Build vs. Buy Calculator

Created by Bogna Szyk
Reviewed by Małgorzata Koperska, MD
Last updated: Nov 03, 2020

Does it make any sense to build your own internal software tool, if someone else already did it, and wants you to buy it? You can find it out with this build vs. buy calculator. In just a few clicks, you will determine what allows you to save more in the long-term perspective: having your developers focus on creating a new piece of software, or paying the license fee.

Costs when buying

If you decide to get access to an already existing platform that operates in the SaaS (Software as a Service) model, you have to pay a monthly or annual fee. Typically, this is the only cost if you settle for an external service.

Costs when building

The situation is a bit more complicated if you decide to build your own software. First of all, you need to estimate the one-time cost to build. You can calculate it according to the following formula:

cost to build = N * T * CE

where:

  • N is the number of developers on the team;
  • T is the time that team needs to build this software;
  • CE is the cost per employee. It is usually calculated as

CE = SE * (1 + OV)

where

  • SE is the monthly gross salary per employee, and
  • OV are the overhead costs (e.g., insurances), expressed as a percentage of the gross salary.

If you only know the hourly salary of your employee, you can use this hourly to salary calculator.

Apart from the one-time cost, any software that is built internally requires some maintenance. Every once in a while, one (or more) of your employees will devote their time and effort towards the product they've built. You can find the annual costs of maintenance according to the formula below:

maintenance costs = D * CE * 12 / 5

where

  • D is the number of days per month that one of your employees will spend on maintenance,
  • CE is the cost per employee,
  • 12 stands for the number of months in a year, and
  • 5 is the number of working days in a week.

Should I build or buy?

Building your own software is a form of investment. Instead of having a recurring cost of a license, you have to invest a large sum at the beginning. It means that, if you only planned to use the software once, it wouldn't make any sense to build it. The benefits only appear with time - the longer you use your own product, the less you pay in total.

At some point, you will reach break-even. It means that the total costs of building and maintaining your own software are lower than the total costs of a license. You can find the break-even point with the equation below:

break even = cost to build / (license fee - maintenance cost)

If you're going to reach the break-even in under three years, it's profitable to build the software tool, as it will most probably turn out to be a good investment in the long run. The later the break-even occurs, the higher the probability that you will switch to some other product, or maybe not need it anymore.

Bogna Szyk
Buying an external service
Cost
$/
per year
Building your own tool
Employees required
Time to build
wks
Employee salary (gross)
$/
per month
Overhead
%
Employee cost
$/
per month
Days of maintentance
/
per month
Build or buy?
Cost to build
$
Annual maintenance
$/
per year
Annual savings
$
Years to profit
yrs
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