How to Estimate Software Project Cost | Guide 2023

Have you ever wondered how to reduce spendings 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.

In a nutshell, cost estimation helps companies to calculate the budget that meets the financial framework required for the project. This approach considers a handful of factors and calculates the required sum. However, when it comes to project development, there are always certain risks and unforeseen costs. 

Therefore, in this article, Qubit Labs provides answers on how to estimate a software project, what are the most efficient practices, what elements influence the final price, and shares some tips that worked for us. 

The Importance of Software Project Estimation

Since the development projects are becoming only larger and 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 which 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 that affect a company’s financial performance.

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 delivery at the right time and under the defined budget. Check the following advantages of software project estimation. 

Enables to note signals

When the team sees the project’s plan and idea, each professional has a specific opinion regarding it. Sometimes, these thoughts are much alike and sometimes — contrasting. Actually, it’s no surprise that both cases take place since they positively affect the whole planning procedure. 

Basically, when the team members come up with different estimates, it means that they treat the problem differently. A lower estimate might signal that a programmer knows about specific tools or a library that can help to facilitate the development process. A higher estimate implies that a developer might refer to some pitfalls that often arise, yet about which the colleagues often 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 any problems and conduct an in-depth investigation on the project before developing it. 

It makes failing early possible

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

This allows teams to figure out what to do next, like think about whether to adjust the scope of features, expand the budget, hire additional employees, or expand 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 certain features earlier. Besides, cost estimation enables reviewing the project piece by piece. The employees can dive deeper into the product’s idea and come up with fresh insights. 

How To Estimate a Software Project: Effective Techniques

It’s a real challenge when it comes to delivering precise estimates. However, a handful of techniques and approaches can help address the question “how to estimate a software project” and get a more accurate answer. You can combine the approaches mentioned below at different stages of project development to see whether your previous assessments were correct and how the project is moving. 

Traditional estimation

It’s a widely-used strategy that involves selecting a requirement and assigning a time value to it. It depends on the project’s difficulty and the estimator’s general familiarity with certain specifications. This strategy implies dividing the requirements into several components, including presentation, business, and database. And then — set deadlines for each of them. 

After that, you will see that the whole requirement estimation is the sum of each mentioned component. However, this strategy might not be the best in case you don’t have much time or the project is somewhat complex and includes many requirements. 

Estimation by order of complexity

This approach entails categorizing all criteria according to their complexity levels. Then — calculate a representative sample of all of them using the traditional method (mentioned in the previous point). Further, in order of complexity, the value of the standard estimations that are pending assessment is extrapolated. This strategy is handy for large projects that have many requirements.

Estimation based on analogy

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, it’s more effective to create estimations considering prior experiences rather than from scratch.

Estimation by team

In this case, different criteria, like components or system modules, distribute the requirements. If necessary, this empowers forming separate groups of estimators to assess the number of identified requirements. After the work is done, they will consolidate the results into a single estimation. This strategy is excellent for large and complex projects. 

Additional Software Cost Estimation Approaches

Bracketing

This is an effective and quick way to receive a prompt answer to the question: “how much will this software project cost me” or “how much time will this project need?” After that, you will need to think of some aspects of the project and put them into brackets (dollar amounts). This will help to align your expectations with the real situation and identify whether there is a mismatch.

Work Breakdown Structure (WBS)

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

Top-down

A senior manager carries out top-down estimation proceeding from the available information about the project and results derived from similar projects from the team’s experience. Next, the professional outlines the project goal or final deliverable. Then, one divides it into smaller elements, thoroughly researches each of them, and assigns them to team members. 

Bottom-up

This approach implies analyzing every detail of the project. The team considers each requirement presented by the client 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 tasks similar to the one he/she estimates. 

Relative Prediction

In this case, you will use one of your previous projects to define how much bigger or smaller the current one is by comparing them. It helps raise questions regarding the current project and implement new approaches. It’s useful for building trust if you are selling the idea to someone because they will see your previous accomplishments. 

Statistical Modeling

This approach uses historical data of critical cost drivers. After that, it calculates how the cost will change if you adjust certain aspects of the project, like its duration. 

