Software Cost Estimation: How to Plan Your Software Development Budget?

When you look to turn your brilliant business idea into something tangible, questions like “How much does it cost to develop software?” or “How do you estimate project cost?” will inevitably pop up. Most of the time, people don’t know the factors that influence software development costs. That’s why it’s crucial to educate teams about the process and how tricky estimation can be.

With enterprises seeing only a 9% project success rate, this article focuses on development costs and clarifies cost estimation models for software development. Let’s start.

What Is Cost Estimation in Software Project Management?

A thorough software cost estimate considers both direct and indirect expenses:

• Development, testing, design, architecture, integrations, and deployment activities usually incur direct costs.
• Project management, QA, DevOps, infrastructure, security, documentation, communication overhead, licensing, and third-party vendor or API fees are all examples of indirect costs.

This way, we must consider all factors, including possible rework, requirement changes, technical difficulty, limitations imposed by legacy systems, reliance on third-party systems, and team availability. Underestimation leads to timetable slips and budget overruns.

Moreover, businesses use cost estimating for financial management and long-term planning. Its guidance simplifies the process of aligning investment with projected return on investment (ROI), prioritizing features, comparing solution approaches, and evaluating feasibility. In its ideal form, software cost estimation is an ongoing process that changes in tandem with it, fostering openness, trust, and predictable delivery.

Key Cost Estimation Models

The cost estimate is the software provider’s estimate of what the software development and testing are likely to cost. Cost estimation models for software development are mathematical calculations used to determine software development costs.

Empirical Estimation Technique

Simply put, this technique is based on data from previous projects, along with educated guesswork and assumptions. Evidence-based formulas are applied to make a prediction, which is a crucial part of the software project planning step.

This technique also requires prior experience in developing a similar solution. Whereas empirical estimation techniques rely heavily on acumen, various estimation activities have been validated over the years. The most popular techniques in this field are expert judgment and Delphi cost estimation.

Heuristic Technique

A heuristic technique refers to any way of addressing the issue through a viable method or different alternative deliveries, whichever are adequate given a restricted time span or cutoff time.

Heuristic techniques are adaptable and are used for quick decisions, particularly when finding an ideal arrangement is either impossible or when working with complex information. This technique expresses the relationship among different project parameters through mathematical equations.

The popular heuristic technique is given by the Constructive Cost Model (COCOMO). The model uses a regression formula with parameters determined on the basis of industry data and characteristics of a particular project.

Analytical Estimation Technique

Analytical estimation is a work-measuring technique. First, a task is divided into simple component operations or elements. If standard times can be transferred from another source, these are applied to elements.

A proficient, well-versed specialist with hands-on estimating experience performs the estimation. We then simply calculate the total working hours that a fully competent worker will need to deliver at a specified level of performance.

Understanding the Estimate Types

To address the perpetual cost issues, you also need to understand three main kinds of estimates with varying degrees of accuracy. So, what are the three types of cost estimates? They include:

• Ballpark, aka Rough Estimate. This estimate type provides a thumbnail sketch of the potential cost range you might expect for your project. The main aim of a ballpark estimate is to answer whether you and your vendor can pursue product development.
• Budget estimate. Budget estimates are forecasts used to plan strategies and budgets. Usually, a client provides a budget to see what the vendor can deliver for that amount. Estimates are required to prioritize strategy based on factors such as risk.
• SoW (Statement of Work). This estimate type defines project-specific activities, deliverables, and timelines. Therefore, a client is upfront about his or her needs and strategy and asks a vendor to provide an accurate estimate.

Now that we’ve covered the basics, let’s move on to software cost estimation methods typically used to plan your development budget.

Estimating Techniques

You may use several cost-estimating techniques at different stages of a project’s development, and the main point is to revisit and refine your assessments as the project moves forward. There are four major approaches to determine the project’s worthiness – here’s how they’re best deployed.

Top-down

Top-down estimating starts with outlining the project goal or final deliverable and breaking it down into smaller planning parts. Each of these smaller parts is then polished into greater detail and assigned to team members.

