Estimating the Cost of Software Development from A to Z
You cannot successfully handle what you cannot gauge, and what gets measured gets done. If you want to know how to estimate the cost of software development, you should know the most common approaches to this issue and key factors that you need to take into account. Below we’ve listed the key points.
Basics of Software Cost Estimation for Businessmen and Managers
First and foremost, there are three main aspects involved in the process of estimation:
- Costs – measure them in dollars (or your currency).
- Durations – measure them in calendar time.
- Efforts – measure them in person-months.
Efforts and costs are closely interconnected. Efforts are calculated in person-months and can be converted into a particular price in dollars by defining an average payment/rate per a certain period of time and then multiplying this rate by the efforts. Today, most teams still meet the following challenges:
Expert judgement / opinion is frequently used as one of the ways to calculate the cost of software development. This method is associated with the fact that most teams rely on the experience to estimate the cost of the project. However, it comes with some issues such as different specifications and lack of experts.
We use quantitative methodologies, both analytical and empirical. The empirical methodology of project estimation uses information from past projects to calculate the cost of software projects to be developed. The analytical methodology is based on the problems to be solved and the development rates.
Key Rules and Steps to Estimate Your Project
So, what makes a good estimate? Here are the key attributes of the right software cost quote:
- A quote is based on a reliable estimate methodology.
- A quote is comprehensive containing all the details.
- A quote is developed by the entire development team.
- Calculations are approved by all stakeholders.
- Calculations are based on similar project experience.
- Risks are understood and measured.
Based on these points, the estimation should be completed in a few steps. Below, we list them in the correct order.
Step #1. Define the Scope and Velocity
First off, understand how large your project is. It is often recommended by experts to focus on a minimum viable product (MVP) which is the minimum of product features needed to develop an application. It’s not a big deal to generate the basic vision. Just research the audience, understand its needs and wishes, and deliver relevant features.
To measure the velocity, you can use any of these models:
- Run sprints to understand how the development is going on.
- Determine the number of fulfilled user requirements.
- Use the team’s velocity from a similar project.
Don’t forget about the so-called ceremonies – periods in Scrum. This time needs to be distinguished from the work. It is critical as it allows the team to move quickly and keep productivity high.
Step #2. Plan Everything with Team Members
Planning is the next thing you should do to evaluate the average cost of software development. The staff gets together and discusses the details. During this process, team members talk about user stories and determine the timescale of the project. Only the development team members are allowed to vote. Stakeholders’ opinion is valuable to identify compulsory elements of the software development cycle. Moreover, it brings a shared vision of the entire process. For example, if your client has unrealistic expectations about the project – just show him the expected budget.
Step #3. Create a Budget, Not an Estimate
Harvard Business Review proved that 1 in 6 IT projects has an overrun of 200%. It means that even experienced professionals fail to provide an accurate software cost estimation. To reduce this risk, stop creating a software cost estimation and start developing a budget. What does this mean? Brainstorm about such valuable decisions:
- Code this set of stories now or later?
- Distribute budget this quarter or no?
- Involve more people or outsource?
- Launch a startup or no?
- Start working on the first feature now or later?
It’s obvious that the in-house development cost of software projects will be higher than the outsourcing cost to the project. In both cases, you can have a fixed sum that will not greatly depend on the number of hours spent.
Step #4. Budget the Software Development Costing
The main thing to do is identifying “must-have” and “nice to have” elements of the project. What is the difference? Compulsory features will influence the whole project while additional components will make a product/service more functional.
Step #5. Divide Requirements to Refine Transparency
It’s actually a Scrum methodology when a team works on each feature in a short time, and then move on. It helps to see whether the expected budget matches the reality and what additional expenses may arise in the future. This point partially connects with the previous one as it’s important during the development phase.
Step #6. Use Both Capitalization and Amortization
Capitalized cost of software development includes expenses such as QA, programmer compensation, and other direct and indirect overhead charges. Software capitalization includes internally-developed software to use only inside the company. These are membership tracking systems, accounting systems, cash management tracking systems, production automation systems.
Capitalization is often required to be in harmony with generally accepted accounting principles. Capitalization is a complex procedure, so feel free to hire a certified public accountant. There is no right way for the capitalization because everything depends on the specification of your company that makes professional help more desired than ever.
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