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According to a McKinsey-Oxford study on Reference-class forecasting for IT projects, IT projects in total had a cost overrun of $66 billion, which is more than the GDP of countries like Luxembourg.
The same study also concluded that projects that continue longer are more likely to exceed budget and defined timelines.
The process of developing custom software can quickly devolve into a financial challenge, due to the obvious, and sometimes hidden costs that are skipped during planning.
These costs can sometimes be the very thing that will send your project off budget and off timeline, and understanding their origin is the most important thing.
With that said, let’s look at some of the secret costs of software development, the ones that give business owners sleepless nights.
So, here’s what you’ll learn in this blog.
One of the most common causes of late-appearing costs in custom software development is technical debt. Consider technical debt as the cost of hacks at the coding level. Instead of developing an application that best adheres to known best practices, programmers meet a deadline by using quicker, less optimal solutions or skimp on best practices. While the apparent efficiency shows promise when meeting deadlines on a project, it creates problems later on.
As the software ages and new features are added, shortcuts taken earlier can lead to code that is hard to maintain, inefficient, or even buggy. These problems sooner or later need to be corrected, with time-consuming updates and rework. Often, fixing technical debt is many orders of magnitude more costly than if the development had been done right from the beginning.
Managing Technical Debt:
To reduce the effects of technical debt, ensure that the development process focuses both on the quality of the code and its velocity. Encourage code reviews, favor refactoring when necessary, and also ensure that the developers have enough time to craft clean, maintainable code. Additionally, invest in tools that help identify areas of technical debt early so they are dealt with before turning into seemingly overwhelming problems.
One other hidden cost during custom software development is scope creep. It refers to a situation whereby the requirements for a project begin to grow outside the agreed original form. It may happen gradually as different stakeholders or team members request additional features or changes as the project unfolds. These changes may seem minor at first, but if not managed properly, can significantly affect the timeline and budget of the project.
Scope creep is particularly dangerous because it’s often hard to quantify how much it will cost in terms of time and resources, so every additional feature added to the project adds to complexity and pushes deadlines, making development costs go up.
How To Manage Scope Creep:
Prevent scope creep by beginning a well-defined project scope. Define all features and functionality within your initial plan clearly, and make sure stakeholders are on the same page. Put in place a change management procedure where new requests that crop up are addressed. Consider the effects of changes on the timeline and budget of the project before allowing them to be incorporated.
Such contracts can also control scope creep. Having a clear definition of scope, a fixed price agreement, ensures that the project will be brought in on budget, no matter how many new requests appear. This strategy is highly effective only when the project’s requirements are stable and well-understood from the initiation of the project.
Many firms fall into a trap when they believe that the development cost of software ceases after the launch of the product. In reality, maintenance and support often comprise a major share of the total cost over the lifecycle of the software, sometimes as high as 90%. Software also evolves in the post-launch phase as it requires periodic bug fixes, updates, security patches, and even more enhancements in regard to user review and feedback. All such activities demand both time and money.
You may fail to factor in maintenance costs as you budget initially. All this may cost you once you hire some extra staff and third-party vendors to update and maintain the software.
Ongoing Maintenance Management
To avoid surprises, allocate a specific percentage of your initial development budget—typically 15-20%—for ongoing maintenance. Make sure to include regular updates, security patches, and bug fixes in your maintenance plan. Additionally, plan for scalability in your software to accommodate future growth.
Integration is another frequently overlooked but still rather significant hidden cost in custom software development. Development of a new system very rarely occurs in isolation. Most software solutions need to integrate with existing systems, which might be databases, CRM tools, or third-party applications. These integrations can very quickly become complex, particularly if the software was not designed with interoperability in mind.
With new software that needs customization to work with existing systems, these integration costs can quickly balloon out of control. Lastly, compatibility issues can create significant delays in troubleshooting and solving them as part of the project timelines.
Managing Integration Costs:
To manage integration costs, take inventory of your existing systems early in the development process and factor in integration requirements. Work closely with your development team to design solutions that are compatible with your existing infrastructure, and test integrations thoroughly to avoid unexpected delays and expenses. Consider using third-party tools or APIs that are already built to integrate with your systems, which can save both time and money.
Training is also one of the other hidden costs when custom software is being developed. New software often requires your team to learn new processes, workflows, or interfaces. This may seem like an easy thing to do-just roll out new software-but it means time and resources required to train your employees can significantly impact both productivity and budget.
