What Is the Average Cost of System Development? Estimation Methods and Cost-Saving Strategies Explained

When outsourcing system development, one of the biggest concerns is the cost.

Many people considering system development may be wondering, "I don't know the market price for system development" or "I want to keep the development costs as low as possible."

Even if you receive a quote, you won’t know if it’s reasonable unless you understand the market. Without knowing the actual costs, it's also hard to come up with strategies to reduce them.

This article provides a detailed explanation of the breakdown and typical costs involved in system development.

It also summarizes estimation methods and ways to cut costs. If you're considering outsourcing system development, please refer to this article.

Akira Shimazoe

CEO of Solashi Japan LLC. Engaged in the development and operation of internal systems at Suntory. Founded Yper Inc., serving as CTO and CPO, contributing to product launch and growth.

Breakdown of System Development Costs

The costs of system development can be broadly divided into personnel costs and miscellaneous expenses. Personnel costs typically make up 60%–80%, while miscellaneous expenses account for 20%–40%.

Let’s take a closer look at each category.

Personnel Costs

Personnel costs in system development refer to the labor costs of engineers and programmers who build the system.

This includes the costs of hiring project managers who oversee the entire project and directors who handle direction tasks.

Workload is expressed numerically to indicate how many people and how much time are needed for development work.

Workload is measured in "man-months", "man-days", and "man-hours", with man-months being the most commonly used. For example, if one person works for one month, it is 1 man-month. If three people work for one month, it is 3 man-months.

Personnel costs in system development can be calculated using the following formula:

Personnel Cost = Man-Month × Man-Month Unit Cost × Development Period

Man-month unit cost refers to the cost of one person working for one month. The development period refers to how long it takes to complete the development.

For example, suppose a programmer, an engineer, and a director are developing a system. If the man-month unit cost is ¥500,000 per person and the development takes three months, the personnel cost is calculated as follows:

3 (man-months) × ¥500,000 (unit cost) × 3 months (development period) = ¥4.5 million (personnel cost)

System development personnel costs are calculated by accumulation.

Miscellaneous Expenses

Miscellaneous expenses refer to the costs of computers used for development, software license fees, and hardware costs.

If there is no space available for system development, an office must be rented. That office rent is also considered a miscellaneous expense.

Other examples include development computers and server costs needed to operate the system.

While personnel costs account for the majority of system development costs, it's also important to check how much miscellaneous expenses will cost.

Man-Month Unit Costs Fluctuate in System Development

In system development, the man-month unit cost for engineers and programmers varies depending on the following factors:

• Work experience and position within the company
• Size of the company they belong to
• Location of the company

Large companies or those located in urban areas tend to have higher salary standards, leading to higher man-month unit costs for project members.

On the other hand, even if someone has advanced skills or an impressive track record, it does not necessarily mean their man-month unit cost is high.

Additionally, factors like the project’s scale and difficulty also impact the man-month unit cost. It is characterized by its variability depending on various conditions.

If you want to know the cost of system development, the first step is to request a quote from the development company.

Flow to Simulate System Development Costs

System development costs can be roughly estimated by clarifying the type of system, the implementation/development method, and the purpose of development.

You can simulate the cost in the following two steps.

Confirm the Type of System

First, check the type of system your company wants to implement.

There are many different types of systems, but they can generally be divided into three main categories: Core Systems, Business Support Systems, and Web Systems. The overview of each is as follows:

Core System	Systems that manage essential information such as accounting, HR, and sales
Business Support System	Systems that support customer information and sales activities
Web System	Systems that process information via the Internet (e.g., online shops, reservation systems)

Check which of the above categories your desired system falls into, and then research the general cost range.

The cost ranges for each system will be explained in detail in the next section. Please refer to that.

Understand the Purpose of System Development

Once you know the type of system you want to develop, the next step is to understand its purpose.

The main purposes of system development can be classified into the following three categories:

1. Introduce a tool only
2. Introduce a tool and customize it
3. Develop a fully original system from scratch

If you want to keep costs low and use the system quickly, the first method (introducing a tool only) is suitable.

If you want to customize the system for your company or integrate it with your existing systems, the second method (introduce a tool + customize) is common.

If you want a completely original system or need complex and unique features, the third method (scratch development) is recommended.

