When it comes to software development, budgeting is key. Without a good understanding of how your project will cost, you may not be able to accurately estimate the entire scope and budget for your project. To help get started, here are three tips on how to budget for a software development project.
Sample Budget for Software Development Project
Let me show you a software project budget example. First, it’s essential to understand that each industry and company has a different way of estimating and controlling costs.
In software development projects, a PM usually tracks the cost of the team. This is because that’s the biggest part of running costs.
As you see, here, we can plan and track the monthly budget in a simple spreadsheet.
Most of the companies use a variation of a Times and Materials contract. We bill the project owner per hour, day, or week of actual work by a resource. Sometimes clients agree to “pre-pay” for a month in advance.
However, software projects always come hand in hand with some hardware.
IT Project Budget Example
In addition to the tracking efforts, you need to budget for infrastructure to host your software.
But there’s a catch:
Nowadays, there are so many payment plans that showing one example is not representative.
Nevertheless, companies like Amazon and Microsoft provide calculators for infrastructure costs:
You can use them as a starting point, but you need to make some usage predictions to ensure you don’t overrun the limits of your payment plan.
These project management examples are excellent, but you can’t re-create them merely by looking at pictures. There are lots of considerations behind each line here.
Reasons Why Budget Planning Is Vital
Whenever we work with startups or enterprises – we strive to be accurate, transparent, and flexible in estimates as possible.
Communicating with a client properly is an important task to prioritize that minimizes the potential for doubt about the accuracy of your cost estimates.
However, it is still essential to create an estimate covering all possible issues and is as accurate as possible.
How to Plan a Perfect Software Development Budget
Step 1: Figure Out the Client’s Expectations
The first and most essential step in creating a cost estimate is finding out the client’s vision of the project.
Every project manager’s dream client provides detailed documentation that describes every element of the future product. The reality is that this rarely happens. In this case, the primary task of an engagement manager, or anyone else who communicates with a customer, is to figure out the client’s exact vision and the primary functionality of a project.
It is not enough to have a general idea of the project. The more detailed the customer is, the more accurate estimate they will receive from the software development provider. If you are unsure how some aspects of a project should work, don’t make anything up. Ask a client to clarify the ideas.
At KindGeek, we believe that asking the right questions is crucial for the success of the project. The more answers you receive, the better — for both you and the client.
Don’t be afraid of appearing incompetent when asking many questions when it comes to figuring out a budget for software development. This fear can cost a company’s employees dozens of hours of unnecessary work and frustration and lots of extra expenses for the client. Remember, you are asking questions, not because of your lack of knowledge but because you want to deliver exceptional service and ensure that everything works out well.
If the client comes to us without a clear vision of how exactly the product will look, we suggest conducting a discovery phase. Business analysts investigate the functionality of a future project in detail and its place in the modern market. It allows us to test products before the implementation phase, saving costs and up to 20% of the time for development.
It is essential to inform a client that the discovery phase will help make a future estimate more accurate and create a more competitive and reliable project.
Step 2: Find Out the Client’s Budget
It is essential to consider how much the client is willing to pay for the project. However, not all clients want to share their budgets with software development providers due to several reasons.
About 30% of our clients do not want to share their budgets.
One of the reasons for that is that some clients are afraid that a software provider will try to squeeze the most money out of the customer and adjust the project cost accordingly.
However, knowing the exact amount the customer is willing to pay for the development might improve client-company communication in two ways:
1. The estimate will be crafted quicker since the software development provider would meet the client’s budget expectations straight away.
2. Less frustration and misunderstandings.
If the customer’s budget is too small, we can ignore non-primary functions by creating an MVP before the finished product. This might happen when the customer is launching a startup and is going through the investment rounds.
About 75% of startups we worked with did an MVP first.
Step 3: Make an estimate
While the actual estimate does not take a lot of time to craft, choosing the right person to perform this task is essential.
This person should be aware of all the technical aspects of the project and be skilled enough to estimate the work of developers, designers, and business analysts involved in the project. You might also use a sample budget for a software development project that could be found on the web.
There are four things to consider when crafting a software development project budget estimate:
- The complexity of the project.
- Software size and type.
- The team needed to build a product and their rates.
- The time it takes to complete a project.
Step 4: Evaluate the risks and include out-of-scope expenses.
No, we don’t try to scare the customer straight away. The risks are evaluated to prepare and inform the customer about possible extra expenses.
It is also essential to include an out-of-scope section while creating a budget for a software development project if you are doing an MVP.
Thoughts on Crafting a Perfect Software Development Budget and Estimate
“When we’re talking about estimated budget, there are a lot of things to be considered. First of all, the perfect budget should meet expectations: both clients and the company’s. The client should indicate at least the best (optimistic) / worst (pessimistic) case scenarios to understand whether he or his investors can cover this budget. A company should make a reasonable profit.
The budget should consider possible risks and their cost. It also needs to consider project timeline (duration), team composition, and its members’ salary reviews. It should include a contingency to cover estimates uncertainties. It also should not be 100% fixed – there should always be room for a change because we don’t live in constants, but much rather in variables.”
Software Development Budget Template Excel
Excel Project Budget Template
If you’re already tracking your project numbers in Excel, then rather than using an online spreadsheet, you might prefer a simple project budget template for Excel. Well, here you go. Just enter your Labor, Material, and Fixed costs into this spreadsheet, and it will calculate your budget for you. There’s even a column for you to enter your actual costs after the fact, so you can compare them to your budget and automatically calculate your overage (or savings, if you’re so lucky). And there’s one more nice feature about this Excel project budget template: It also works as a project budget template in Google Sheets, if you prefer that.
