Updated: Dec 7, 2021
An appropriate budget means just as much for software development as a skilled team. If you allocate fewer resources, the quality will be poor. If you invest uncontrollably, you may not achieve the ultimate goal. Earlier, we have talked about how the project estimation and the right approach to budgeting affect custom development.
Today we offer to go further and consider how the budget structure looks. If you need to create a project budget, what will you allocate funds for? What will you be guided by? What mistakes can you make? We suggest you arm yourself with information to cope with this task flawlessly.
Cost Breakdown Structure: Definition, Purposes
What is the cost structure?
The cost breakdown structure is an integral part of the work breakdown structure (WBS) that displays how much resources a client should spend on each WBS item.
A client consistently sets a specific budget for each development stage based on previous estimations. It is quite difficult to create a flawless cost structure since human mistakes are so common here. Neither the vendor nor the client can guarantee a 100% accurate project estimate and correct budget allocation. Thus, often one of the parties is left a bit of a loser.
Cost breakdown components
When drawing up a cost breakdown, your task is to allocate resources to the following cost items accurately:
For materials. It is necessary to calculate how much investment will be required to purchase materials needed for development.
For employees. It considers the work time of each specialist and its cost.
For outsourcing. Sometimes it happens that a vendor also needs help from outside to ensure you a quality result. If your project provides for such an opportunity, you should also pay attention to this point.
For transportation and logistics. These are the costs for the equipment delivery and the employees' business trips if they are required.
For unforeseen expenses. Your project should always have a reserve fund. This item will give you confidence in the result and prevents the lack of resources for development.
Why do you need a cost breakdown structure?
There are several reasons why you should be concerned about the accurate cost breakdown:
It will allow for more efficient control over resource usage.
You can effortlessly determine how cost-effective a development is.
You will be able to maintain a healthy business relationship with a vendor.
It will be easier for both parties to approach a possible budget expansion and faster agree on the latter.
Common Approaches To Project Budget Distribution
There are many ways to structure your budget. It all depends on what kind of data management trusts the most and what method is most convenient for the current situation. Among the frequently used approaches, it is worth highlighting:
Expert opinion. You involve a specialist practitioner who, based on his experience and project estimates, predicts the amount of resources needed to cover each project cost item.
Bottom-Up. It involves summing up the cost of each task, material, and stage to determine the project cost.
Top-Down. The opposite of the previous method. It involves allocating a specific budget for the entire project and its proportional distribution among all types of expenses. However, to avoid mistakes, this method is worth applying together with an expert judgment one.
Analogous approach. If a client or vendor has done similar projects before, this way is most convenient. Here, the evaluator can, with a high probability, state how much funds are needed to complete each task.
Does a budget breakdown necessity depend on the collaboration type? No. You can cooperate with a vendor on a fixed-price or time-and-material basis, and a project cost breakdown is always needed.
In the first case, you get a fixed project price at the beginning of a development cycle. Sure, it will be pretty high. It would be best if you had a cost breakdown to understand where a vendor will spend your investment. It can give you confidence that you have chosen the right partner and that the project is being estimated fairly.
In the second case, you pay for a certain period and amount of work, following the hourly rate. It is also essential here to understand why a supplier asks for a certain amount. It will allow you to manage resources and control costs effectively.
Define Project Cost Structure Without Mistakes
Correct cost breakdown performing is a laborious process. You should be careful not to make the following most common mistakes:
Mistake 1. Estimators often overlook important factors that influence budget structure. For example, when creating a new system, the integration with existing software may be forgotten. It seems that it is obvious, but sometimes these things are not considered. It leads to high unforeseen costs.
Mistake 2. Ignoring standard costs. These can include any organizational and communication ones. For example, it is easy to miss the business trip item in a budget structure. It takes relatively small amounts, but it leads to large monetary losses if the mistake is systematic.
Mistake 3. Ignoring free work. It would help if you tracked it as well as paid one to determine the development profitability accurately.