Estimating Software Projects: The Ultimate Guide + A Project Estimate Template

Have you ever wondered how to reduce spending yet increase profits? How to keep the project within the budget? How to make your project skyrocket without investing a fortune in its development? Estimating software project cost isn’t an easy task, which, yet, matters greatly.

92% of organizations that regularly apply project management techniques achieve their goals. In a nutshell, cost estimation helps companies calculate the budget that meets the project’s required financial framework. This approach considers a handful of factors and calculates the required sum. However, there are always certain risks and unforeseen costs regarding project development.  Therefore, in this article, Qubit Labs provides answers on how to estimate a software project and what the most efficient practices are, shares some tips that worked for us, and provides a handy project estimate template you can use.

What Is Software Project Estimation?

Software development estimation accurately determines the time, effort, and cost required to deliver or maintain a software-based project. It considers the distinctive approaches and processes a software development firm uses to accomplish tasks. Software project estimation helps plan and allocate resources effectively, identify and mitigate potential risks, and set realistic project milestones and deliverables expectations.

Why Is Estimation Important?

Since development projects are only becoming more complex, it’s little wonder the teams find it harder to set, follow, and meet realistic deadlines. Meanwhile, the project managers or other employees responsible for the project’s execution require accurately calculated financial expenditures. This helps them create the annual budgets for IT outsourcing and tell whether the project is worth the time and money and meets business needs. That’s when software estimation comes into play.  

Did you know?

• Companies that invest in proven Project Management practices have strategic initiatives that help them achieve success and waste 28x less money.
• In the previous 12 months, 70% of companies experienced at least one project failure.
• 73% of businesses suppose reliability, ease of use, and ease of integration are the key requirements when considering investing in digital PM software.
• 37% of the project failure relies on a lack of clear goals.
• 91% of US CEOs treat skill as one of the most significant factors affecting a company’s financial performance.
• At least 71% of U.S. businesses now use Agile for software management.
• 89% of organizations report having one or more PMOs. 

Different approaches in this field help focus on core metrics and aid managers in developing realistic scenarios and forecasts. The correct introduction of this activity into your business helps meet the expectations and enables the project’s efficient delivery at the right time and under the defined budget. Check the following advantages of software project estimation. 

Enables to note signals

Each professional has a specific opinion when the team considers the project’s plan and idea. Sometimes, these thoughts are much alike, and sometimes, they are contrasting. Actually, it’s no surprise that both cases occur since they positively affect the whole planning procedure. 

Basically, when the team members come up with different estimates, they treat the problem differently. A lower estimate might signal that a programmer knows about specific tools or a library that can help facilitate the development process. A higher estimate implies that a developer might refer to some pitfalls that often arise, yet about which the colleagues usually forget. 

In some cases, other employees, like designers, mention that the project requires additional testing stages or quality assurance activities. Thus, close estimates help define problems and conduct an in-depth investigation of the project before developing it. 

It makes failing early possible

Failing early is a key term for agile development because it enables development teams to promptly adjust their projects, introduce changes, and develop new features. It helps understand what complications might occur and what to expect during the following stages of development. 

This allows teams to decide what to do next, such as adjusting the scope of features, expanding the budget, hiring additional employees, or extending the deadlines. 

Helps address uncertainty

Although software development cost estimates have certain levels of uncertainty, they still provide information on what the team can plan to accomplish next week. It enables dividing the project into milestones or other points to guide budgets and distribute the assignments more effectively.

Allows for prompt plan adjustments

Once the estimations are done, there is a framework for discussing the planned work and aligning the defined steps with the actual goals. For example, the team can see a need to postpone some steps to introduce specific features earlier. Besides, cost estimation enables reviewing the project piece by piece. The employees can dive deeper into the product’s idea and develop fresh insights.

Which Estimations Take Place During A Project?

These are key components of software project estimation.

Cost

Estimating the project’s overall cost, which includes employee salaries, hardware and software fees, overhead expenses, and any other project-related expenditures, is vital. Incorrect or unrealistic budget planning and unclear requirements are some of the main reasons companies do not succeed. In addition, according to the study by BITKOM e.V., inadequate communication between project participants also negatively affects accomplishing goals.

