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IT Outsourcing Cost Analysis Breakdown — with Calculation Frameworks

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After the post-pandemic reduction of budget and resources, many companies opted for cost and optimization, embracing new digital operating models to manage the need for online activity and remote work.

Outsourcing with its flexibility and scalability proved to cut costs and reduce overheads. However, companies faced the challenge to calculate the full cost of outsourcing. The first thing to do is to calculate your inhouse cost (the actual cost of operations at various levels like process, product, and activity), but many fail to do it either.


Total Cost of Outsourcing

Severe talent gap, digital transformation acceleration and distributed work urged companies to extend their teams with outsourced developers. To find out how much you actually have to budget for outsourcing engagement, you should delve deeply into the real cost of outsourcing, considering both direct and hidden costs.

Direct Costs In Outsourcing

Direct costs in outsourcing are the bills you actually have to pay. These include a developer salary, taxes, insurance, vacation and retirement plans, as well as one-time payments like bonuses, overtime, etc.

Average Software Developer Salary 

Compensation makes the lion's share in software development outsourcing cost. Depending on your project needs, the budget and complexity, you may want to choose hiring a freelancer, an extended team or engage an entire cross-functional team to deliver you an end-to-end solution. 

Considering the above mentioned factors, the salaries you’d be prepared to pay, will also vary.

Outsource Cost for 1 Freelancer

According to Upwork data, the average hourly rates for software engineers in the most popular outsourcing hotbeds are:

Country

Average hourly rate

Ukraine

35-55

Poland

43-65

South Africa

25-50

Egypt

15-40

China

18-40

India

16-30

Brazil

35-50

Argentina

38-70

Offshore Software Development Rates by Region

 

Offshore Software Development Rates by Region

If you need a coder that is available right now and you have clear technology requirements, a freelancer is the right choice. They will work for you on an hourly, monthly or project-based basis.

In addition to significantly lower rates of freelance developers, there’s another side of freelancing that may turn into a hidden cost of cooperation. Many companies face such challenges as missed deadlines, lack of engagement and dedication, as well as the need to look for other freelancers when their dedicated one is busy with another project for another customer. 

Outsource Cost For a Remote Team

Augmenting your in-house team with remote staff is a good solution for long-lasting cooperation because of the significant volume and complexity of a project. Companies always choose to partner with a staff augmentation service provider that will take responsibility for hiring remote engineers for your project. Unlike freelancers, this type of cooperation supposes full-time dedication of your remote staff to your project.

The cost-savings within staff augmentation are usually more effective than in project outsourcing, as you don’t have to spend on an entire team and management. You can start with one developer and gradually scale the team size as needed.

Outsource Cost for Full Outsource

Full product development outsourcing means entrusting your outsourcing partner for the development of the end-to-end product. A partner will build a cross-functional team and will manage it themselves—from ideation stage to quality assurance.

The cost saving of the fully outsourced project will come in the form of the savings on daily management of the process.

The Average Offshore Software Developer Rates in Most Popular IT Outsourcing Regions

Outsourcing Region

Average Hourly Rate

CEE

$30–$65

Asia

$20–$45

Latin America

$35–$70

Africa

$25–$45

Find out more about offshore software developer rates around the world.

One-time payments

One-time payments to recognize outstanding performance or a special project or interim assignment usually take the form of the bonus payments made once a quarter or once a year. The sum varies but usually is no more than one monthly salary.

Cost to Hire Developers in the UK, Germany, the Netherlands, the US, and Ukraine

Cost to Hire Developers in the UK, Germany, the Netherlands, the US, and Ukraine

Hidden Costs in Outsourcing

With outsourcing, the majority of the in-house costs disappear and the cost structure becomes more simple and visible. However, beware of the expenses that are not so obvious for initial estimation . Depending on the cooperation model, e.g. project outsourcing or outstaffing, you may have some additional costs to bear in mind. These are recruitment costs, communication, travel and management, legal documentation and others. 

