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Software development outsourcing and cost factors: part II

This time, let’s speak about cost items that comprise your vendor rates. This way we explain financial factors that affect the cost of your outsourced software development project.

To start with, hourly rates you find software development companies place on directories listings are external rates that include not only hourly rates of developers, but also project management (and even vendor bench) fees, vendor’s overheads, and profit margin.

Developer’s hourly rate

The developer’s hourly rate is the money he gets for his work per hour. It is worth to mention, that on the market of high competition (and this is exactly what labor market usually is) hourly rates are not subjective. In other words, there are objective factors that determine them — location, proficiency, experience, and expertise.

Location

First, labor rates differ from country to country. For example, the same developer may earn just $1 in Pakistan but $ 50 if he moves to a country with higher living standards.

Second, typically, labor rates differ from region to region as well as from city to city within the same country. For example, salaries in the capital and big cities are higher than in a province, small town, or countryside.

Proficiency, experience, and expertise

First, rates may differ within technology and technology stack. For example, a Ruby on Rails developer may have lower hourly rates than a Python developer. Just because of the complexity of tasks they may solve. And market demand.

Second, as you know, developers step up trough three main levels — junior, middle, senior developers. Every step involves higher proficiency, enhanced self-sufficiency, and greater responsibility. So, evidently, the hourly rate of a junior developer is lower than of a senior one within the same company.

At last, the expertise depth may also involve hourly rate differentiation. After all, deep expertise does not come cheap. So, it is evident that a developer desire to sell it at a higher price.

Project management and vendor bench fees

The origin of project management and vendor bench fees comes from two aspects:

  1. Software developers can be great at coding and testing, but there should always be a person who coordinates their work and supervises a project. After all, you don’t expect all the team messages with you or negotiates project alterations. That is to say, for successful collaboration you need someone on your vendor side who acts as a point of contact with your outsourced software development team. In other words, each project requires a project manager. And, as you can suggest, his effort should be also billable.
  2. Sitting on a vendor bench is not relaxing in a SPA. It takes time and effort from a software outsourcing company to negotiate, assess and estimate the project, prepare their bids and contracts, etc. So, some companies include these items into the rates they charge as well.

To cover any objections, it is worth to mention that charging project management fees is a widespread practice. On the contrary, charging a vendor bench fees don’t do a company any favor as these expenditures can be truly regarded as overhead costs.

Overheads

Overheads stand for company expenses associated with organizational and managerial aspects of running a business. So, the final rate costing includes the following items that can be named as overheads:

Support staff salary. Here, it concerns such personnel as accountants, layers, managers of all levels, cleaners, etc.

Contributions into pension funds. A mandatory item of your vendor expenditure in many counties. May take up to 30% to personnel salaries in some countries.

Insurance. A mandatory item in many counties in part of compulsory Social Security. Still, a company may choose to enhance its care about its employees and provide them with extra insurance.

Fixed asset costs. To code, developers require computers/laptops and licensed technologies and software. To run UX tests, they need mobile devices, etc. They need tables and chairs, at least. Besides, other personnel also require equipment, hardware, and software to perform their duties. So, part of these values a vendor includes in its rate through depreciation.

Office rent and maintenance. A company needs office facilities, lighting, and electricity to feed its hardware. And these services don’t come to a company for free.

Training and recreation. Technologies emerge, evolve, upgrade, and become outdated. So, to keep up with the times and new challenges, an IT company has to upgrade its developers’ proficiency on an on-going basis. Moreover, many companies practice a strong corporate culture policy. That is to say, they provide their personnel with extra recreation benefits such as gyms, dining, team building activities, etc.

Marketing and SEO. Brand promotion requires running marketing campaigns, search engine optimization for higher ranking in the SERP, etc. And all these activities mean extra expenses. So, these are other items to include in overheads.

Profit

Yes, you can’t exclude this factor from the project cost when you outsource your software development project. Still, it is good to understand that its amount directly affects the bid you get from your vendor. Besides, it is even twice good to understand why different companies may have different profit margins and what aspects to factor here.

Market recognition

To put it simply, big names earn more. It is true in any business and software development is not exclusion.

Definitely, when a name becomes a brand, it is associated with the success of a project that this software development company takes over. Thus, customers get ready to pay more, bringing a higher profit to the company.

However, small companies, which are just doing their second dozen steps onto software development outsourcing service path but have already proved their proficiency and reliability, are a good choice as well. To clarify, you still get high-quality service and high-valued solution but pay less just because these vendors are more modest in their appetites.

Current workload

When a company experiences a downtime, it may sacrifice part of its profit and, thus, may be ready to temporarily decrease its rates. After all, with no orders, the company will have to pay its employees from its own pocket. So, yes, quotes may vary even within a company.

And what a lucky you are if you reach them exactly at this time! ;)

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