How to Calculate Offshore Software Development Costs

So you want to have decided to offshore your software development or you’re about to decide, but still want to know how much is gonna cost you and where to outsource. Sure, you can get fixed price quote and just decide from there but most of the time is not that easy.

Software development companies are reluctant to give a fixed price and prefer to work under a Time & Materials model due to the easy flexibility and risk management benefits it provides. It’s important to know that determining the cost of an offshore development team in many ways is similar to the way that’s is done in-house. You can even say that estimating the cost of your offshore team is more complicated and has some extra steps, and even so in most cases it still represents a fraction of the cost of doing it in-house.

How to estimate the cost of an offshore development team: a short video guide:

1. Have a clear idea of what your project is

   This is the first key step before anything. You need to get a clear idea of what you want your software to do, who it is for, what the key features are, what the user experience will look like, whether it needs to work with a third party, etc. The better you can define your project, the easier it’s for an offshore company to understand what it’s needed to deliver it.

2. Define the complete scope of your project

   Once you developed your idea it’s time to put it on paper. Developing something like an RFP could greatly help you and your service provider to give you a more accurate estimate of your development team cost.
   Ideally, you want it to be as detailed as possible where you develop all the epics and user stories, roadmap, deliverables, timescales, and in some cases even an MVP. If you don’t know how to do this, then this can be considered a discovery analysis, and it’s performed by your service provider.

3. It’s time for cost estimation

   Do not confuse the estimation for the final price. The estimation is the amount of time, technology stack, and effort represented in hours and manpower that your project will need in order to become a reality.  Estimating the cost of an offshore development team is really not set in stone.
   
   Usually one tries to be as thorough in the estimation as possible, but there are always things like delays, incidents, changes, approvals that could change the estimate. We try to force this and include it in the estimation in a form of a safety net, but it’s like trying to foresee the future, impossible to be sure.

4. Get the right developers for the job

   Here is where the major cost of the project will be decided. Now that you know your estimate and it tells you what tech talent you need and for how long you get the developers that can do it and compare their costs to your estimation.
   You take the developers' annual or monthly gross salary and their overhead (equipment, licenses, infrastructure, and extras) and reduce it to an hourly rate. Now you have your hourly cost and compared to the man-hours of your estimation.
   

5. Don’t forget the additional cost

   Remember that you are not hiring developer, you’re hiring a company. Depending on your project, these additional costs can vary, but they usually include the indirect cost of the operation, the service fee or margin of the company, the travel expenses, and additional equipment or licenses if required. 

6. Are you looking for additional services?

   Software outsourcing companies usually offer you a guarantee to cover technical support, solve unexpected bugs, documentation, and to help with the takeover of the ownership of the operation of the project.
   But not all clients want to be handed over the finished product, some want for their service provider to continue customer support, hosting, license management, and in some cases run the operation. Of course, it’s needless to say this but this comes with additional costs. 

7. The final price for your offshore dev team

   Now that you have considered all the above, you can get the final price that you’re paying. After understanding all these, you can see the difficulty of having a final fixed price. It’s fair to say that developing software is not as easy as many people think.
   There are many variables and unexpected issues that come with a full-on project. With the Times and material model, you make the assumption that only the client would be charged an average hourly rate for only what it’s used and worked. At Intersog, we guarantee that you pay only for the real amount of work and not be grossly overcharged.