Most projects tend to exceed their initial budget. A study by McKinsey & Company, in collaboration with the University of Oxford, shows that 45% of enterprise software development projects experience cost overruns, and a third exceed the estimated schedule, with almost 20% ultimately failing to the point of threatening the company’s financial health.
If you’re planning a new app or platform, two questions set the tone for everything that follows: How much will software development cost, and how long will it take? Early on, it’s hard to answer, and details are fuzzy, with many unknowns, so cost estimates are rough. As you define the work and make decisions, the numbers get clearer and turn into a budget you can trust.
In this article, we will explore a structured approach to assessing your software development expenses, featuring real-world cost scenarios, and get your estimation right.
Why Estimating Software Costs Is Hard?
Estimating cost is tricky because many factors shift, and it’s well-known among software engineers that trying to get an accurate number on the software development costs (and time) is a task doomed to fail. Software development is not like car manufacturing or house building.
Some factors include: ever-changing requirements, high dependency on system integration, technological limitations, the human factor (performance, productivity, communication, and experience), and the necessity of creativity and inspiration for problem-solving.
According to BCG, two-thirds of large-scale projects had experienced a software development fiasco, where the project wasn’t delivered on time, within the budget, or within the agreed scope. The cost of failure for each project could exceed €20 million ($23 million).
In short, software development is not a step-by-step recipe. Therefore, accurate estimates on software development costs are not possible.
However, it’s possible to continuously estimate a software project as a hypothesis and correct that estimate as development goes on and new information arrives.
In fact, that’s the whole point of being Agile: to continuously create an Increment of working software and thoroughly inspect it. This is how you make gradually more correct assertions on estimates in software development.
How to Estimate Software Development Costs
Estimating software development costs is a challenge, but certain methods and techniques can make the process more precise. Instead of trying to cut costs to appease investors and executives, the goal is to obtain a realistic, data-driven estimate that supports planning and decision-making.
1. Requirements and Scope
There is no secret here. You need a briefing on what is going to be built. If you are in a Waterfall project (e.g., in government), this briefing will be a very detailed document listing all features, interfaces, business logic, and restrictions. On the other hand, if the project is Agile, likely Scrum, your product is the project; the product backlog (assuming they are using epics, features, user stories, and story points) will function as a high-level measurement estimation.
If your Agile product doesn’t have them in your product backlog, ask the product owner to create or use a high-level cost estimation for each product backlog item.
Make a budget estimation for each Sprint. Most Sprints have one month or less. After the end of each Sprint, your product owner should show the actual costs of the Increment produced. Compare your estimations with the real cost of each iteration.
Assuming your product owner utilizes story points and velocity charts, you will have an average of how many story points the team delivers per Sprint.
Estimate how many Sprints they will work on the project:
Number of Estimated Sprints = Product Backlog Story Point Total / Average Team Velocity
Now multiply the Number of Estimated Sprints by the Average Cost of each Sprint:
Total Estimated Cost = Number of Estimated Sprints x Average Cost of a Sprint
Now that’s a start. The cost per sprint is the development team’s fixed costs (salaries, tools, infrastructure) over the duration of a sprint. If the sprint lasts two weeks, the sprint cost is the team’s total salary for two weeks.
2. Utilize Multiple Estimation Techniques
Reliable cost estimates aren’t the result of a single calculation but rather a product of a strategic, phased approach. The following estimation methods are not mutually exclusive; they are best applied sequentially as the project matures and more information becomes available.
Analogy/Top-Down Estimation
Cost estimation based on historical data on similar projects. It’s useful for quick estimates when past data is available.
Parametric Estimation
This estimation method utilizes parameters or factors, such as the project size, complexity, the number of software developers, and the estimated duration, to generate development cost estimates. We will talk more about that when dealing with the software development costs breakdown.
Bottom-Up Estimation
Here, you break down the project into smaller tasks and activities (or you can check the Sprint Backlog from the Developers). For each task, estimate the resources in use and associate them with the costs. Then just sum them up. It has the most precision of all the others, but it takes time.