Time

Project planning is needed to forecast the overall project time and the timing of individual activities. Planning the project timeline will allow you to manage resource availability and ensure all deliverables are timely.

Size Or Scope

The project scope encompasses all the tasks that must be accomplished to finish the project or deliver a product. You should define a comprehensive scope to ensure accurate estimations.

The size or scope means the number of screens or pages your software includes. There are different sizes; for example, a small software application has 10 to 25 screens and costs around $50,000-$75,000. 

The next one is a medium software application with 25 to 40 screens, usually costing between $75,000 and $250,000. The last one is an extensive software application with more than 40 screens and a price of over $250,000. It usually works across several platforms and provides complex security and logging features.

Also, there are enterprise-level projects that have rigorous security and data integrity. Such solutions require extended design sessions and daily interactions with all the team members.

How to estimate the size of a software project?

You can use various techniques to identify a project size. Also, involve stakeholders. 

Stakeholders are people who have a vested interest in the final product. They help the company determine what type of software is needed, what features they want to see in the product, and what problems it has to solve. Stakeholders can help elevate the development process because they know what will or won’t work in certain areas. 

With the stakeholders by your side, you can be confident the project won’t go beyond its original boundaries. They provide more understandable estimations so all parties understand why certain functions must be included while others can be omitted. 

In addition, make sure your estimation process is iterative and that you refine your size estimations as the project evolves and goals are clarified.

Risk

Software development entails internal and external risks that can influence your project. They encompass:

• Code issues (bugs, logical errors, etc.)
• Unrealistic deadlines
• Poor human resources planning
• Low productivity caused by delays or employee burnout
• Poor project management
• Scope creep
• Stakeholder issues (ineffective communication, blurry goals, and inaccurate expectations)
• Low engagement from end-users
• The use of improper tools
• External risks (law updates/changes, new government regulations, economic shifts, political issues, changes in consumer behaviors, etc.)

Therefore, you should identify the areas where the risks are most likely to occur and anticipate the consequences. Then, take action to prevent or mitigate the adverse outcomes, like performing trial runs, allocating time to try new methods in advance to see if they work out, or clarifying requirements to determine whether you need refinement. 

Resources

Resource management guarantees you have all the resources you need and can use them most. These resources include capital, people, materials, tools, and supplies required to complete a project. Here is a short breakdown of project resources.

Human Resources

Human resources are essential for any project, regardless of scope, type, and cost. People usually occupy various positions,  such as software engineers, designers, quality assurance specialists, managers, etc. These occupations are based on their abilities and expertise. For minor projects, a single person can handle all of these duties. However, large-scale projects require a team of people to work on them.

You can hire in-house developers, freelance programmers, or build outsourced teams. Each alternative has its price, benefits, and drawbacks.

• Freelance software developers. This is the most cost-effective choice, and there are numerous sites where you can find programmers. This isn’t the most reliable option because you can’t really monitor the freelancer’s job, and there’s a chance one won’t complete the project on time. Also, you might be dissatisfied with the task’s quality, so this choice is best for small projects that don’t entail much experience or resources.
• In-house software developers. This is usually the most expensive alternative because it includes paying for the office and a few other employee perks. You can, however, contact the developers at any time to resolve any problems the moment they arise, and they will promptly fix them. Yet, working in-house requires considerable financial and time investments. 
• Outsourced software developers. Business owners often regard this option as the middle ground because it allows hiring developers worldwide. You can choose countries with high price-to-quality ratios and save costs on software development while still receiving top-notch products. One notable shortcoming here is a time zone difference, but a flexible schedule can go a long way.
• Outstaffing. This approach is your win-win option if you want complete control over the software development life cycle and work with the best professionals in their field. Qubit Labs will match you with perfect candidates with excellent expertise and experience. Our developers will provide top-notch digital solutions at a competitive cost. We manage recruiting, HR, payroll, and all administrative tasks, and you focus on scaling your business.

If you want to be fully confident in the quality and transparency of the processes, opt for outstaffed and outsourced teams or in-house developers. 

Material Resources

Material resources are whatever your organization has that will be used to benefit the project. These can be raw materials with a one-time use, tools (hardware resources, software solutions, and infrastructure resources), physical infrastructure (e.g., offices), and communication tools (mobile devices, local networks, or team chat apps). Material resources ensure efficient workflow, high-quality software, security, and scalability.

