Software Cost Estimates that Won’t Put You in the Red

Accurate software cost estimates are the key to a successful software development project. If you can’t get a grip on what it takes to complete a project, you could face cost overruns, overworked developers, missed deadlines, ballooning costs, and ultimately, a massive loss for the company.

Let’s find out how you can wrangle all the moving pieces when estimating software costs to keep your development team happy and your business profitable.

Software Cost Estimates: Why Should You Care?

Cost estimation in agile project management calculates the direct and indirect expenses (e.g., overhead costs, labor costs, vendor fees, new software) associated with completing a software engineering project based on a scope and within a specific timeframe.

Creating accurate software estimates can help you:

• Define the scope of work and the effort required to complete the project, so you can present the right price to the client and avoid undercharging for your work.
• Understand what drives the project costs and prioritize backlog tasks effectively.
• Establish milestones, understand the assumptions, and set the appropriate client expectations.
• Outline the time and effort required for upcoming projects to inform team scheduling and resource allocation.
• Provide a reference point to check if a project is progressing as planned, so you can take corrective actions promptly to address issues.

The 3 Types of Software Cost Estimates

There are different types of estimates with varying degrees of accuracy for different stages of the scoping process:

The Ballpark Estimate

This rough project estimation sketches out a cost range for a project. It can help a client decide if the cost is in line with its budget and whether it wants to pursue the project.

The Budget Estimate

This estimate offers a more detailed cost breakdown and is usually presented alongside a high-level project plan. It guides strategy and identifies risks while giving the client an idea of what you can deliver for a set budget.

The Statement of Work (SoW) Estimate

This estimate outlines all the activities in a project, the deliverables, the associated costs, the timelines, and a contingency plan. This is often the last step in establishing a budget before a project starts.

Software Development Cost Estimation Techniques

Many factors affect the cost of a software product development project. These cost estimation models and methodologies can help you wrap your head around the numbers involved:

The Empirical Estimation Technique

This evidence-based technique takes data from previous projects and uses assumptions about the current project to make a prediction. It requires prior experience in developing a similar solution and often relies on the expertise of team members to identify potential issues.

Popular empirical techniques include the Expert judgment technique and Delphi cost estimation.

The Heuristic Technique

This approach addresses cost estimation from various angles. It’s an adaptable method for making quick decisions on complex software projects by addressing relationships of different elements and project parameters.

A common heuristic technique is the Constructive Cost Model (COCOMO,) which uses a regression formula that involves parameters determined by industry data and a project’s characteristics.

The Analytical Estimate Technique

This work measuring technique starts by dividing a task into component operations or elements. Then, you’d either apply a standard time or effort (e.g., story points and function points) to each based on information from experience or other sources.

The process should be performed by a specialist with hands-on experience estimating similar projects and a solid understanding of all the workflows involved.

How To Create Accurate Software Cost Estimates

Here are our top tips to help you nail your software cost estimates:

1. Don’t Skimp on the Discovery Phase

Get an in-depth understanding of the project and ask the stakeholders as many questions as you need. Learn about the client’s business objectives to prioritize tasks and assign the right team members to the project. You can also use different estimation techniques to understand the project scope from different angles and increase accuracy.

Speaking of getting the right people on the project—it’s best to have the same team members estimate and execute the project. They should have previous experience with similar work to help identify red flags and account for potential issues in the estimation.

2. Chunk Down the Work and Leverage Historic Data

How do you eat an elephant? One bite at a time! Break down your big hairy audacious project into smaller tasks, analyze them in detail, and account for each component to improve the accuracy of your estimates.

Combine team members’ experience with historic data from previous projects to inform the estimation process. Analyzing detailed records about the time spent on each work item can help you pinpoint the effort required for each component to make realistic estimates.

3. Reduce Complexity and Risk Factors

The fewer assumptions, unknowns, and potential inaccuracies in the scope, the more accurate your estimate will be. To minimize complexity and risks, you may need to go back to the discovery phase to gather more input or build a proof of concept to validate assumptions.

Risk management isn’t a one-and-done exercise. You should regularly assess where you’re at in the development process to identify red flags early. Track the time your team spends on each work item and compare the data with the original estimate to see if everything is going as planned throughout the project lifecycle.

4. Manage Dependencies and Contingencies

Minimizing unpleasant surprises can help you create accurate estimates and keep the project on track. Identify bottlenecks in your processes that could increase time and cost. Account for activities such as meetings and client communications—they often take longer than you think!

Additionally, address contingencies that may lead to added costs, man-hours, or resource requirements. Devise contingency plans to handle these scenarios when they arise so you can pivot quickly and minimize their impact

Use the Right Tools to Create Accurate Software Cost Estimates

Getting a grip on all the moving parts isn’t easy, so get all the help you can get with the right online estimation tools to pull all the pieces together to create a realistic and accurate estimate.

Having the right data is key to making accurate estimates. A time tracking software solution gives you the data to understand how your team performed in the past on similar projects to inform future decisions. The insights can help you make better decisions on time and resource needs, which will lead to more accurate cost estimation.

But here’s the caveat: Your estimates are only as good as your data.

The data you use must be accurate and granular. You must have the capabilities to associate the time spent with each work item to drill down to each component in your project plan.

Most time recording apps fall short because developers enter the hours after the fact, sometimes days after completing a task. The entries are often too generalized to provide meaningful insights and inform the estimation process.

On the other hand, 7pace Timetracker allows developers to track their time where they work (i.e., Azure DevOps and GitHub) and associate the hours with each work item. There are no hoops to jump through, so you can get the most accurate data.

You can analyze the granular information from past projects and make data-driven decisions in your cost estimates. You can also track the hours spent on the current project in real-time and compare it to your estimate to identify potential risks before they become an issue.

Learn more about 7pace Timetracker and see how it can help you create more accurate software cost estimates.