Thus, an outsourcing service provider in Asia might quote you an amazing rate, but management and travel costs might become a spending horror show. On average, be mindful of an additional 20% for hidden costs on top of the base cost. 

Hire Cost

This is everything related to screening and recruiting your remote developers. Not all outsourcing vendors charge for hiring. For example, in the staff augmentation model like Daxx, you don’t need to pay for recruitment—it’s already included in the partnership fee.

Price for Setting up a Unit

In order to set up a separate business unit made up of remote software engineers, a client needs to negotiate the conditions of the contract and maintenance of the process control.

Price for Legal Documentation

The outsourcing contract with all SLAs, timelines and non-disclosure agreements is an imperative. To ensure all aspects of the cooperation, as well as punishments are considered and put down, you will need a legal advisor. The cost for such service, as well as a fee to notary institutions is usually missed when estimating the total cost of outsourcing.

Cost Variability Factors

In addition to the difference in cooperation models and their corresponding pricings, be ready for substantial differences in pricing, and thus the hidden amounts you can spend or save. These are the sums you’ll ultimately pay that vary based on such factors as outsourcing location, the uniqueness of the certain tech skill on the outsourcing labour market, level of experience, English proficiency and the length of the engagement.

How Outsourcing Can Reduce Cost

1. IT in Nearshore Costs Less

Nearshoring is transferring software development activities to countries with similar time zones. Thus, a Germany-based company can outsource software development to offshore locations like India, or to nearshore ones like Hungary or Ukraine. And while nearshoring is not the cheapest solution, it can save you more in the long-term perspective by offering comfortable cooperation hours and minimized travel fees.

2. Reasonable Pricing for Quality

Over the decades, top outsourcing companies like Daxx have honed their skills in providing high-end services delivered by vetted software engineers. Based in Ukraine, the country with a wealth of talent consisting of 210,000 developers, Daxx is a sweet spot for outsourcing as our fair pricing model doesn’t compromise on quality of the software.

3. Easier Time With Team Scaling

While in-house sourcing is a risky and time-consuming ordeal due to a severe talent shortage, outsourcing ensures rapid release of the software solutions. With Daxx, you can start working with your team within 4-8 weeks after the initial request for sourcing. The team scaling in outsourcing is also a doable thing - you can grow or reduce your team within one month's notice.

Framework for Outsource Cost Analysis

Define Your Task

A clear outline of the product or service you want to develop is an imperative for better cost analysis. Do you plan a long-lasting large-scale project or just an application development? What are your expectations for UI/UX, backend infrastructure, level of customization? All these aspects are vital for choosing the right outsourcing cooperation and pricing model. 

Each software outsourcing model has its own strengths and weaknesses, and the choice you make will depend on a number of key factors. The following questions may help you figure out which model works best for you:

Do you have an in-house specialist with the requisite technical background to supervise and manage the development process?

  • YES — Staff Augmentation
  • NO — Project Outsourcing

Is the project long-term?

  • YES — Staff Augmentation
  • NO — Project Outsourcing

Are project requirements likely to change significantly during the development process?

  • YES — Staff Augmentation
  • NO — Project Outsourcing

Read more about defining your goal and choosing the right cooperation model in our blog post: Outsourcing cooperation models 

Calculate In-House Expenses

When you’re hiring software developers in-house, scarce data collection and analysis, as well as insufficient collaboration often prevent precise calculation of the in-house cost. 

The breakdown of the elements that make up the total in-house expenses on software development is:

  • Cost per hire
  • Developer net salary
  • Taxes
  • Legally required benefits 
  • Office and IT Supply
  • Overheads

Hire Campaign Expenses

Cost per hire includes recruitment agency service or a team of in-house recruiters.

Developer Salary

If you hire a developer in the US, the cost will be $157,570 including taxes; if you hire software engineers in the UK, you'll have to pay around $82,199 with taxes included; hiring a developer in Germany will cost you $97,396 with taxes; in the Netherlands, it will cost you $95,669 to hire a programmer. 