Financial Resources

Financial resources relate to the project budget, which the project sponsor will set before launch. This group encompasses project budgets, external funds (a bank loan), and grants.

Time As A Resource

Time is a resource that is available and used to complete each activity. It has limits and must be managed well to achieve goals.

Quality

Quality is associated with functional and non-functional requirements and stakeholder expectations. Products that meet strict quality requirements, such as environmental, medical, or legal regulations, require more funding, effort, and other resources than those with fewer criteria.

Project Estimation Techniques

What is the software project estimation technique? Estimation approaches are used to create project estimates. When a customer or a stakeholder requests an estimate for a project aspect, these strategies assist you in providing them with an accurate estimate. 

Top-Down Estimate

A senior manager performs top-down estimations based on the available information about the project and results from similar past projects from the team’s experience. Next, the professional outlines the project goal or final deliverable. Then, one divides it into more minor elements, thoroughly researches each of them, and assigns them to team members. 

Bottom-Up Estimate

This approach implies analyzing every detail of the project. The team considers each requirement the client presents and makes a range of estimates by defining the lowest appropriate level. After that, one of the team members analyzes the cost, yet this person has to have experience in project tasks similar to the one they estimate. 

Expert Judgment

Expert judgment is one of the most common estimating approaches due to its speed and simplicity. It involves obtaining suggestions and guidance from project managers and other IT specialists who may offer a qualitative approach to estimating. A team of specialists in the relevant field determines the project’s size based on their experience and knowledge. This strategy is frequently employed when little information is available regarding the project. Expert judgment can be used to provide top-down or bottom-up estimates.

Comparative Or Analogous Estimation

To implement this strategy correctly, the company must have extensive experience. The software project estimation will be based on the principle that the past indicators obtained by the company help predict future project performance. Thus, creating estimations considering prior experiences is more effective than creating estimates from scratch. For instance, if prior projects took an average of twelve months to complete, the present one should take the same time. 

Parametric Estimating

The parametric model uses previous project data but adapts it to account for the changes across projects. The parametric estimation uses a statistical or mathematical approach:

• The first phase is to identify the development factors involved, which include business or functional needs, non-functional requirements, project complexity, and technology.
• The next step is to gather information about the effort necessary to accomplish one unit from similar previous projects and then compare it to the total number of units applicable to the current project.
• Finally, the cost is calculated using an empirical link between the elements involved and the project’s total units.

Project Evaluation and Review Technique or Three-Point Estimates

This approach is also known as the PERT Chart. The process starts by providing three ranges of estimations based on three data points. The three data points are: “best scenario,” “worst scenario,” and “most likely scenario.” This three-point estimate lowers the likelihood of an inflated estimate. It is also one of the most straightforward and accurate software development cost and time estimation approaches. Various individuals can complete the three-point estimations for more precision. PERT is then calculated using the following formula: PERT Estimate = (B + 4 x M) + W) / 6. M stands for “most likely,” B stands for “best scenario,” and W stands for “worst scenario.”

Step By Step To A Successful Software Project Estimation

How do you calculate cost estimation for a software project? You should leverage a structured approach to ensure a comprehensive and accurate prediction. Suppose you follow the necessary steps, adhere to specific techniques and methods, and understand what exactly affects the price of a software development project. In that case, your odds of success are relatively high. However, some valuable hints never hurt, so here are some of our observations that may come in handy.

Define Project Type And Environment

The first thing you should do is to identify a project type. It can be a new development, improving existing functionality, maintenance, optimizing, migration, or integration. Then, decide on a project environment. A development environment is a collection of tools and methods to create, test, and debug software. An integrated development environment (IDE) is a software package with extensive authoring, producing, testing, and debugging tools. Usually, it has several features: code editor, syntax highlighting, code linting, code correction, and project and environment awareness.

A testing environment assists computer programmers in identifying and correcting flaws that may cause the application to operate slowly or interfere with the user experience. As for 

production, it is closely imitated in a staging environment. Only a small group of people usually have access to it. Besides, a production environment is needed for interaction with end-users, testing, and implementing features.

