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How to Estimate Software Development Cost

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Ottun Odunayo

October 18, 2023

How to Estimate Software Development Cost

Estimating software development costs is a critical aspect of any software project, whether you're a developer with a lot of experience or a business owner who wants to start a project. Estimating costs accurately is the foundation of good project planning. In addition to accuracy, it increases your profit and helps you prevent budget overruns.

In this article, we'll discuss the major factors involved in estimating costs and the steps taken to estimate costs accurately. By the end of this article, you should understand how to estimate costs and why it is needed in all software development projects.

Overview

What are software development costs?
Factors that affect software development costs.
Six steps to determine software development costs

What are Software Development Costs?

Software development costs refer to all the expenses involved in creating software for individuals or businesses. For instance, think about the cost incurred in constructing a house. The entire process of building a house, from the planning stage to its completion, describes the image of software development costs.

The cost of developing software is not standardised. It fluctuates based on factors such as the size of the business. For instance, small-scale businesses typically involve lower expenses compared to larger enterprises. However, size is not the only determinant; the type and complexity of the software also influence the cost. Software development companies often use fixed-cost models. However, If clients seek customised software built from scratch, costs are calculated based on various resources spent, including time, the client's budget, and the expertise of the professionals involved.

Additionally, calculating the costs of these projects raises several questions. Who is the target audience, and what is the app meant to achieve for users? What specific requirements do users have for the software? These inquiries serve as the initial step in determining how to estimate the cost of the software project.

Six Factors that Determine Software Development Costs

To have a better understanding of the steps involved in determining the software development cost, it is expedient to know the various factors that determine these costs. These factors include

1. Type of the Project

Different projects require different efforts. Having an understanding

of the project will help you determine its cost. For instance, creating a website for a small business requires less time and resources compared to constructing an e-commerce platform, resulting in higher development costs.

2. Size of the project

The number of users determines the size, thereby determining the project's resource needs. Simply put, smaller projects require fewer resources, which translates to lower costs. On the other hand, larger projects entail more resource allocations, resulting in increased costs, time, and the number of developers involved in the project.

3. Location of Developers

The region where the developers are staying also determines the project's cost. For instance, developers staying in highly developed countries where the cost of living is high, such as Australia, are likely to charge more when developing software.

4. Deadline of the Project

Clients with tight project deadlines may need to budget higher. This is primarily because a larger workforce of developers is necessary to carry out the project and meet the stringent deadline. Consequently, the increased number of developers working on the project leads to higher costs associated with compensating them for their efforts.

5. Technology Stack

The programming language used, choice of technology, and frameworks all determine the cost. The choice of technology also depends on the goals of your business. These technologies and tools determine how fast it will take to develop your project and how much teamwork will be needed to implement it.

6. Size and level of developers

The size of the development team plays a crucial role in estimating the project's cost. For instance, using just two developers for your project will naturally result in lower costs compared to assembling an entire team of developers.

Additionally, a Senior-level developer will automatically cost more than a Junior or Mid-level developer. This is because they have more expertise and experience, making their skills more valuable.

Steps to Determine Software Development Costs

Now that we know the various factors that influence the cost, let's take a look at the steps involved in estimating software development costs

Step One: Define the Project Scope

Defining the scope of the project is the first step in estimating software development costs. It involves stating what you want your project to achieve, including its features, functionalities, product description, and the specific problems it aims to solve.

To accomplish this, it is essential to conduct surveys, engage with stakeholders, and gather as much information as possible to understand the project's requirements comprehensively. This ensures that the project aligns with the users' and stakeholders' needs and expectations.

Furthermore, bear in mind that the software development landscape is dynamic, with features and technologies that are constantly evolving. Therefore, it's important to remain flexible and adaptable when defining the project scope. This flexibility allows you to incorporate changes or improvements in response to changing technologies, ensuring your project remains relevant and effective throughout its development lifecycle.

Step Two: Determine the size and complexity of the project

After defining the project scope, the next step is to assess the project's size and complexity. Due to the difficulties involved, a highly complex software project typically requires more time and resources. This complexity demands the involvement of a larger team of programmers, designers, quality assurance testers, and developers, which naturally incurs higher costs.

Additionally, the size of the project also impacts the cost. Smaller-scale software projects generally require fewer resources in terms of human effort and technical infrastructure. Consequently, these projects tend to have lower overall costs.

Step Three: Break down tasks

Dividing the project into smaller, more manageable tasks is essential to estimating cost. This allows you to estimate the costs associated with each individual task, allowing you to calculate the total project cost by adding up the smaller tasks.

By breaking down the project in this manner, you not only gain insights into the overall cost but also develop a better understanding of the time required to complete each task. This time estimate multiplied by the cost of the needed resources provides an understanding of the total cost associated with that specific task. This breakdown of costs and timelines is essential for effective project planning and budgeting.

Step Four: Estimate the cost

The cost estimation process encompasses three main models, and organisations typically choose the one that best aligns with their needs and preferences. These models are

1. Analogous Model Estimation

The Analogous model involves cost estimation by using expenses from previous projects that have similarities to the current one. This approach is straightforward because it doesn't necessitate calculating costs from the beginning.

2. Parametric Model Estimation

As its name suggests, the Parametric model involves estimating costs based on various parameters or factors, as mentioned earlier, to determine the project's cost. This approach is suitable when you need a quick estimate; however, it may be less accurate, especially when defining costs for complex tasks.

3. Bottom-up Model Estimation

The Bottom-Up estimation model involves breaking down tasks into smaller components and estimating the cost of each subtask. These individual cost estimates are then aggregated to determine the overall project cost. This approach is known for its higher accuracy than other models, providing a more detailed and comprehensive cost breakdown.

Step Five: Review the cost

After estimating the project's cost, the next step is to conduct a thorough review to ensure its accuracy with the intended project. This review process serves as a checkpoint, preventing the possibility of budget overruns. It also provides stakeholders with a clear understanding of what to expect regarding budget allocation. It allows for adjustments to project requirements if the estimated costs do not align with available resources.

Step Six: Allocate Resources for Unexpected costs

The final and last step in the cost estimation process is the creation of a contingency budget. This step is essential in cases of unforeseen expenses or unexpected changes that may arise during the project's execution. It serves the vital purpose of preventing any issues that could potentially delay the development process.

Research findings suggest that an ideal range for allocating contingency costs within a budget falls between 15% to 25%. This allocation ensures sufficient resources are available to address unexpected challenges without affecting the project's progress, thus contributing to a smoother and more successful project outcome.

Conclusion

Estimating the cost of a software development project can indeed be a challenging task, but the benefits it offers are substantial. To determine the appropriate budget, it's important to have a deep understanding of your project and how complex it is. Software development costs can vary significantly, ranging from a few thousand dollars to potentially reaching hundreds of thousands of dollars.

Here at Wazobia Technologies, we specialise in turning your software development ideas into reality. If you have a fixed budget and need help managing your software development costs, we're here to assist you in staying within those budgets.