How To Estimate Cost of Software Development: Factors Affecting The Price

Every great project begins with an idea. One day you might get insight on how to build the next Facebook or Telegram, and in a couple of days, you find yourself writing down the features and developing a business plan to turn it into an MVP.

Another case is when you are looking for ways to boost your performance because your business faced a certain challenge. Software products are great solutions to keep the business going, especially when it comes to working with distributed teams. 

Whatever your situation, eventually, it comes down to the question “how to estimate software project eta and cost?” To answer it, you should make the initial cost estimate, consider challenges, and come up with a budget that offsets research and development expenditures. 

We’ve created a list of the top 7 factors influencing the software project cost to make the task easier for you. 

Software complexity

This is the first thing you need to define to see how to estimate software project cost accurately and decide what kind of software you want to build. If you haven’t decided on anything specific, the team will have to do research, and that will considerably affect the project’s cost. The more hours the developers spend on your solution or altering the existing prototype per the users’ feedback, the more money you will have to pay for their extra work. 

To decrease the number of additional costs, spend time figuring out what you want to see in the outcome, your ideas about the project’s features, and what kind of specialists you require. You will save both your time and money and prevent the project managers from doing additional work that will slow down the development process. 

In case you want to implement some cutting-edge technologies, it will influence the final price. It increases the project’s complexity and raises the need for more experienced developers. If you want the development process to have top-level security, it will call for special arrangements, which add some extra dollars to the bill. 

Human resources and functionality

It’s no secret that the more functions in the program, the more expensive the software development services. The thing is that more people will have to work on these features, hence invest more hours into the development. If you want every function to work correctly and smoothly, it has to be the task of skilled developers. 

Besides, program elements require specific skills acquired only by certain programmers, most often of senior level of experience. Thus, it’s logical to assume that their wages are several times higher than those of junior or middle-level employees. If there are many complex tasks in the project, like payment integration, only senior developers will be able to handle them. Therefore, you will have to make sure the project budget includes costs for software engineers’ salaries. 

The more complex the project is, the higher the price will be. It’s simple like that.   

Software size

This 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 that has 25 to 40 screens and usually runs between $75,000 to $250,000. The last one is a large software application, consisting of more than 40 screens and implying 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.

Creative design

It’s significant to create an application that has both top-notch performance and looks. You don’t want to spend hours on development yet deter users with not really attractive aesthetics of the product. The app has to make a good first impression on the people and be user-friendly.

It’s necessary to delve into the nitty-gritty of UI/UX design and choose the most appealing color palette, fonts, illustrations, and layout. If you want the users to opt for your product instead of others, strive for clear and engaging design, intuitive navigation, and unique and stylish interface elements. 

The cost usually ranges between $8,000 and $16,000 for the general design, but if you want everything to be custom-made and avoid pre-built templates, the price will be higher.  

Integration with other systems

Often, integration is tricky because it can be either swift and seamless or challenging and time-consuming. Everything depends on what kind of integration you want to have, for example:

• Integration with third-party services, like payment or credit check services.
• Integration with business applications, such as CRM, Marketing Software, and ERP.
• Integration with AR/VR, Blockchain, IoT.

If you opt for, say, PayPal, the integration will be easy, but there will be specific changes in the duration and project cost for some lesser-known systems.   

Migration of existing data

Whether consolidating data on a single platform or upgrading to completely new software, custom software creation often involves data migration. If your company needs to move the existing data into the new system, the process will include custom scripts. They will extract, clean, and reshape the existing data to fit into the new system.  

This will take time and require additional costs because the developers have to perform a handful of tests and adjustments before they are confident the migration is done properly. 

Hiring option

You can hire in-house developers, freelance programmers, or build outsourced teams. Each alternative has its own price, as well as 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 a great deal of 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 perks for the employees. 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 from all over the world. 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.

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

How to Estimate Software Project Eta and Cost: Key Steps 

Action is in interaction, so when it comes to software project estimation, gather a team of professionals experienced in different areas. Each estimator will have one’s opinion regarding the project, which will help create the most accurate estimation based on the industry’s specifics. There are certain steps to follow if you want to reduce uncertainties, create practical recommendations, and have clear understandings of the scale, objectives, and commitments. Let’s take a look at them.

