Software Project Estimation: How to Succeed

In the realm of project management, nothing is more treasured than estimates that precisely reflect reality. As a significant component of success, a proper software project estimation has to give an accurate answer to the question: “How much will the project cost?”.

After the client has provided a list of features for the team to implement, the need for a software project estimation becomes more apparent. It means the development team has to face a complicated process: everyone working on the project—project manager, developers, designers, etc.—must agree and confirm the difficulty of each task. No matter how small or grand the project may seem, meeting deliverables’ time-frames and optimizing the budget is a must for a project manager or a business owner. Hence, a proper estimation will clarify the scope of work for a certain period.

Having extensive experience in this area, we are willing to share some helpful information and insights for you to benefit from. To avoid common mistakes and achieve the desired result by the end of the project, follow this article where we dig into nuances of software project estimation and get ready to find out how to estimate the budget for a project.

What Is Cost Estimation in Software Project Management?

Estimation is a critical part of project management that forecasts the cost, duration, and resources needed to complete a project within a defined scope.

What you are willing to achieve as a result of the estimation is minimum cost balanced with maximum project quality. At the same time, software engineering is a complex area of knowledge that requires innovative solutions. Therefore, proper cost estimation must be agreed upon to avoid mistakes and achieve the desired result by the end of the project.

A lousy estimate means missing deadlines and breaking budgets which kills a project at the very beginning. With the estimation process being quite a risky task requiring real experience and collaboration of various parties, we need to get a clear understanding of all aspects of the software project estimation that need to be taken into consideration before making crucial decisions.

When To Do Project Estimation in Software Engineering?

Determining a transparent software development process prevents failed deadlines and budget overruns. In the software development sphere, Waterfall and Agile are the two most widely-used methodologies.

Waterfall

Waterfall describes a stepped approach with a prescribed set of activities. It entails that you start by gathering and documenting all requirements, then move to design, development, testing, and finally deployment and delivery.

The planning phase follows the project initiation in a traditional Waterfall project. Estimates for the project aspects are created and documented during this stage, then updated when new information becomes available throughout the project.

Agile

The Agile methodology replaces rigid structures with an iterative approach. Commonly, projects are divided into iterations or sprints. Estimates are made at the start of the project when the overall project backlog (list of features and requirements) is being created, and then estimates are revised during each sprint. Estimates can occur during the sprint retrospective at the end of the sprint as you update the backlog or during the planning session of every new sprint.

How To Create a Project Estimation in 7 Basic Steps

As stated by the McKinsey report, overruns occur in 66% of all software development projects, which means that most of them fail to meet deadlines, exceed the budget, and deliver fewer features than agreed. To prevent this series of unfortunate events, you must prepare a proper software project estimation.

Source: McKinsey-Oxford study on reference-class forecasting for IT projects

The three major components to project estimation are scope, time, and cost, also known as the triple constraints or the project management triangle. This is because each constraint is connected to the other two, and if some changes are made in one of the constraints, they will impact the other two.

Step 1. Define The Scope of Work

First things first: you need to determine the scope of work that has to be performed on the project. The scope is a detailed outline of a project covering all the tasks, time-frames, resources, deliverables, and boundaries. The project scope also includes key stakeholders, processes, assumptions, constraints, and what the project is about, what is included, and what isn’t. The scope is usually documented. Accurately estimating the project’s scope means you can better understand the cost, time-frames, and potential risks.

Step 2. Set Time-Frames

A proper project schedule will show how much time is needed for each phase to achieve each milestone. Estimating the timeline allows time for management and administration, helps prioritize tasks, and manages client expectations of receiving critical deliverables.

Step 3. Estimate Cost

Cost is a vital part of a project as everyone involved wants to know how much it will cost to develop a project before inquiring. Cost predictions require a clear understanding of scope, timeline, and resources.

Cost estimation forecasts the financial resources—from materials to labor—needed to complete a project. An early and accurate estimate helps set client expectations and ensure enough budget to accomplish the project.

Step 4. Resources

Once you clearly understand the scope of work and timeline, it is easier to define what resources are needed for the project. Resources can be thought of as staff, contractors, equipment, materials, and more. Long story short: project resources are the assets you need to get work done; they must be assigned to each activity on the to-do list.