Constructive Cost Model (COCOMO II)
COCOMO was a model developed by Barry Boehm in the 80s. Its recent version, COCOMO II, calculates effort and time needed for software development based on software size, team abilities and experience, product complexity, and tools involved. The difference between Engineering/Bottom-Up Estimation and COCOMO is that COCOMO uses algorithm formulas to make estimations, while Bottom-Up is made by hand.
Function Point Analysis (FPA)
Allan Albrecht at IBM in the 70s created FPA, which focuses on software user-centric features called “function points”. To calculate the budget of these function points, the model analyzes external input and output, user inquiries, internal logic files, and external interface files.
| Method | Ideal Project Phase | Reliability | Effort Required | Key Input |
| Analogy/Top-Down | Early-stage (e.g., initial budget pitch) | Low | Low | Historical project data |
| Parametric | Mid-stage (e.g., as scope is defined) | Medium | Medium | Statistical metrics (e.g., story points) |
| Engineering/Bottom-Up | Late-stage (e.g., development begins) | High | High | Historical project data For Waterfall: Work Breakdown Structure (WBS) For Agile: Product Backlog |
| COCOMO II | Late-stage (e.g., development begins) | High | High | For Waterfall: Work Breakdown Structure (WBS) For Agile: Product Backlog |
| Function Point Analysis | Early-stage (e.g., initial budget pitch) | Low | Low | Historical project data |
3. Create a Prototype and an MVP
If the project hasn’t started yet, a prototype and an MVP will give you a reasonable starting point for software development costs estimation. The MVP also helps you to measure how viable the Product-Market Fit is.
4. Check the Product Backlog or the WBS Often
In Waterfall, a WBS lists all the needed tasks to complete the project, with cost estimates for each task. In Agile, the Product Backlog is never complete because it’s a living, dynamic list of all potential work for a product. They help you to create a bottom-up estimate that is more precise than other estimation methods.
5. Propose a Contingency Plan
Incorporate a contingency fund in the budget based on risk (10%-20% over the total cost for simpler projects, up to 50% for greater, innovative projects).
6. Implement an Efficient Project Management
Implementing Agile frameworks enables adaptation to change by employing iterative development cycles and continuous feedback. Agile has a good record of efficiency and cost optimization, enabling regular inspection of costs and progress. According to McKinsey, Agile companies have 30% more efficiency in KPIs than others, including cost efficiency.
7. Leverage Existing Solutions
Developers can reduce costs and deliver faster by utilizing open-sourced libraries and frameworks, integrating third-party services for non-essential features (as long as it doesn’t compromise security), and considering SaaS platforms for common business logic.
Software Development Costs Breakdown
The total cost of a software project can be broken down into direct and indirect expenses, each of which requires careful consideration during the estimation process.
Direct Costs
These are expenses related to software development. The largest component by far is labor: encompassing salaries or contractor fees for the entire project team, including developers, designers, project managers, and quality assurance engineers.
Labor costs are not limited to base salaries but also include benefits, payroll taxes, and other associated personnel costs.
Beyond personnel, direct costs include physical infrastructure, license fees for development tools, platforms, and third-party APIs. In addition, software might require cloud infrastructure and hosting services. Subcontractor fees for external consultants or specialized service providers also fall into this category.
Indirect Costs (Overhead)
These are shared expenses not tied to a single project but allocated across the organization. They include general administrative costs such as office space, utilities, and corporate IT infrastructure.
Furthermore, non-billable staff support, which includes salaries for other departments (e.g., human resources, finances, and legal), must be accounted for as an allocated cost.
The Project Lifecycle Breakdown: A Phase-by-Phase Analysis
The total investment in software is best understood by breaking down the cost across the various phases of the project lifecycle. The following table illustrates the actual development or “coding” phase, which is the largest single component and represents only 40-65% of the total budget.
| Cost Component | Cost Percentage of Total Budget |
| Planning and Requirements Engineering | 10-15% |
| UI/UX Design | 5-20% |
| Software Development (Coding) | 40-65% |
| Quality Assurance & Testing | 15-30% |
| Deployment & Launch | 5-10% |
| Post-Launch Support & Maintenance | 15-20% (annually) |
As you can see, software costs aren’t equivalent to developer salaries. Significant portions of the budget are allocated to essential, non-coding activities. Under-budgeting these critical phases can lead to a financial disaster.