Understand The Scope Of Work

Your scope of work should be detailed and comprehensive. Be sure to identify the main objectives, deliverables, a work breakdown structure (backend development, frontend development, testing, and deployment), resource allocation, timeline and milestones, cost estimation, risks and mitigation strategies, and documentation.

Prioritize Tasks

First, create a task list to identify all objectives and their value. Then, leverage prioritization techniques. For instance, you can use the impact effort matrix. This matrix is a simple decision-making tool that ensures you obtain the highest return on investment for the resources you put into work. The process is straightforward. Break down all development tasks into several categories.

• Low effort, high impact. These easy wins will provide the most significant value for the least time and money.
• High effort, high impact. These tasks need a significant input of resources and provide a corresponding payoff.
• Low effort, low impact. These tasks involve modest resources yet provide no considerable advantages.
• High effort, low impact. These goals are time-wasters that won’t provide adequate benefits.

Then, ensure goal alignment with stakeholders and schedule tasks based on their priority.

Choose Estimation Techniques

Project estimation is time-consuming, but accurate estimation is essential to ensure project success and prevent delays, missed deadlines, and budget overruns. You can choose from the approaches mentioned above.

Write Down Possibilities

To prevent uncertainty, try to consider as many possibilities as possible. Try to include technical possibilities (tech stack, security, scalability), business possibilities (competitor analysis, market demand), project management (resource allocation, timeline, risk management), functional (customization), operational (deployment and recovery), and user possibilities (feedback).

Revise Your Estimation

Revisions with other estimators might help you estimate projects more quickly and precisely. The only potential disadvantage is the time constraints involved. 

Use Software Development Estimation Tools

Work Breakdown Structure (WBS)

This approach decomposes a project into several parts, namely phases, deliverables, and work packages. It analyzes the work on the project in scale to determine whether each element works correctly and if there aren’t any miscommunications. It uses the 100% rule and implies that everything must be included in the scope. 

Product Backlog

A product backlog is an organized list of what should be done to complete a project. This information helps prioritize and modify project requirements, deadlines, and size. When creating the list, specify the task’s complexity to make a realistic estimate.

Use Case: Staff Augmentation

Qubit Labs had a client who wanted to scale his team with our dedicated developers. A large company wanted to augment an existing team by adding a software engineer (full-time) and a quality assurance specialist (full-time). The budget was $80,000. Qubit Labs matched our client with skilled professionals and handled recruitment, HR, taxes, and payroll.

Requirements

This stage is usually uncomplicated. In this case, the customer has already specified the expertise, hours, and rates they need. With that information in hand, we filled out the project estimate template.

Project Description

In this section, enter the projected period of a staff augmentation contract. This can be entered as a whole or as a decimal month. In this case, our project was a one-year contract. This part also has an optional project description area.

Team Details

You should indicate software development team members and their roles at this stage. You can add various information, such as the number of months and the monthly salary. Then, you can estimate a project cost and a yearly cost. We found a software engineer in Brazil and a QA in Poland, which helped the client save costs without compromising quality.

The top destinations for outsourcing are Eastern Europe and Latin America. These regions can boast a large talent pool, excellent expertise, and great communication skills. Do you want to learn more about these locations and their benefits? Check out our guide on Outsourcing to Latin America vs Eastern Europe: Report by Qubit Labs. Do you want to build a tech team that will boost your business? Qubit Labs can find top-tier specialists at competitive rates. Schedule a free consultation call to learn about our approaches and conditions. We will develop an effective strategy tailored to your business needs.

Bottom Line

If you are wondering how to estimate the cost of software development, you are already on the road to success. Not all professional or amateur business owners understand the significance of estimating in the software development world. Well-thought estimates increase company competitiveness, sought-after products, profitable projects, and higher income and productivity. 

Consider time, scope, risk, resources, and quality to estimate a software project. To assess your next software development project, you can leverage various software estimation tools and techniques — for instance, top-down, bottom-up, expert judgment, comparative estimation, parametric, and three-point estimation.

If you need help with project cost estimation or are searching for talented developers to level up your business, don’t hesitate to contact Qubit Labs. Meanwhile, you can check our recent articles for the newest tech world updates.  

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