Calculating the cost of developing websites, applications, and services involves detailed planning, and sometimes predicting future processes. This sounds complicated, but the truth is that it is impossible to give the client an exact amount immediately. This is why young studios and agencies often end up working at break-even or even at a loss.
Over 13 years in the IT market, we have also had loss-making projects and know firsthand how difficult it is to achieve stability and start making a profit after them. Therefore, we decided to help our colleagues and share what needs to be considered when estimating project work with a fixed price.
Determining a Profitable Rate
The constant in the project cost calculation formula is the specialist's rate. It depends not only on the employee's level but also on:
- the overall salary of the entire staff,
- the cost of equipment and software licenses,
- office rental and maintenance,
- taxes and social contributions,
- margins,
- the competitive market.
An agency needs to sum up the monthly expenses and add the projected profit for the same period. The resulting amount is divided by the number of employees involved in the projects and their working hours (also monthly). This yields the average specialist rate, which is adjusted according to market prices.
Now that there is an hourly rate for one employee's services, at which the agency is profitable, we can move on to estimating time.
Project Time Estimation
The basis of the time estimate is the technical specification for development. But let's be honest, most clients at best have design layouts and functional requirements, at worst, just a desire to create a website or application. However, without a technical specification, the result is unpredictable.
Requirements Analysis
To start writing the technical specification, you need to know what the client wants and their business processes. A business analyst, product, and/or project manager, whose time is paid before involving technical specialists, handles identifying goals and tasks.
If neither the agency nor the client company has such an employee, you risk wasting time (= money) on an extended presale, resulting in no contract at all. The only alternative to an analyst is experience from similar projects.
Developing the Technical Specification
Creating technical documentation takes 3 to 30 days: the period depends on the project's complexity and the agency's past cases. Preparing a full-fledged technical specification can be a separate service or included in the final amount, constituting 5-15% of the entire project's cost.
Including Risks
A proper technical specification includes a description of the stack, structure, functionality breakdown, database schema, integration guide, screen prototypes – everything that collectively represents the future product. Based on it, knowing the team's skills, it is easy to estimate the time and create a budget. But many forget about unforeseen situations:
- difficulties in integrating various systems and components,
- new legal requirements,
- errors that can only be detected in production,
- new client requests,
- project suspension due to a sudden budget cut.
Even experienced agencies may not account for all possible risks, but the main ones should be prepared for in advance.
- Technical forecasted difficulties are covered by adding extra time to the budget for their resolution, which increases the cost.
- For adding tasks beyond the agreed technical specification, a new estimate is made. The client must be warned about this in advance.
- To avoid payment problems, do only what is already financially covered. It's better to prepare and offer the client two cost estimates from the start: for the MVP and the entire project.
Estimating and Calculating Costs
- Estimate the time for each task from the technical specification.
- Include hours for risk mitigation.
- Proceed to calculations.
*The hours of all specialists involved in analytics, technical specification, development, and risks.
Now it all depends on your love for mathematics. But we are confident that you will succeed and not go into the red on the project. With the caveat – if you correctly determine the specialist's rate and the time spent solving tasks.
