How to Estimate the Cost of Custom Software Development: A Guide for Entrepreneurs

Categories: Advice for Start-ups and Entrepreneurs
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Whether running a recruitment agency in the Philippines or managing a company in any other industry, innovation is the way to stay at the top. 

Commercial off-the-shelf software (COTS) can be an excellent solution for everyday tasks, but it often falls short when it comes to the specific intricacies of your business. Meanwhile, custom software allows you to create solutions that align perfectly with your organization’s processes.

But custom software development isn’t without challenges; perhaps the most significant is estimating its development cost. Building bespoke software is a worthwhile investment but can become costly if you don’t approach it strategically.

Learn more about the step-by-step process of estimating the cost of custom software development in the handy infographic below!

How to estimate the cost of custom software development infographic

7 factors that affect software development cost

Understanding the factors influencing software development costs allows you to make informed decisions and manage your budget effectively.

1. Software size

The size of your software refers to the number of features and functionalities and its overall complexity—the larger and more complex the software, the more development time and resources it will demand. For instance, a simple contact management application will cost significantly less to develop than a comprehensive enterprise resource planning (ERP) system.

2. Architecture complexity

The architecture of your software serves as its foundation, determining how it’s structured and how different components interact. A more compound architecture, such as one designed for scalability and high performance, requires additional work and expertise.

This complexity results in a longer development timeline and increased costs. A simple application might have a straightforward architecture, while a complex, enterprise-level system requires a highly intricate architecture.

3. App integrations

Custom software often interacts with other applications or systems, such as payment gateways, third-party APIs, or existing databases. The number and intricacy of these integrations can significantly impact the development costs.

Each integration requires planning, development, and testing to ensure smooth communication. The more integrations your software needs, the more effort and resources are necessary.

4. Data migration requirements

Migrating data from an existing on-premise system to the cloud environment can be complex and time-consuming. Aside from planning, mapping, and testing, the complexity and volume of data to migrate can add more expenses to the entire project.

5. Software testing and QA

Checking that your software is defect-free and functions correctly is critical to development. Quality assurance (QA) and testing activities are essential but require additional resources, workforce, and time. Rigorous testing at various stages of development can uncover and address issues early, preventing costly fixes later in the project.

6. App maintenance requirements

After launching the software, it enters a phase of ongoing maintenance, updates, and support. The extent of post-launch care varies based on the software’s complexity and the frequency of updates. More regular updates need an ongoing budget for support and maintenance.

7. Development team size

The size and composition of your development team directly impact the project’s timeline and cost. A larger group can accelerate development but needs higher labor expenses. Moreover, finding qualified talent for technical roles can be like finding a needle in a haystack. The cost of recruiting staff for your software development team can be daunting, too.

Hence, you should align the team size with the project’s complexity and budget constraints without compromising quality. 

How to estimate custom software development costs

There are several methods for estimating custom software development costs, each with its approach and advantages. Here are four of the most common estimation methods.

Estimations by analogy

This method relies on historical data or past projects as reference points. You can estimate costs by comparing your current project to similar ones in the past based on previous experiences and outcomes. 

However, the accuracy of the cost estimate relies heavily on the availability and relevance of past projects. If there isn’t a similar project to compare with, it’s not helpful. Moreover, even similar projects can still have differences in requirements, complexities, and technologies, making this method sometimes imprecise.


The bottom-up estimation method takes a detailed approach. It involves breaking down your project into smaller, manageable components, estimating the cost of each element individually, and then putting them together to determine the overall cost.

While this approach can give you an accurate project estimate, the impact of missing out on a small component can throw off the entire estimate. This method is also less feasible for large, enterprise-level projects, as breaking everything down can be overwhelmingly complex.


In the three-point estimation method, a professional generates three different cost estimates for each task or component: the optimistic estimate, the pessimistic estimate, and the most likely estimate.

These estimates help make predictions more accurate by factoring in best-case, worst-case, and most-likely scenarios. By taking stock of your options, you can prepare your budget accordingly.

For this approach to be effective, the person doing the estimating must have good experience and understanding of the project’s intricacies. If not approached objectively, the three scenarios can be skewed too optimistically or pessimistically, which can throw off the accuracy of the estimation.

Parametric estimation

Parametric estimation relies on mathematical models and algorithms. It considers various project variables, such as the size, complexity, and industry benchmarks. It then calculates the cost using said variables based on predetermined formulas.

This method is much like a shopping cart, adding up the costs of items based on their prices and quantities, which means that it is inherently scalable.

However, the accuracy relies heavily on the quality and relevance of historical data. Poor data can lead to unreliable estimates. You should also be careful not to let mathematics simplify your perspective. The algorithm may assume that historical patterns will repeat, which isn’t always the case, especially if technologies or methods change.

How to reduce custom software development costs

As with any other project, remember to control the cost of custom software development so everything remains within budget. Here are some effective strategies to reduce expenses while maintaining quality.

Avoid scope creep

Scope creep is the inclination for a project’s scope to gradually expand beyond its initial definition. This can significantly increase the budget over time as more complexity—and thus, more time and resources—are added. 

To avoid this, define your project’s scope meticulously and adhere to it throughout development. Try to manage changes in requirements carefully and consider their impact on costs and timelines.

Choose the right tech stack

The right tools and technologies that align with your project’s needs are critical. Opt for well-established, widely-used tech stacks offering ample community support and resources. Determining your choice can prevent costly issues and delays associated with less mature or obscure tools.

Include QA at all stages of development

While implementing software QA will increase the cost because of the required tools and personnel, early identification and resolution of issues can prevent costly rework later on. Regular testing, code reviews, and QA activities are integral to each development phase, reducing the likelihood of defects and associated expenses.

Automate whenever possible

Automation streamlines repetitive tasks and reduces the time and effort required for manual work. Identify processes you can automate, such as testing, deployment, and data entry. It enhances efficiency and minimizes the risk of human errors, ultimately leading to cost savings and faster project delivery.

Consider hiring an offshore software development team

In today’s competitive tech landscape, the demand for top-tier talent often outweighs the supply in many regions, making recruitment challenging.

Moreover, the overhead costs of establishing and maintaining an in-house development team are substantial. There are not only the direct salary expenses but also the ancillary costs of benefits, workspace, equipment, training, and so on.

Utilizing an offshore software development team can be cost-effective for custom software development. Offshore teams can offer a pool of skilled professionals and competitive pricing without sacrificing quality.

Custom Software: A Worthwhile Investment

With a deeper understanding of the influencing factors, estimating methods, and cost-reduction strategies in custom software development, you can now confidently manage the intricacies of your project. You have the tools and knowledge to make informed decisions to meet your business objectives and stay within the budget.

Manila Recruitment is your trusted partner if you need assistance finding the right talent to execute your software development vision. We specialize in connecting businesses with remote and offshore IT professionals with the skills and expertise you need to bring your projects to fruition.

Contact us today to find out how we can tailor a solution for you!

Lawrence Barrett