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How To Save Money on Software Development Costs

December 12, 2017
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How To Save Money on Software Development Costs

Whether they are small or already established within their market, technology startups spend a significant amount of time, money, and energy developing or acquiring some type of software. Inevitably, the question is always asked, “When do I capitalize my software development costs and when should I expense them?” Properly accounting for software development costs can save a lot of time, money, and aggravation, if done right the first time, or it could impact the company’s current and future financial statements.

To properly account for software development costs, companies should consider and understand:

  1. When “technological feasibility” has been established, and
  2. What costs can be considered for capitalization/expense.

Technological feasibility is generally defined as the establishment of a working model, which typically occurs when beta testing commences, and the general availability of such software has been very short.

Overall, companies are permitted to capitalize an allocable portion of indirect costs, such as overhead related to employees who work on the software, and the related facilities. These costs can be salaries, cost of materials, contract labor, purchased software being incorporated into the developing software, and any upgrades and enhancements to the functionality. Items that are not permitted to be capitalized, and should be expensed, are any general and administrative (G&A) expenses for the product. These costs can include analysis, training, product maintenance, G&A and operational expenses, feasibility testing, and prototyping. Keep in mind that all capitalization must cease when all substantial testing has been completed or the product has been brought to market to be used by customers.

All in all, in order to ensure that your software development is cost-effective, you should keep thorough records of labor hours, employee rates, any overhead allocations, and milestones in order to help identify and properly account for your startup’s software development costs.

Written by: Thomas Porricelli, Supervisor