Once you determine which of the above applies, you can estimate the general development team structure, number of people, timeline, and flow, leading to a more detailed cost estimate.

System Development Cost Estimates

The cost of system development varies depending on the type and scale of the system being developed.

This section explains the development cost estimates for Core Systems, Business Support Systems, and Web Systems in detail.

Please note that the costs introduced here are only for the system construction and implementation. They do not include license fees, initial support costs, or ongoing costs such as monthly system usage or maintenance fees.

Cost Estimates for Core System Development

First, let's look at the cost estimate for Core System development. Core Systems include various types such as Sales Management Systems, Financial Accounting Systems, and ERPs.

ERP refers to systems that manage management resources such as "People, Goods, Money, and Information" in an integrated way, aiming to contribute to business management. Examples include software for HR, payroll, and labor management.

The cost varies depending on the type and level of customization, but this article focuses only on the cost estimate for Sales Management Systems.

Sales Management Systems can be classified into four types: Cloud-based, Package-based, Semi-order, and Full Scratch Development. The cost estimates for each type are as follows:

Type	Initial Setup Cost Estimate
Cloud-based	0 – 300,000 yen
Package-based	From 50,000 yen

Type	Development Cost Estimate
Semi-order	1 million – 4 million yen
Full Scratch	5 million – 20 million yen

<Note>

• Cloud-based: A type where the system is used via the internet
• Package-based: A type where completed software is installed on a PC or used in the cloud
• Semi-order: A customized version of a package-based system to enhance usability
• Full Scratch: A fully original system developed from scratch

Cost Estimates for Business Support System Development

Business Support Systems include various types such as systems for managing customer information, projects, and supporting sales activities.

Some systems integrate these features, and the more functions you add, the higher the cost tends to be.

For example, in the case of a Customer Management System, the cost estimate varies depending on the implementation/development method, as shown below:

Implementation / Development Method	Initial Setup Cost Estimate
Cloud-based	Several tens of thousands to several hundred thousand yen
Package-based	Around 50,000 – 150,000 yen

Implementation / Development Method	Development Cost Estimate
Semi-order	500,000 – 3 million yen
Full Scratch	4 million – 15 million yen

The cost of a fully original customer management system generally starts from 4 million yen, and this is for cases that include only CRM (Customer Relationship Management) functions.

Adding SFA (Sales Force Automation) functions will increase the cost even further.

Average Development Cost of Web Systems

There are various types of web systems such as EC sites, reservation systems, and CMS. Here, we will explain the average development cost of an EC site.

The cost of building an EC site varies greatly depending on the method of development. The five main development methods for EC sites are as follows:

• EC Mall
• ASP
• Open Source
• Package Type
• Fully Scratch-built

Using templates can reduce the cost, but fully original development will be more expensive. Below is a table showing the average development cost for each method.

Development Method	Average Development Cost
EC Mall	Free – 100,000 yen
ASP	Free – 1 million yen
Open Source	500,000 – 5 million yen
Package Type	1 – 6 million yen
Fully Scratch-built	From 5 million yen

＜Supplement＞

• EC Mall... A format where multiple stores open in a large-scale website (e.g., Amazon, Rakuten Ichiba, Yahoo! Shopping)
• ASP... Stands for Application Service Provider. A cloud-based system that offers functions necessary for EC sites (e.g., BASE, Shopify)
• Open Source... EC site construction systems that are publicly available for free (e.g., EC-CUBE, Magento)

4 Key Points to Determine the Reasonableness of System Development Costs

If you want to reduce system development costs, be sure to check the reasonableness of the provided estimate.

To determine whether the system development cost is reasonable, it is recommended to check the following four points.

1. Is the scope of work clearly defined?
2. Is the management workload included in the estimate?
3. Are the unit costs of engineers appropriate?
4. Are revision costs included?

Each of these points is explained in detail below.

Is the scope of work clearly defined?

First, confirm whether the scope of work is clearly defined.

System development includes many work processes such as requirements definition, design, and testing. In some cases, investigations and analyses are required to define the requirements, and the specific scope of work may differ depending on the development company.

Additionally, there may be cases where a quality evaluation process is conducted after development is completed but before the release. Since the understanding of the scope of work differs among companies, it’s important to prevent misunderstandings.