What is a budget spreadsheet template?
A budget, in case you’re in charge of Boston’s Big Dig and haven’t heard of one, is a careful estimate of what your project will cost. No matter what you’ve heard about the power of positive thinking, when it comes to your budget, being optimistic and just making a guess is a bad idea. The difference between an estimate and a guess is that smart people make estimates, and estimates are based on information.
To make sure that your estimate is based on the best information possible, it’s helpful to have a spreadsheet that lays out each part of your project, and the labor, materials, and other costs required for each part to be successfully completed. And since building your own spreadsheet from scratch takes time, it’s helpful to have a budget spreadsheet template with all the columns already set up and labeled.
That way, you won’t forget to break each project down into tasks, and then consider the materials, labor, fixed costs, and various other expenses of each task. Instead, a project budget template like this one lets you enter your costs to calculate an estimated budget.
Did you know?
If you are financing a large purchase of parakeets, you may want to consider a budgie spreadsheet.
A 70-year study found that nine out of ten construction projects end up going over budget. And the tenth one was probably something like “Municipal pothole.”
The average cost overrun of a project is 27%. But since half of all projects are completed within budget, that means the ones that fail to do so are usually off by more than 27%. Sometimes by over 200%. That means they spent all the money they had, and then spent all that money they didn’t have, twice, and kept going. Probably should have had a project budget.
How does it work?
Break your project budget down into main categories, represented by blue rows. Within each category, all related tasks are given their own row as Level 2 Tasks. For more complex or multi-part tasks, use a summary row (rows in gray) to break them down further into level 3 tasks.
For each bottom-level Task, select the necessary Resources (be they human or otherwise). Each Resource is linked to the Resources worksheet, where they are entered with a type classification (Person, Equipment, etc.) and a picture, to clarify what resources will be required for various parts of your project.
Back on the main Budget worksheet, each Task is also assigned an Owner and an RYG stoplight status to indicate whether the project is proceeding as planned or in need of attention. Use the left-hand view options to sort tasks into Kanban views based on either of these two fields.
For each task, enter Fixed costs, Material costs (by Unit and Quantity), Labor costs (by Hours and Rate), and any Other costs associated with that task. Note that parent rows (indicated here in blue or gray) should not have any of these costs entered, as the Subtotal column will automatically tally all descendant rows.
Consult the About worksheet for further details on modifying this budget spreadsheet template — as well as some extra tips for calculating a project budget.
How do you Estimate a Software Project?
1. Analogous estimating
This method of estimating a budget consists of analyzing an already completed project with a similar scope to the current one and using its budgeting calculations, adjusted for differences in scope, quality, term of execution or any other relevant parameters. It is not always a completely accurate method, but it can be an appropriate method in situations when there is limited information regarding the upcoming project and a quick estimate is required. This method is usually quicker and less costly than others, but can only be used by companies that have had similar projects in the past.
2. Parametric estimating
This estimating method consists of using historical data and other related variables for estimating the project’s scope, duration and total costs. This is usually achieved by researching past data, calculating various per-unit costs for various aspects that are common to the current project and adjusting the proportions to fit the scope of the new project. The accuracy of this method is usually proportional to the quality and relevancy of the historical data it is based on.
3. Top-down method
This method consists of looking at the project budget in its entirety and then calculating individual costs for each of the required processes. Each part of the overall project is analyzed, with its exact costs calculated and then compared to the initial estimates for each. Based on the results, project managers can see how cost-efficient each process is and may decide to reduce the scope of some parts of the project, so it fits within its total allocated budget.
4. Bottom-up method
Unlike the top-down method, which divides the project into multiple processes and calculates the individual costs for each, by using the bottom-up method the project manager attempts to directly generate a total project budget, with the help of their project management team. As a general rule for this method, the budget estimation’s accuracy is usually proportional to the accuracy of the information and expert advice received during the budgeting period.
5. Three-point estimate
This method uses three different calculations to estimate a budget: the most expensive scenario, the most cost-effective scenario and the scenario that’s most likely to occur. By using these figures you can roughly estimate there required budget, but also assess some of the risks involved in the project.
6. Earned value analysis
This method is a way of estimating the accuracy of a project’s budget during the execution of the project. It consists of constantly comparing the costs for each phase of the project with the ones that were previously estimated, typically by using one of the four previously-mentioned methods.
Tips for accurate project management budgeting
Consider these tips when determining a project’s budget:
- Focus on the organization’s needs. When creating a budget for a particular project, it is essential to remember that the ultimate goal of any project is to help its parent organization reach its goals. By knowing exactly how valuable a project is to the organization you can improve your odds of accurately determining its budget.
- Keep open communication with the stakeholders. Throughout the project’s budgeting and execution phases, you must constantly communicate with the people who stand to benefit from its successful completion. Depending on their priorities and needs, you can determine if the project is correctly budgeted or if it needs adjustments in scope and budget.
- Adapt to changing parameters. Various unforeseen events and situations may occur from the time a project is budgeted until its execution. When creating a budget, you need to plan for this eventuality and have enough flexibility to adapt to any change, internal or external.
By following a budget strategy and estimating the costs of the project, you can find the best financing options for your software development project. By setting a funding goal and choosing the right financing options, you can make sure that your software development project is affordable and benefits your business in multiple ways.