· 7 min read
The True Cost of ‘Cheap’ Development: You’re Buying the Wrong Thing
A low rate prices an hour, not finished software. What really decides the cost of a development team: output, your own people's time, and the cost of waiting.
True cost of development calculator
What does a “cheap” rate really cost you? Compare two teams on what you actually need: finished work, the time your own people put in, and every month you wait for it to go live.
- Output Team A needs to break even
- 92%
- Difference, counting everything
- £424,595
Team A sends the smaller invoice, but Team B costs £424,595 less once you count everything. Team A goes live 13 months later. At £25 an hour, Team A is only cheaper if it delivers at least 92% of a fully productive team’s output per hour.
Team A£1,107,893
Team B£683,298
- Team A’s rate, as a share of Team B’s
- 28%
- Team A’s invoice
- £357,143
- Team B’s invoice
- £665,280
- Team A goes live in
- 26.8 months
- Team B goes live in
- 13.9 months
- Your people’s time on Team A
- £104,464
- Your people’s time on Team B
- £18,018
- Value lost waiting for Team A
- £646,286
- Value lost waiting for Team B
- £0
- Team A, per hour of finished work
- £72
- Team B, per hour of finished work
- £107
- Team A, all in
- £1,107,893
- Team B, all in
- £683,298
Private by designEverything is calculated in your browser. Nothing you enter is sent to us or anyone else.
01The method
How it works
Procurement compares hourly rates. But you are not buying hours: you are buying finished, working software, and you are buying it to use. So this compares two teams on the same piece of work, and asks three questions a rate cannot answer: how many hours will it really take, how much of your own people’s time will it consume, and how long will you wait for it?
The model
- Hours needed: the work, divided by the team’s productivity, plus the share done again because it was wrong and the share lost to handovers, time zones and waiting for answers.
- Invoice: hours needed × rate.
- Time to go live: hours needed ÷ the team’s capacity (developers × 1,600 hours a year).
- Your people’s time: the hours a week they spend directing and checking, for as long as it takes.
- Value lost waiting: each month the slower team takes beyond the faster one, multiplied by what the finished system is worth to you each month.
The break-even figure is the one to argue about. A lower rate only wins if the team delivers enough finished work per hour. Once your own time and the cost of waiting are counted, “enough” is often far closer to the expensive team than the rates suggest. And sometimes the cheaper team does win, for example a larger team that finishes sooner. The point is to compare what you actually get.
Sources
- Herbsleb, J. and Mockus, A. (2003). An empirical study of speed and communication in globally distributed software development. IEEE Transactions on Software Engineering. Distributed work items took about two and a half times as long.
- Dibbern, J., Winkler, J. and Heinzl, A. (2008). Explaining variations in client extra costs between software projects offshored to India. MIS Quarterly.
- Larsen, M., Manning, S. and Pedersen, T. (2013). Uncovering the hidden costs of offshoring. Strategic Management Journal. Cost estimation errors grow with the complexity of the work.
- Nichols, W. (2019). The end to the myth of individual programmer productivity. IEEE Software, summarised by the Software Engineering Institute.
- Reinertsen, D. (2009). The Principles of Product Development Flow. Celeritas. The case for putting a price on delay.
From the article
Want a second opinion on your numbers?
Tell us what the tool showed you. We will help you test the assumptions and work out a practical next step.
02Tools