There may also be unnecessary tasks for your company included in the scope. Be sure to check the work content and range carefully.

Although confirming these details takes effort, doing so will help you determine whether the provided estimate is reasonable.

Is the management workload included in the estimate?

Management workload refers to the resources (people and time) required for tasks related to project management.

To determine whether the system development cost is reasonable, it is also important to check whether the management man-hours (personnel and duration) are included in the estimate.

Make sure to verify this in advance.

In order to proceed with system development, various management tasks such as project progress management, quality control, and incident management are required.

These management tasks are essential to the success of the project, helping to prevent delays and ensure quality.

The man-hours for these tasks must be calculated separately from those of engineers and programmers.

Since the burden and effort required for management tasks are significant, it’s important to confirm whether they are included in the estimate.

Is the engineer's unit price appropriate?

Among development costs, the most significant portion is often the labor cost of engineers.

Be sure to verify whether the unit price of engineers is appropriate in advance. As mentioned earlier, the unit price of engineers varies depending on their experience, internal position, and the region of the company they belong to.

The unit price of engineers is a figure calculated by the development company. The method and criteria for setting this price differ by company. Some companies may even include man-hours for handling potential issues in their estimates.

Therefore, in order to judge whether the system development cost is reasonable, it’s a good idea to ask about the basis for the engineer’s unit price setting.

Is the cost for revision work included?

In many cases, revisions are required during the system development process. When checking an estimate, it’s important to verify whether the cost for revision work is included.

If revision work is not included in the estimate, the man-hours will increase each time a revision is needed, resulting in significant additional costs. Always make sure to check whether revision costs are covered.

Also, once the system is completed, it needs to be inspected to confirm that it meets the requirements. Be sure to check in advance how inspection will be handled and who bears the cost if bugs are found.

By checking the four points above, you can judge whether the provided estimate is reasonable. If you have any doubts about the estimate, be sure to ask the development company.

Three Estimation Methods with a Solid Basis for System Development Costs

The main estimation methods for system development costs are Top-down, Bottom-up, and FP method.

To confirm the basis and appropriateness of the development cost, select the method that suits your company from these three. Each method is explained below.

Top-down

Top-down estimation is a method of estimating development costs based on past experiences and case studies.

This method allows for quick cost estimation by predicting man-hours based on previous experiences and similar projects. A key advantage is that it doesn’t take much time to calculate the estimate.

However, this approach heavily relies on the judgment of the person preparing the estimate. Without substantial on-the-ground experience, it can be difficult to provide accurate figures.

Furthermore, if the company hasn’t handled similar system development projects in the past, it may be difficult to provide highly accurate estimates.

If the development company’s website shows the profiles of their engineers, it’s a good idea to check them out.

Bottom-up

Bottom-up estimation is a method that calculates costs based on the required man-hours for each phase of system development.

This method includes approaches like detailed calculations for each function or using WBS (Work Breakdown Structure) to derive man-hours.

WBS is a project management method that breaks down the project's work into a hierarchical structure of tasks and presents them in a list format (Structure).

In the case of the bottom-up method, each person in charge of a phase estimates how many days are needed for each function, which is a distinctive feature of this method. Since it’s easy to understand the necessary workload and cost, the estimate tends to be more accurate.

However, accurate estimates are difficult unless some development work has already progressed. For that reason, it’s challenging to use the bottom-up method in the early stages of development, and it becomes more effective once development has advanced to a certain degree.

Function Point Method (FP Method)

The Function Point Method (FP Method) is a way to estimate cost and workload by separating functional requirements from other requirements.

In the FP method, system features are referred to as “functions,” and points are assigned to each of them. Since each function is estimated individually, it ensures consistency — anyone can calculate the same result.

Moreover, there’s no difference in scoring depending on the deployment type, whether it’s on-premise or cloud-based.

While the FP method offers more accurate estimates, it has limitations when evaluating previously unimplemented features or complex input functions.

4 Ways to Reduce System Development Costs

The more features you want to implement, the higher the system development costs will be — but nobody wants to incur unnecessary expenses.

Here are four strategies to help reduce system development costs.