For example, a project that rushes through the design phase to save money on prototyping often results in costly rework after development has begun.
Similarly, a failure to allocate sufficient budget to quality assurance and testing leads to bugs and issues being discovered after the product is launched, a problem that is often two to three times more expensive to fix than if it were caught earlier in the process.
How Much Does Software Development Cost in North America (2025)?
Software development in North America can cost from tens of thousands for a simple project to hundreds of thousands or even millions for a complex one, depending on the developer’s experience and the complexity of the project. Key factors influencing the total cost include the project’s scope, the average hourly rates plus the experience level of the developers involved, and the team’s structure. Here is the benchmark data on software development costs in North America for 2025, so you can prepare your budget with more accurate estimates.
Project Size
The cost of a software development project varies greatly depending on its size and complexity. Simple or Minimum Viable Product (MVP) apps, which are small-scale mobile or web applications, can range from $5,000 to $50,000. No-code or low-code solutions can sometimes reduce this cost significantly.
Mid-sized applications, such as a moderately complex mobile app or a SaaS platform with standard features, generally cost between $50,000 and $150,000. These projects require more time and a dedicated team to implement features like payment processing and databases.
Large-scale, complex software, including enterprise applications, multi-platform systems, or apps with advanced features like AI/ML, have significantly higher budgets. These projects typically cost from $100,000 to over $300,000. Very large, cutting-edge projects can even exceed $1 million. The average cost for a custom app in 2025 is estimated to be around $171,000. Additionally, businesses should budget for ongoing maintenance, which can be 15-25% of the initial development cost per year.
| Project Size | Description | Average Cost Range |
| Simple/MVP Apps | Small-scale mobile or web apps with basic features, or a proof-of-concept (POC). No-code/low-code solutions can significantly reduce this cost. | $5,000 – $50,000 |
| Mid-Sized Applications | Moderately complex apps, such as consumer mobile apps or SaaS web platforms, with standard features like user accounts and custom UIs. | $50,000 – $150,000 |
| Complex/Enterprise Platforms | Large-scale, complex software like enterprise systems, multi-platform applications, or platforms with advanced technology (AI/ML, heavy backends, high security). | $100,000 – $300,000+ |
Average Hourly Rates for Software Development Roles in North America (2025)
Hourly rates for software development roles in North America are among the highest globally. The average rates for core development roles like Front-End, Back-End, and Full-Stack Developers are clustered between $50 and $60 per hour, with more experienced or specialized professionals commanding rates of $80 per hour or more.
DevOps Engineers are also in high demand, with an average rate of about $60 per hour, reflecting their critical role in cloud infrastructure and continuous integration/continuous delivery (CI/CD). Roles focused on management and quality assurance, such as Project Managers and QA Engineers, have slightly lower average rates, typically around $48 to $50 per hour.
It’s important to note that these are average figures for mid-level talent. Actual rates can vary significantly based on a developer’s experience, specific technical skills, and geographic location. Hiring through an agency or consultancy will also likely result in higher billable rates compared to hiring freelancers or in-house staff.
| Role | Average Hourly Rate (USD) | Common Range (USD) |
| Front-End Developer | ~$50 | $40 – $80+ |
| Back-End Developer | ~$55 – $60 | $50 – $100+ |
| Full-Stack Developer | ~$60 | $55 – $100+ |
| DevOps Engineer | ~$60 | $50 – $80+ |
| Project Manager | ~$48 – $50 | $40 – $60 |
| QA Engineer | ~$48 – $50 | $30 – $50+ |
Summary of Typical Team Structures and Monthly Costs
Software development costs are frequently calculated based on the team’s size and composition, also known as the monthly “burn rate.” In North America, where labor costs are high, even a small team can be a significant investment.
A small project team, suitable for an MVP or a simple app, typically consists of 2-4 members, including a couple of developers, a QA engineer, and a part-time project manager. The monthly cost for such a team in North America can range from $20,000 to $40,000.
For a mid-sized custom application, a larger team of 5-8 members is common. This team might include front-end and back-end developers, a DevOps engineer, a QA engineer, a UI/UX designer, and a project manager. The monthly burn rate for this size team can be $50,000 or more. A six-month project with a team of this size can easily exceed a total cost of $300,000.