Cost for Setting up Legally Required Benefits and Other Overheads

sick leaves, annual bonuses, overtime pay, training tax, medical insurance, etc.

Cost for Office Supply

Hiring an inhouse software developer in the US

Hiring an inhouse software developer in the US will cost you between $137K and $173K per year including taxes and benefits. A middle software developer in the Bay Area will cost you $157,570. On average, 70% of the total developer cost consists of the net salary, while the remaining 30% represents taxes and benefits. 

US In-House Developer Cost Structure (annual calculation):

  • net developer salary
  • supplementary pay (3.2% out of annual net salary)
  • insurance (8%)
  • paid leave (7.1%)
  • retirement and savings (3.8%)
  • legally required benefits (7.6%)

 plus

  • cost per hire ($4000 on average)
  • overheads (15%)

US In-House Developer Cost Structure

Annual

net developer salary

$121,488

supplementary pay (3.2% out of annual net salary)

$3,887

insurance (8%)

$9,719

paid leave (7.1%)

$8,625

retirement and savings (3.8%)

$4,616

legally required benefits (7.6%)

$9,233

cost per hire 

$4,000

overheads (15%)

$18,223

Total In-House Cost:

$179,791

Calculate Pricing for Outsource Team

The calculation of the total cost of outsourcing is usually a breakdown into two cost items: software developers salaries and an outsourcing vendor service fee.

Outsourcing Fee

Each outsourcing company quotes its own fee ranges depending on multiple factors, such as location, availability of ISO certifications, type of cooperation model, and more.

The outsourcing fee structure includes all overhead expenses in addition to a base remote software developer salary, so you don’t have to pay additional sums on top of that. These include recruitment, finance, office premises and equipment, handling payroll, taxes, employee records, vacations, sick days, and other administrative hassles. 

For example, when you build a development team with Daxx, recruitment comes without any additional charges. You don’t pay us anything until you find a developer that meets your needs. After that, you’ll pay a fixed monthly fee on top of your developer’s or team’s salary. All further recruitment and replacement services come free of charge, whether you’re making changes to your existing team or considering a major expansion. If you decide to stop the cooperation, there are no cancellation fees. Just let us know one month in advance so we have time to wind things down. 

Cost For Setting Up a Cross-Functional Team

In outsourcing, software development salaries are the only cost items you need to address when building a cross-functional team. For getting a quite commonplace product developed, you’ll need a junior and a middle software engineer, a designer, a QA, a project manager as a basic team. 

For calculating the cost of such a team in outsourcing, find out their base salaries and sum them up. No other cost items are not applicable here.

Cost for Office Supply

When you hire remote software developers through partnering with an outsourcing vendor, you don’t have to pay extra sums on office rent, equipment and IT support—these are all included in an outsourcing fee. Should you have any special requirements to equipment or additional security mitigations, then it’s a condition to be discussed and agreed.

Software Development Cost Structure Compared: In-House Versus Outsourcing

Software developer cost structure

Software developer cost structure

Software development in-house cost structure

  • Other allowance
  • Pension funds
  • Insurance
  • Taxes
  • Net salary

Daxx developer cost

  • Daxx fee
  • Net salary

Conclusion

Tech talent demand caused by technology disruption and forced by the post-Covid need to move online have impacted both the in-house and outsourcing costs. Qualified technical experts are getting more global business savvy thus making it possible for companies to benefit from this expertise at a moderate price. 

Such sweet outsourcing spots at Eastern Europe offer a perfect blend of engineering smarts and affordable cost, compromise-free.

About Daxx

Our mission at Daxx is to help your business grow through remote software development talent. Build a cross-functional team with custom hired software engineers from Ukraine and benefit from our value-added services. Reach out with any questions you have by clicking the button below.

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Natalia Kosenko

Digital Content Writer and Marketer

Natalia is a seasoned professional with 7+ years of hands-on experience in content creation and communication. She's an energetic promoter of Ukraine and Daxx on the global business arena.

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