1. Clarify the purpose and budget for system development
2. Internalize some of the tasks
3. Utilize subsidies and grants
4. Use offshore development

Let’s break down each of these methods in more detail.

Clarify the Purpose and Budget for System Development

First and foremost, clearly define the purpose and budget for system development.

The purpose of system development varies from one company to another — it might be to improve work efficiency, enhance productivity, reduce costs, or launch a new business.

If the purpose of development is unclear, it becomes difficult to identify the required specifications and necessary features.

In such cases, it also becomes harder for the development company to visualize the final product, leading to more revisions or changes mid-development. As a result, they may provide a higher estimate to cover potential risks.

Start by clarifying the purpose of your system development and solidifying the features and final image of the product. Make sure to specify how much IT investment is possible and request an estimate based on a clear budget.

As a result, the number of revisions will be reduced, helping you minimize unnecessary costs.

Internalize Some of the Tasks

Instead of outsourcing all tasks to a development company, internalizing tasks that can be handled in-house is also an effective way to reduce costs.

For example, if you have a designer in your company, you can reduce costs by handling design tasks internally instead of outsourcing. Additionally, having your internal IT department manage operations and maintenance after system development is complete can also be beneficial.

To reduce system development costs, it's recommended to identify which tasks can be handled in-house and internalize them accordingly.

Internalizing tasks also allows your company to manage schedules and content more flexibly. Since communication with the development company is reduced, you can expect not only cost savings but also improved work efficiency.

Utilize Subsidies and Grants

To reduce system development costs, it's recommended to take advantage of subsidies and grants offered by the national or local governments.

By using available subsidies and grants for system development, you can significantly reduce the total development cost.

Some well-known subsidies available for system development include the Monozukuri Subsidy, IT Introduction Subsidy, Small Business Sustainability Subsidy, and Business Restructuring Subsidy.

For more details on these subsidies, please refer to the article: “4 Recommended Subsidies for System Development – Tips for Increasing Approval Rates.”

At our company, Solashi Co., Ltd, we handle numerous consultations regarding subsidy applications for system development. We provide comprehensive support from application to actual development.

If you're interested in subsidies for your first system development project, feel free to contact us.

Use Offshore Development

Offshore development refers to a development approach where system development is carried out in overseas countries.

Countries such as Vietnam, India, and the Philippines — which are popular offshore destinations — offer lower labor costs, making it possible to reduce development expenses. Compared to domestic development, offshore development is said to cut costs by about 20%.

Vietnam is currently one of the most popular offshore destinations. In addition to being pro-Japan, Vietnam is geographically close, and its development rates are highly cost-effective, which adds to its popularity.

For more details, please refer to: 8 Reasons Why Vietnam is the Best Choice for Offshore Development and How to Choose a Good Company.

By utilizing offshore development, you can significantly reduce the cost of system development.

For High-Quality System Development at a Lower Cost, Contact Solashi

In this article, we’ve covered the topic of system development costs, including market rates, estimation methods, and cost-saving strategies.

If you want to reduce costs while ensuring high-quality system development, leave it to Solashi Co., Ltd.

Our company is a system development firm based in Vietnam. In addition to system and app development, we also offer support-type services and IT consulting for system implementation.

Our engineers are primarily graduates from top Vietnamese universities such as Hanoi University of Science and Technology, Vietnam National University, and Foreign Trade University. We offer access to outstanding engineering talent at lower costs than in Japan while delivering high-quality development.

We also have multiple Japanese project managers with experience in launching businesses and startups, making us well-equipped to support your new system development initiatives.

If you're interested, feel free to reach out to Solashi Co., Ltd.

Akira Shimazoe

Representative of Solashi Japan LLC. Born in April 1989 in Fukuoka Prefecture. Graduated from the Graduate School of Information and Mathematical Sciences at Osaka Prefecture University. Joined Suntory System Technology Co., Ltd., an IT subsidiary of Suntory Holdings, in 2014. Broadly responsible for the development, operation, and implementation of vending machine delivery management, efficiency improvements, and sales management systems. Founded Yper Inc. in 2017, serving as CTO and CPO. Contributed to the launch and growth of the app-linked delivery bag "OKIPPA." Selected for Toyo Keizai's prestigious "Amazing Venture 100" and Forbes' "Forbes 30 Under 30 Asia 2019."