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I am doing research to know the effect of inflation in software making. How does inflation affect the cost of software production? For example, you are following a waterfall model. Does inflation affect the cost of Design, Construction, Testing, and Production/Implementation?

  • ? Can you define inflation in the context you're using? If you're talking about inflation economic sense (money supply growing faster than GNP), then it affects all prices/costs; the value of money declines, no matter what you spent that money on. But perhaps you're using inflation in another context? – Mark C. Wallace Aug 3 '20 at 10:47
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    Many aspects of technology have negative inflation - e.g. look at the cost of machine learning-based software R&D today compared to 10 years ago. It's hard to quantify but the awareness of that negative inflation has for a long time been a factor for IT strategists: dollars spent next year may yield greater value than dollars spent this year. – nvogel Aug 3 '20 at 12:21
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Inflation affects everything in the economy. Unless you are building software with volunteers and using donated equipment, software production will also be affected by inflation.

You need to pay salaries for example and people get raises. The raise might be a raise for individual performance or new responsibilities, or the raise might span across all employees as a cost-of-living adjustment (in some places, employment contracts are tied to economic indicators like the Consumer Price Index for example, so no matter your individual performance, each year you get a salary increase to combat the negative effects of the cost of living becoming more expensive).

You also need to pay for equipment, like servers. Although I doubt that IT equipment is explicitly considered when calculating economic indicators for inflation, if you are a hardware provider you also have expenses with employees salaries. Increases in those salaries will reflect in increases in your product's prices to keep profitability at the same levels. The same applies for service providers also.

So if you have a long running project, a server bought next year will most likely be more expensive than one bought now (not a rule though, since electronic products actually keep becoming cheaper), and people's salaries will be greater than they are now. There are also other factors, like regulation for, say, minimum wages, or currency fluctuations if you don't operate locally.

Because you can't really predict how the prices will fluctuate, the only real options you have is managing contracts with providers and managing the project budget. You have to account for these fluctuations, assume they will be increases, and add a buffer in the budget or proper contract clauses.

To use you example with Waterfall, Waterfall projects are mostly backed by a fixed-price contract so you can either:

  • increase the total cost of the project by a projection of inflation (say, plus 2.5 percent if that's the target)
  • go for a "fixed-price contract with price adjustment" that contains contract clauses that allow the price to be revised up or down based on official economic indicators.
  • properly manage the budget by planning for things to increase in price, be it salaries, equipment or services.

These are just a few ideas of the top of my head. I'm sure things are more complicated and have an impact on many areas. Also, although I never liked the analogy between construction and software making, this is one area where there are similarities between the two, because you have cost of workers, and cost of materials that change over time, and things occur in stages (keeping on the Waterfall approach of building software), so maybe have a look at the construction sector for some inspiration?!

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