The costs of training are also variable and depend on the complexity of the software being used and the size of your team. Training programs, the loss in productivity among other things because employees will spend their time learning the new system rather than performing the work they normally do, should be included as part of the costs.
Reduce training costs to the barest minimum by creating a holistic training plan that you factor in right into your budget from the get-go. Use software that is user-friendly, so not too much time will be wasted in the classroom. Ensure that you have materials, such as video tutorials or documentation, available on demand, to minimize time spent in formal training sessions. Finally, make sure you have internal champions who will be able to guide others through the process and provide continuous support.
Both compliance and security belong to any custom software project but are generally treated merely as afterthoughts. Failing to address security and compliance with the relevant regulations in a timely manner during the early stages of developing software means that there’s a possibility of costly fixes further down the line. Besides the severe economical costs of neglecting compliance in terms of updates or redesigns, there is also the peril of potential legal liabilities and fines, or even data breaches.
Controlling Compliance and Security Costs:
Ensure that these considerations are built into your software development process from day one, avoiding costly security and compliance issues. Consult legal and security experts to ensure your software complies with industry regulations, and be sure to develop strong security measures, such as encryption, secure authentication, and regular security audits. While integrating compliance and security with design and development is much less costly than fixing issues later in the product life cycle, it is a most expensive upfront investment if not integrated at this stage.
Last but not least is infrastructure, an ongoing cost that should never be ignored when making custom software. This can either be cloud-hosted or having dedicated servers. It all adds up on time as the number of users rises. Such hosting costs consist of a variety of things such as server rental, data storages, bandwidth usage, and backup solutions.
Infrastructure cost for businesses that have growth in expectation or scale up in operation can soar up if it is not properly planned.
Cost Management of Infrastructure:
To control infrastructure cost, hosting needs should be planned right from the early development phases. Make use of cloud services by having a scale that only charges you for what you need at any point in time. Also, hybrid is worth considering whereby critical data and applications are hosted on dedicated servers, and less resource-intensive tasks are handled in the cloud.
Now that we have identified some of the most common hidden costs in custom software development, it’s essential to consider strategies for managing and controlling costs and keeping your software development project budget within the scope of what you had initially agreed. Here are some measures you can consider as you work towards ensuring your project stays within budget:
Plan everything upfront: A comprehensive project plan that outlines all possible costs, direct and indirect as well as those hidden, will help avoid surprises down the line. Engage stakeholders earlier in the process to clearly outline requirements and expectations.
Use fixed-price contracts: If the scope of the work is well defined, fixed-price contracts can help keep costs locked in and avoid scope creep.
Adopt Agile Development: Agile methodologies offer flexibility, allowing changes and adjustments as needed while maintaining control over the scope and timeline through regular check-ins.
Allocate Maintenance Funds: Budget 15-20% of the initial development cost for ongoing maintenance and support to ensure your software remains functional and up-to-date.
Invest in Training: Make resource provisions to properly train up your team so it can hit the ground fast and minimize productivity losses during the transition.
Proactively Manage Risks: Identify potential risks and hidden costs as early as possible in a project and adjust strategy accordingly to avoid letting them take over the project.
But by following these strategies, you can ensure your custom software development project stays on track and within budget, with no unexpected costs getting in the way of success.
Common hidden costs include technical debt, scope creep, ongoing maintenance, integration expenses, training, compliance and security updates, and infrastructure costs. These can add up over time and impact both the timeline and budget.
Unexpected expenses can be identified through careful planning, risk assessment, and regular reviews. Mitigation strategies include setting aside contingency funds, using fixed-price contracts, and prioritizing early testing and quality assurance to catch issues early.
To prevent budget overruns, establish a detailed project plan with well-defined scope, use Agile methodologies for flexibility, implement a change control process, and allocate 15-20% of the budget for maintenance and unforeseen expenses.
Inadequate testing can lead to bugs, performance issues, and security vulnerabilities that are costly to fix after the software is launched. This can result in expensive rework, delayed timelines, and customer dissatisfaction.
Clear communication between stakeholders, developers, and project managers ensures that expectations are aligned, changes are managed properly, and potential risks are identified early. This reduces misunderstandings and helps control both the scope and costs of the project.
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