Large, enterprise-level projects require even bigger teams, sometimes with 15-20 or more people. These teams can cost over $100,000 per month and often require millions of dollars in total for projects that span a year or longer. Companies often manage these costs by mixing roles, using part-time staff, or blending onshore and offshore talent.
The total monthly cost is directly tied to the number of roles and their specific hourly rates. Each additional role, such as a UX designer or DevOps engineer, increases the overall burn rate.
Companies on a tight budget might opt for a smaller team, shorter project timelines, or leverage offshore talent to reduce costs. Be aware: decreasing your team’s size will likely decrease productivity; it’s not a decision to make based on the budget alone. A better option would be to hire nearshore and offshore remote developers.
| Team Size & Project Type | Typical Team Composition | Estimated Monthly Burn Rate (USD) |
| Small Project (MVP / Simple App) | 2-3 Developers, 1 QA Engineer, Part-time Project Manager | $20,000 – $40,000 |
| Mid-Sized Project (Custom App) | 5-8 Members (Developers, DevOps, QA, UI/UX, PM) | $50,000+ |
| Large Project (Enterprise Platform) | 15-20+ Members (Multiple specialized roles) | $100,000+ |
Software Development Costs: Pricing Trends in 2025
Software development costs continue their upward trajectory in 2025. Rising developer salaries are a primary cause, fueled by a persistent tech talent shortage and high demand for specialized skills, especially in AI and cloud technologies.
The average cost for a typical custom app has reached a record high of around $171,450, a noticeable increase from prior years. According to Grand View Research experts’ projection, the mobile app industry will reach $567.19 billion by 2030.
To combat these high costs, many companies are increasingly turning to offshoring and nearshoring. There is a significant pay gap between North American developers and those in regions like Eastern Europe and Latin America. It allows businesses to save money while still accessing skilled talent. This has led to the rise of hybrid and remote teams.
While the emergence of AI and automation tools promises to boost developer productivity, they haven’t yet caused a significant drop in overall project pricing. Instead, AI is shifting budgets. While simple coding tasks might become more efficient, the development of sophisticated, AI-powered features requires expensive, specialized talent, which drives up the total cost.
Finally, there’s a growing awareness of the total cost of ownership. Businesses are now budgeting more for post-launch expenses, including ongoing maintenance, security, and cloud infrastructure costs. Vendors are more transparent about these long-term expenses, which can be 15-25% of the initial build cost per year. This means the overall financial commitment for a software project in 2025 is higher than in previous years, reflecting a more comprehensive view of the software lifecycle.
| Trend | Key Characteristics in 2025 | Impact on Pricing |
| Developer Salaries | All-time high in North America due to talent shortage and high demand for specialists. | Drives up project costs, with average custom app prices hitting a record high of ~$171,450. |
| Offshoring | Increased use of nearshoring (Latin America) and offshoring (Eastern Europe, Asia) to leverage lower labor costs. | Creates a significant rate gap, making hybrid teams a popular strategy to control budgets. |
| AI/Automation | Widespread use of AI tools (e.g., GitHub Copilot, Claude, and Cursor) for coding and testing. | Shifts budget from simple coding tasks to more expensive, specialized AI/ML roles and feature development; it does not lower overall project costs. |
| Total Cost of Ownership | Greater awareness and budgeting for long-term costs like maintenance, security, and cloud infrastructure. | Raises the total financial commitment for software, with vendors now emphasizing the 15-25% yearly cost for upkeep. |
Conclusion
Companies have budgets. Time costs money, and development teams are not cheap. Asking “How much will it cost?” in software development will have different answers after every release. There are always new non-foreseen functionalities to add and unpredictable bugs to fix. This is the tension between developers and management.
One can’t oversimplify estimations behind budget reports. In conclusion, the journey of bringing a software project to life is fraught with challenges, and among them is the management of development costs.
As a Technical Project Manager, I’ve learned that you can’t just ballpark figures. Each project has its own identity, and costs can vary widely. It’s not just the development you’re paying for but also the expertise, the integration, and the potential for business growth these solutions unlock. Partner with DistantJob to ensure that your project is not only cost-effective but also engineered for success by the best remote developers the tech world has to offer.
