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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 a key to a software development project’s success. However, 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 to nail it down.

Why Creating an Accurate Cost Estimate Is Critical

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

  1. It allows defining the scope of work to be done and the time and human effort needed.
  2. It allows 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.

software cost estimating

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

  1. It allows defining the scope of work to be done and the time and human effort needed.
  2. It allows 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.

There are several types of software cost estimation techniques in software project development:

  1. Ballpark estimate: this type of estimation is used when the client needs a rough estimate 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: is used when the client needs a more precise estimate on the project but usually provided when the project requirements are in place. This estimate usually contains a quick project plan consisting of cost estimation and 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 estimation for a project is a basis for a fixed price contract, it should be as accurate as possible. It should include the estimate of each milestone and the total project cost. Assuming the  project estimation is $100k, it will be $100k + $15k contingency or change for request (0 percent to +15 percent variance).

Various estimation techniques can be implemented to ensure an effective cost estimation is provided.

At SCAND we use different estimate techniques depending on the client’s request. What stays the same is the high level of the 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 budget.

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 requirements provided by the customer on the project 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 provide a very accurate estimate 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 on 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 stages it might include (requirements preparation, prototyping, design, development, testing, maintenance and support).

software project cost estimation

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 the 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.

estimate software project

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 cost and time frame estimates and they are responsible for regular budget statements, risk detailing, and documentation management. Moreover, project managers unite clients and teams, create a vision 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, however, 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, and 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 the software development company needs 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.

Bottom Line

Budget is a constraint when it comes to software development 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 the if budget permits add the “good to have” ones. If not, add them in the next release.

Estimating the cost of software development 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 towards building quality software that delivers value.

Author Bio

Victoria Puzhevich Lead Business Development Specialist
Victoria has over 15 years of experience in IT, keeping track of the current and future trends in the sphere, sharing expert advice and relevant industry experience.

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