Step 5. Consider the Risks

Before you are able to do a project estimation, you have to keep in mind that risk is almost inevitable in any project, and you will need to be prepared with a risk management plan. Project risk is an uncertain event that may or may not impact your project, for better or for worse. Identifying risks helps play it safe and predict what events could occur and how seriously they might affect the project. It is essential to foresee strategies that handle the risks.

Step 6. Choose Estimation Techniques

Software development project estimation can be extremely challenging and time-consuming. If done superficially, it may blow your project budget, extend the timelines and disappoint a client. The utilization of estimation techniques makes it possible to predict the amount of effort and cost that will be incurred in a specific software project.

Here are several methodologies that can be used for judging the size of any project. Keep in mind that these techniques can be implied no matter if you’re doing agile (Scrum, Kanban, etc.) or traditional waterfall (Prince2, PMI, etc.).

Top-down

Using this technique, you set a project budget and then divide it up between different work packages. It helps businesses ensure that the client’s budget balances the appropriate ratio to cover costs and make a profit.

Bottom-up

Bottom-up estimating is the complete opposite of the top-down approach. This technique involves breaking the project into small manageable parts until it is possible to estimate each milestone or even individual task. Then those estimates are summed up to give the final numbers.

Analogous

Analogous or Comparative estimating takes one or more similar past projects to compare with the present-day project. It is a simple, rough estimation, not to be used as a precise guideline.

Parametric Model Estimating

Parametric estimation is similar to analogous estimating. This is a more scientific method that bases a new project on a previous project but adjusts for variables. However, it may be hard to find data to manipulate for digital projects.

Three-point Estimating

This method seeks to determine the medium cost using a combination of three estimates: the best-case scenario, the worst, and the most probable. Your next step is to sum up the three numbers and divide them by three to find the estimate closest to reality.

Expert Judgment

As the name implies, using this technique means simply asking the experts to share their hands-on experience. First, make sure everyone has the same understanding of the project requirements. Finding experts who will actually be working on the project is an additional bonus this technique provides as well..

Planning Poker

Planning poker (also known as Scrum poker) is a gamified technique for estimating, mainly used to estimate the effort or relative size of development goals in software development. The majority of development teams use story points to rate the amount of work involved in a particular task with the help of Fibonacci-style numbers: 0, 0.5, 1, 2, 3, 5, 8, 13, 20, 40, 100. Story points represent the relative measurement of effort to deliver the story:

  • The amount of work to do.
  • The complexity of this work.
  • Any risk associated with this story.

T-Shirt Sizes

T-shirt sizing is one of the story points sizing techniques to estimate user stories usually used in agile projects. It’s a relative estimation technique.

According to this technique, instead of using several planning pokers, items are classified as t-shirt sizes: XS, S, M, L, XL. The development team is supposed to evaluate whether they think a story is extra-small, small, medium, large, extra-large, or double extra-large.

Step 7. Use Software Estimation Tools

There are several software solutions used for estimation. You might want to use them to simplify the overall amount of work you have to do:

  • Google Sheets and Microsoft Excel are popular solutions with plenty of project estimate templates and calculation features.
  • Agile task management services such as Jira or GitLab offer a way to control the entire software development life cycle as they help track the man-hours spent on each task.
  • Redmine helps simplify the calculations and assign an hourly rate for each task and then display the final sum.
  • EcoSys tracks changes and correlates man-hours with the cost, then provides a complete estimate in a comprehensive table.
  • Price&Cost is a SaaS estimating and cost management tool to manage project finances.
  • Web Development Project Estimator helps estimate time and materials for web projects.

Average Cost of Software Development

If you send a request on how much software development costs, you will most likely receive a counter question on the project details. As many factors determine the cost of creating a piece of software, it is impossible to give a single answer to such a common question. However, based on our previous experiences, we can provide you with some preliminary calculations. Based on our experience, the ballpark figure of software development costs is between $50,000 to $250,000. The lower price tag is for a simple app that takes less than 700 hours to develop. If you’re building a complex application with a server-side application, development costs will be much higher. It all depends on the hours invested and the technology stack utilized when creating the software.

What Are Your Next Steps?

Hopefully this article has given you a clear understanding of software project estimation and how to do it properly. If you are looking for a project cost estimation, feel free to contact us and take the first step towards creating your project and collaborating with a team of experts here to help along the way.

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