out which ones fit into your initial build, or are you bringing exact specifications to the developer? This service can be helpful both to streamline your app and for you to make sure the agency really understands what they're building.
• Design: do you need UX/UI design, or are you bringing full mockups? Custom design can be really valuable for creating a great product and making sure you know what you're going to get, but also very expensive.
• QA testing: one thing to check is how the agency reviews and confirms that all functionality is working properly. It's important to have a robust process in place.
• Migration and onboarding: do you need help migrating your data and users from an existing system and training users on a new system? This is usually important for internal tools and rebuilds, versus new systems.
• Support and maintenance: do you need ongoing maintenance after the build? A build is never done after launch, and you should expect it to cost 10% of the original build cost annually to maintain the app (or more if you're adding to it).
• Marketing and launch support: some agencies will also help you with go-to-market strategies, or extracting insights from your user analytics.

2. Features

‍It's easy to assume that a feature is a feature. But it’s not quite that simple. Within each basic feature description is a world of permutations which can have big impacts on assumed pricing. Some agencies will assume bare-bones versions of each feature, while others will assume the premium version.

For example, if you say "a user should be able to sign up for the app" this could include any of the following:

• Entering an email and password to create an account
• Email verification
• Identity verification from a KYC provider
• Sign-up with Facebook/Google/other
• 2-factor authentication with your phone
• Filling out a long form with lots of information
• Following a step-by-step onboarding process to the app
• Getting approved by someone before they can go in
  ‍
  It's hard to specify everything to the highest degree when getting a quote, but it's important to detail the features that matter most so you aren't surprised later that they aren't included.
  

3. Quality

‍Two apps with the exact same design and features can perform very differently in the real world. Four things that affect outcomes that you should think about are speed, scalability, security, and bugs. Each of these can be tricky to evaluate before the build, but there are a few tricks for anticipating each:

• Speed: test out apps the agency has built before and get a sense for speed, or have them demo something.
• Scalability: ask about the scaling limitations (either in terms of daily active users or another key metric), and examples of apps they have made that have scaled.
• Security: you can ask a bit about security features of their technical infrastructure, making sure the app will have role-based data privacy protections (i.e., users can only access data that they’re authorized to access), and ask about their security processes.
• Bugs: you can ask how they handle bugs during and after the build.

Fixed vs. capacity quote structures: understanding how you’ll be charged

There are 2 types of quotes you can receive from agencies: fixed and capacity. Generally fixed price is better for you, but each has its advantages and things to consider. Below are some points you should evaluate around each:

1. Fixed price

In this model, the agency tells you a total price for the output, and they incur the cost (and risk) of getting it done right. Typically, this benefits you because it lowers your risk, but there are a few considerations (and red flags) to be mindful of:

• Scope of work: the key to managing a fixed-price build is making sure both sides are clear and aligned on what the deliverable is that the agency is committing to. Per the section above about explicitly defining features, you don't want to realize later that the agency assumed much simpler versions of each feature, leaving many of your core features out of scope. Make sure you have written documentation of all features so you can point to them later if there is a disagreement. If an agency gives you a fixed quote without proper diligence or written scope on their end, it's a red flag – they should be looking to protect themselves with specificity too.
• Review and acceptance process: make sure you’ve defined how you will review and confirm that everything is working properly before accepting the output. This takes time (especially if your feedback requires clarification and fixes), but it's important that the agency accounts for it in their plan. If they plan to hand it over and head to their next project, that's a red flag.
• Contingencies: what happens if the agency doesn't deliver? You may want to make explicit that they will incur any costs to make you whole, or suffer penalties for going over or under-delivering.
• Change orders: one clear downside of fixed price projects is that the scope is also fixed. If you anticipate wanting to adjust the scope midway, understand how that will work (e.g. does it stop the whole build? is there a penalty?).
• Likelihood of success: even in cases where agencies claim to have you covered, it's important for you to evaluate the likelihood of success. Ask questions to understand how they will scope, build, and review the app. If they seem to have an insufficient process or staffing to get it done (e.g. one developer does it all), that's a red flag.

2. Cost-plus (usually an hourly price)

This model, which gives you an hourly cost and estimated number of hours, is more common for development agencies since predicting total hours is difficult (especially when they have the same concerns about how you're interpreting features that you have about them). While this model puts the risk on you, it's still something you can navigate. Some considerations are:

• Staffing: understand what roles they are planning to staff in each phase of the project and how much each costs. This will help you know what extra cost you'd incur if different parts of the build go over.
• Timing and scope: this is the key factor for these quotes – do you believe the agency is properly staffing each step to get to the end? It’s important to note that the agency has a clear incentive to underestimate the work because the quote looks more attractive to you and it'll be hard for you to switch teams midway.
• Assumptions and milestones: one way to test whether the agency's estimate is sound is whether they clearly define milestones (versus giving a high-level estimate), and assumptions (either features, or dependencies on your team for answers/data) up-front. They should do this to set expectations, and if they don’t it may be a red flag that budget overrun is more likely.
• Examples and references: at the end of the day, it’s difficult to know the true expected time/cost for your unique app, so looking at references and examples of successful past projects can be critical for building trust in a team.

Airdev’s approach to software pricing

Here’s how we at Airdev, a no-code software development agency, incorporate the 2 concepts described above to price our clients’ apps. (Refer to our What is no-code? guide for a full overview on building apps without code.)

How we approach price vs. value

While we serve a wide range of clients (and budgets), our approach is always to minimize excess services and features to maintain the highest quality standards. This means that we:

• Always provide robust scoping/design services before development and document everything very clearly so you know exactly what we’re building and how it will function
• Don’t add ancillary marketing/business/user testing services because we try to specialize in the process of making an app
• Rely on our clients to understand what they want their app to accomplish – even if they can’t describe all the technical details (that’s where we help translate)
• Build a wide range of features, but generally push clients to stay lean to facilitate high quality, fast launches

How we approach fixed vs. capacity quotes

When it comes to our pricing structure, we try to do fixed quotes whenever possible (coupled with very detailed scope documents and app wireframes so you know exactly what’s being built). However, we shift to capacity quotes in instances where clients need to be more flexible (i.e. the client prefers to evolve their idea as they go) or for huge projects where we can’t document everything upfront. In this case, we’ll use a more agile setup where we define priorities in weekly sprints. 

No matter the case, we will always use the following principles to give you the most accurate quote for the value possible:

• Requiring specificity and due diligence up front to make sure all parties are aligned on what we're building
• Budgeting to do each phase properly (versus skipping steps that might make an initial quote appear lower)
• Including buffers so that we don't go over our estimates
• Focusing on defining and building a technical product (i.e. scoping, design, build, support) versus business and marketing services which the client can find elsewhere

Want a quote from Airdev?

At Airdev, we build custom software at fraction of the time and cost of traditional development using no-code. Contact us to see if we're a good fit for your project!