Involve business stakeholders in the software estimation process

Stakeholders are the people who have a vested interest in the final product. They help the company determine what type of software is needed, what kind of features they want to see in the product, and what problems it has to solve. Stakeholders are the ones who can help take the development process to another level because they are aware of 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.  

Expand your employees’ skill set and involve them

Employees must be keen on decision-making, team building, and problem-solving. When every member works like clockwork and knows the project’s details, there will be practically no unexpected issues. Besides, when investing in a team’s knowledge, you will reap the benefits soon enough. The employees will see what adjustments can be introduced to the product or how to avoid certain challenges. 

Also, the team isn’t only about developers; it also has to include a business analyst to write down the requirements, a designer, a QA engineer, and several other professionals depending on your project’s goals. Each of them adds value to the product and helps drive efficient development and compliance with the set expectations and plan. 

Break the requirements down

It’s much easier to evaluate the project when it’s divided into phases, tasks, and subtasks compared to estimating the general picture. Each element adds time and cost to the product, so when estimating them one by one you can be more granular about the work that has to be done. Besides, in this way, it’s much easier to understand whether the project will meet the intended budget and deadlines or you will have to introduce some changes. 

Tie the estimate to reality

Consider finding a piece of the project that seems to be well defined to everyone. It has to be estimated within a relatively short term, like about half of a day in development time. This element will become a baseline you are going to measure against. In case the team has already started working on certain tasks, it will quickly re-estimate it once the development starts. At this point, you will avoid wasting too much time and cost due to a standstill. 

Be open to changes

Once the product is launched, you can see all the shortcomings and gains of your project estimation. It’s easier to see these points post-factum and analyze what can be improved in the future and in what way. It allows your company to be more flexible and adjust easily to the ever-changing market demands. You will hone your skills and deliver more superior results next time.  

Tips On How to Estimate Software Development

Suppose you follow the necessary steps, adhere to certain techniques and approaches, and understand what exactly affects the price of a software development project. In that case, your odds of success are rather high. However, a couple of valuable hints never hurt, so here are some of our observations that may come in handy.

Set and document ideas and goals

Clearly established goals are half the success because both you and the team will know the development objective at the outset. It will help to prioritize the tasks and ensure each team member and stakeholder is on the same page. Make sure to state all the ideas and assignments as coherently as possible, so everyone understands what he/she has to achieve. It eliminates the miscommunication and allows seeing whether all the objectives are realistic enough to meet the deadlines. 

Continuous deployment solutions

Once you divide the software development process into smaller stages, the team will produce results in short iterative cycles. This brings more effective and fast testing and release. Besides, you can receive feedback on each element, which allows for a smoother development process and reduced cost and time.

In this way, you will make adjustments while in individual cycles, without re-checking the completed product, trying to detect the bugs.  You will have more control over the development process, and the launching will be several times easier.  

Separate direct and indirect costs

You can calculate your gross and net profits when separating direct and indirect costs. Direct costs are the expenditures on the project, namely:

• The cost of various supplies required for the specific project.
• The team members’ salaries.
• The payment for the consultants or other third parties’ services who are involved in your project.

Indirect costs are the money you pay both when you work on the project or deal with routine tasks. These include:

• The price of office rent, equipment, and various supplies.
• Employee benefits and bonuses.
• The salaries of non-team members, namely marketing, finance, and administrative department employees.

This tip will help you understand whether the project pays off and decide to cut costs or increase the budget if necessary. 

Determine priorities

One of the main threats to the project’s success is being scattered and not having a specific action plan. You might try focusing on too many things at once but fail to achieve the desired results due to poorly thought-out objectives. So, it’s more effective to consider the most critical or time-consuming topics that require constant attention and push away from them when determining priorities. 

Use tools for estimating

The tools were created to automate the processes and add value to software project estimation, so consider leveraging them. They help to make the processes more effective by reducing manual labor and enabling checking the history of estimations to tell how specific actions impacted the final result. 

Analyze project risks

The “best-case scenarios” sometimes prevent the business owners from seeing the complete picture, and they fail to predict the difficulties. So, try to identify the areas where the risks are most likely to occur and anticipate the consequences. Take action to prevent or mitigate the negative outcomes, like performing trial runs, allocating time to try new methods in advance to see if they work out, or clarifying requirements to know whether you need refinement. 

To Sum Up

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. 

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

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