How to Estimate Software Development Project Cost?

It’s critical to make an accurate cost estimate in order to keep the project within the budget. Many costs may occur over a project’s life cycle, and the difference between a successful plan and a failed one might be the cost estimate.

Cost estimation is the approach that considers different factors and calculates a budget that meets the financial commitment required for a successful project.

An accurate cost estimate is key to a software development project’s success. However, project effort estimation is not an easy thing. Projects carry risks, and risks carry unforeseen costs.

This article provides simple yet helpful suggestions for calculating software development costs. We disclose how we approach the software cost-estimating process and share some tips that have helped us nail it down.

Why Are Accurate Estimates Critical to Effective Project Management?

There are several main reasons explaining the importance of an accurate software costing estimation process.

1. It allows defining the scope of work to be done and the time and human effort needed.
2. It allows for understanding what in a project creates the costs and prioritizing tasks more effectively.
3. It gives clarity to both the development team and the client, helping to define and agree on milestones.

The Types of Project Estimation Techniques In Software Engineering

There are several project management estimation best practices in software development:

1. Ballpark estimate: This type of estimation model in software engineering is used when the client needs a rough estimate program to get the approximate cost of the project to understand whether he meets the allocated budget or the sum to ask for his investors. In this case, a very rough estimate is provided for a client to decide whether the project is feasible. A ballpark estimate is typically ranged, so if you think the project might cost $100k, you name a $75k-$150k range (-25 percent to +50 percent variance).
2. Detailed estimate: This is used when the client needs a more precise estimate on the project but is usually provided when the project requirements are in place. This estimate usually contains a quick project plan consisting of cost software development effort estimation and the timeframe needed. In comparison to a ballpark estimate, it can be a range between $90k-$120k (-10 percent to +20 percent variance).
3. Definitive estimate: If the cost of effort estimation in project management is a basis for a fixed price contract, it should be as accurate as possible. It should include the exact estimate of the software’s milestone and the total project cost. Assuming the project estimation is $100k, it will be $100k + $15k contingency or change for the request (0 percent to +15 percent variance).

At SCAND, we use different project estimation techniques depending on the client’s needs. What stays the same is the high level overview of the project costs that we provide. We break the project down into phases, which helps us to prepare a much more accurate final quote. Learn more about how much it costs to create a mobile app.

How to Do Project Estimation: Factors Impacting Software Development Cost

Many projects are developed in accordance with a chosen cooperation model: time & material or fixed price approach, etc.

It depends on the quality of project requirements provided by the customer and the number of changes expected during the development process.

If there is a brief description or no requirements at all, then the time and materials approach should be chosen as it is difficult to estimate development effort at the beginning, and the changes might occur during the development process.

In this case, the cost of the project is based on direct labor hours spent at a pre-discussed hourly rate.

The fixed price approach is used when there are detailed project requirements or SRS, and the budget and terms are defined in advance at the stage of signing the deal.

During project evaluation, besides standard risks and problems, the development team should provide accurate estimates of the budget and terms, include them in the contract, and strictly adhere to the prescribed terms and the budget during project execution.

Project Scope

A big part of the software cost depends on the scope of the project as it will depend on the number of stages it might include (requirements preparation, prototyping, design, development, testing, maintenance, and support).

Some projects start with the requirements or SRS preparation. During this stage, the overall scope of the project is defined, and team size is determined. Every project requires at least four roles – a Project Manager, a Designer, a Developer, and a QA Tester.

After the scope is defined, the project creation begins with wireframing and gradually extends to the designers who create the design and visual components. The developers then begin coding and transform the design into working software. However, the cost of the project can be less with a ready-made design.

Project Management

While developers’ responsibilities are clear for most customers, the role and merits of project managers are often underrated.

The roles of project managers often include scope planning and definition, activity sequencing, monitoring and reporting progress, and so on.

They are the guards of time frame estimates, they decide on how to present an estimate for a project, and they are responsible for regular project updates, risk detailing, and documentation management.

Moreover, project managers unite clients and development teams, create a roadmap for a successful project, and keep everyone on the same page of what’s required to stay on track for success.

Quality Assurance

It is important to ensure the quality of the developed app. Thus, thorough testing is conducted during each development stage. Basically, testing is aimed at ensuring that bugs do not creep into production and affect the quality of the software.

Software testing is essential when your software goes through multiple development iterations. Testing can be costly since it aims to find and eliminate all bugs as the software moves further into the development cycle.