You should apply the top-down technique only when you have a clear vision of the project details and the lead PM has a full picture of how the organization will benefit from the project. This method is also used when you need a quick rough approximation of your budget.

Bottom-up

The bottom-up method is more detailed and time-consuming than the first one since it analyzes every detail of the project. Within the bottom-up approach to estimating, the project team focuses on each of the client’s requirements, defining the lowest level appropriate to make a range of estimates.

Typically, the individual project team members who will take over the tasks analyze the costs because they are in a better position to estimate tasks they have experience with. Compared with the top-down techniques, the bottom-up estimates feel more tangible and accurate.

Analogous Estimation

The technique uses historical data to compare the current project with a similar project completed in the past. It does not require data manipulation or statistical adjustments. Analogous estimation is a type of expert judgment with a sprinkle of historical data, since no calculations are involved.

To apply this method, you’ll need data from previous and ongoing projects, a similar project, and the project manager and estimation team’s participation.

Planning Poker

This one is a consensus-based estimating and planning technique used within the Agile methodology. To introduce a poker planning session, the product owner or customer demonstrates an agile user story or explains a feature to the estimators.

Each team member holds a deck of Planning Poker cards. Each card contains a value like 0, 1, 2, 3, 5, 8, 13, 20, 40, and 100. If each estimator selects the same value, that value becomes the estimate.

Example of Software Development Cost Estimation

At Devox Software, we most often receive inquiries to create design and development solutions. Every case is unique, with a wide range of factors affecting the average cost of software development.

Step 1. When a client reaches out for a software development quotation, we collect the data needed for further analysis. Then, the assigned specialists liaise with the client to identify the project requirements and determine whether the design is already provided.

Step 2. If the product design needs to be developed, we finalize the design requirements before estimating the cost. At this point, our Account Manager, Design Team Lead, and assigned designer usually set up a call with the client to clarify expectations.

After that, our dedicated development team compiles a brief that we later use for the cost estimate, which the client must approve. Once the team has addressed all technical details, it moves on to designing the solution and making changes as needed. At the end of this stage, the client gets a complete product design for approval.

Step 3. Once the design is finalized, our team proceeds with software cost estimation. We provide two types of cost estimates: one by full-stack developers and two separate estimates by front-end and back-end developers. When the software cost estimation template is ready, we check it with the client and move on to development.

You can also perform QA and PM risk analysis based on the software cost estimate. The analysis uses a percentage of the overall development working hours.

Typical Mistakes in Developing a Project Budget and Solutions

The purpose of planning a development budget is to ensure you’re prepared for all possible circumstances. Going over the budget is not an option, nor is delivering an incomplete project. In most cases, you can avoid budget overruns, especially if you know the common pitfalls.

Allowing False Expectations to Form

Sometimes vendors forget that clients can’t be expected to know every peculiarity of the development process. As a result, developers share cost estimates that clients may wrongly perceive as set in stone.

The vendor has to explain that the budget may need adjustments as the project progresses and requirements change. If stakeholders are well informed about the development process, they may be more willing to provide additional funding if needed.

Overlooking Taxes

Aside from the cost of software development, a client may also have to pay taxes. Some companies get tax benefits, while others don’t, so this factor is easy to overlook. It may not strongly influence budgeting decisions, but it can cause problems and eat away at the vendor’s profits.

So, when estimating the software development budget, a vendor should research any additional client expenditures, including taxes.

Forgetting about Maintenance Costs

Partners may get carried away discussing the cost of adding various software features. However, no solution will operate well long-term without ongoing maintenance. Over time, the software will need updates to remain functional and effective.

Therefore, vendors should include maintenance in the project scope and factor its cost into the budget. This includes infrastructure and server management, regular updates, quality assurance automation, etc.

Out of Scope Task

Some scope changes are part of the plan. But if a client has an incomplete picture of the functionality before the project begins, that will cost extra. In this case, a vendor complements the estimation and proceeds with new feature implementation.

Loose Requirements

Cost estimation is difficult per se, let alone when requirements change. When your requirements are vague, even the best estimates will be ill-defined. The pill depends on the methodology.