In general, the testing phase should include the following:

• Usability testing
• Compatibility testing
• Interface testing
• Services testing
• Low-level resource testing
• Performance testing
• Operational testing
• Security testing

Integration With Other Systems and Migration of Existing Data

Quite often, software needs to be integrated with some 3d party systems. If that’s the case, the cost of the custom software project might increase significantly. It depends on the number of systems and the complexity of integration with them.

Typically, with the proliferation of APIs, integration with standard external solutions, such as payment processing applications, is easy.

If you need your software to integrate with a lesser-known legacy system, additional difficulties will be faced, and the duration and cost of the project will increase. In fact, much of the time is spent on RnD to get familiar with the API – data structures, protocols, user authentication, etc.

There is often some amount of data migration involved in custom software development, whether consolidating data on a single platform or upgrading to entirely new software.

If you need to move existing data into the new system, the total cost of the project will increase as well.

Data migration includes custom scripts that extract, clean (if required), and reshape data from your current system so that it can fit into a new system. It takes time to develop these scripts and requires a lot of questions to be answered to guarantee full compatibility.

Time

When it comes to software costs, time is also a factor. Your company will have to extend resources to meet your time constraints if you have a fixed deadline in mind. Therefore, the software development cost will also increase as more resources will be added.

In-House Team vs. Outsourcing

The choice between in-house development or outsourcing will have a big impact on the cost of software development. Software development outsourcing can typically reduce the development cost by 40% due to a huge wage gap in developed and developing countries.

You can learn about the difference between insourcing and outsourcing in more detail here.

Moreover, there are several types of outsourcing models, each with its own goals and budget options, so you can find exactly what you need:

Project-Based Model

Project-based model is a popular approach where a company outsources specific tasks or projects to a third-party service provider. This model is well-suited for short-term or well-defined projects with clear deliverables and timelines.

Here are some key points to consider:

1. Fixed Scope: In this model, the scope of the project is well-defined and agreed upon before the project begins. This includes project goals, deliverables, timelines, and costs.
2. Cost Control: Since the scope is fixed, the cost of the project is typically also fixed, making it easier to budget for the project.
3. Expertise: Companies can tap into the specialized expertise of outsourcing partners for specific projects without the need to hire and train in-house teams.
4. Limited Flexibility: Changes to project scope can be costly and may lead to delays, which makes this model less flexible for dynamic projects.

Time and Material Model

The time and material (T&M) engagement model is more flexible compared to the project-based model. It involves paying for the actual time and resources expended on a project, making it suitable for long-term, growing projects.

Here are some key points:

1. Flexibility: T&M contracts allow for changes in project scope and requirements as they emerge, offering adaptability to evolving project needs.
2. Transparency: Clients are billed for actual hours worked and materials used, providing transparency in costs.
3. Long-Term Collaboration: The T&M model is often used for ongoing, evolving projects where the scope may not be fully known at the outset.
4. Risk-Sharing: Clients and service providers share project risks, as the final cost and timeline may not be fixed.
5. Cost Monitoring: While T&M offers flexibility, it requires close monitoring to avoid cost overruns, which can occur if not managed carefully.

Dedicated Team Model

The dedicated team model involves establishing a team of professionals who work exclusively on a client’s project(s). This model is suitable for long-term collaborations requiring a high level of control and collaboration.

Here are some key points:

1. Team Integration: The dedicated team becomes an extension of the client’s in-house team, promoting close collaboration and knowledge sharing.
2. Control: Clients have full control over the team’s priorities, tasks, and project direction, allowing for real-time adjustments.
3. Scalability: Dedicated teams can be easily scaled up or down based on project needs.
4. Long-Term Partnership: This model often leads to long-term partnerships, as the dedicated team becomes closely familiar with the client’s processes and goals.
5. Management Overhead: Managing a dedicated team requires ongoing supervision and coordination, which can add management overhead.

Choosing the right engagement model depends on the specific project requirements, budget constraints, and the level of control and flexibility desired. Remember, it’s possible to use a combination of these models for different projects within their organization.

Bottom Line

Budget is a constraint when it comes to a project cost estimation. To avoid wasting your time, let the software development company know your budget at the beginning of the project. Include all the essential features, and if budget permits, add the “good to have” ones. If not, add them in the next release. Estimating software projects requires all hands on deck, from developers and QA engineers to business owners. If technical teams can collaborate and provide metrics for software project cost estimation, then there’s a higher chance that project execution will align more closely with initial estimates, even if new challenges arise. Teams that remain agile and collaborate closely with product owners take crucial steps toward building quality software that delivers value.