If you work with a Waterfall model, developers must rebuild the whole project from scratch if requirements change. If the team uses the Agile methodology, known for its flexibility, developers can adapt to changes.

Top Mistakes Vendors Make

Budget overruns, delivery delays, and confidence erosion are expected outcomes of hastily prepared cost estimates that lack genuine engineering input. Let’s list the most common faults.

Inaccurate Cost Estimate

An inaccurate cost evaluation in one project area presupposes an inaccurate distribution of resources across the project. As a result, the team ends up under-allocating resources and spending more time on critical tasks. In this case, the vendor completes the essential tasks at its own expense.

Not Factoring in Risks

When a vendor fails to perform an in-depth risk assessment, cost variations are common. And in most cases, without clear risk awareness teams cannot identify the necessary contingencies and end up with cost overruns. The only viable solution is to prioritize critical tasks.

Underqualified Team

If specialists who lack real development experience perform the software development cost estimate, it’s no wonder the team brings its eggs to the wrong basket. Another mistake in this category includes assigning a motley crew of junior and senior devs to draw an estimate. They need different amounts of time to complete the same task, so the average number of man-hours will be estimated incorrectly.

Also, the average software developer hourly rate varies by seniority level, which can influence the final cost estimate too.

Top Cost Estimation Tools

As you might have guessed, software cost estimating is the piece de resistance of the whole development process. Luckily, teams won’t have to do back-of-the-napkin math to calculate how much you are going to spend. Software cost estimation tools combine estimation applications, statistical tools, and more to ensure you get a clear-cut software cost estimate.

Microsoft Project

A project management tool that optimizes portfolio management and lets you plan and control project activities. The software uses built-in templates, tools for different levels of analytics and statistics, time management tools, etc., to tackle anything from small projects to large initiatives.

Concerto

A project management system designed to fully support and maintain the project environment. Its budget and funding management system lets you enter an overall budget, with detailed financial information you can later study, review, and report across multiple channels.

JIRA

Agile teams use Jira, a project management platform, to plan, track, and manage work throughout iterative development cycles. Backlogs, sprints, boards, and burndown charts give stakeholders a clear, real-time view of progress, obstacles, and delivery risks, boosting team productivity.

Paired with other cost-control tools like effort tracking and rate models, Jira becomes more than a cost-estimation tool. Teams can monitor time spent on tasks, stories, or sprints, assign work to individual resources, and predict expenses based on velocity and past performance.

Jira is a useful tool for enterprises that collaborate with seasoned delivery partners like Devox Software to align scope, effort, and budget. It allows for ongoing validation of estimation assumptions against execution facts rather than static plans.

Primavera Project Planner

Project management software used to manage and control projects and track resources, materials, and equipment used in a project. The software includes core project management concepts, from work breakdown structure and activities to budget and costs, to effectively manage and control project implementation processes.

Spider Project

Spider Project is a professional toolkit that helps navigate project management processes of any complexity within the allocated budget and chosen strategy. The solution lets managers select projects with maximum impact, optimize resource allocation, minimize costs, and more.

Why Do We Need to Estimate Software Cost?

Producing detailed estimates is a crucial part of project management and a key component of every successful project. Estimates are essential for defining the project budget, schedule, and resource plan. If the vendor fails to provide realistic development costs, they’ll inevitably face cost overruns, overworked developers, and missed deadlines.

Among other things, on-point cost estimates entail the following benefits:

• Sound planning
• Improved resource management
• Stronger client relationships
• Better reputation and repeat business

As a Conclusion: Develop Software with Devox Software

One of the hardest things in software development is providing a project forecast. Over the course of a project, costs may change, and a precise estimation method is crucial to distinguish a successful plan from a failed one. At Devox Software, we are always upfront about development costs, offering an honest algorithm for calculating software development costs.

At Devox Software, honesty and transparency are placed at the heart of all work processes. Open, honest communication creates a forum where clients and teams have full access to the status of every project phase. This way, clients understand the project’s rationale and stay on top of all pricing specifications and terms.