Guide To Software Development Estimation

Planning a software project comes with many questions, but one of the most pressing is: How much will it cost? The answer is rarely simple. Every software solution is unique, and shaped by its goals, features, and technical requirements. That’s why proper estimation is the cornerstone of turning your idea into a successful product.

But cost estimation isn’t just about numbers. It’s about uncovering what drives those numbers—like the complexity of the app, the choice of technology, and the expertise of the team. A thoughtful approach ensures not only a realistic budget but also a clear roadmap to achieve your business objectives.

In this article, we’ll share all the detailed information on how to estimate the cost of a software project. Finally, you’ll be able to calculate project costs based on a project estimation sample.

Curious about where to start and how to stay on budget? Let’s dive in.

Understanding Software Development Estimation

Have you ever wondered how software development estimation shapes the success of your projects? How do you accurately predict timelines and resources in a constantly evolving digital landscape? Here are the answers. Estimation of software projects is a critical aspect of project planning, guiding teams in predicting the time, effort, and resources needed to complete a software project successfully. Whether you’re embarking on a new development initiative or refining an existing system, an accurate estimation software project sets the foundation for effective project management and decision-making.

Common Estimation Challenges and Planning Fallacy

Estimating the cost and timeline of software development is often more complicated than it seems. Even the most experienced teams can fall into common pitfalls, leading to delays, budget overruns, or misaligned expectations. At the heart of these challenges is the planning fallacy—a cognitive bias that causes teams to underestimate the time, effort, and resources required for a project.

One of the biggest hurdles is balancing ambition with practicality. Many projects start with a bold vision, only to hit roadblocks when the scope expands mid-development or unforeseen technical challenges arise. Without a clear and detailed estimation process, businesses can lose sight of priorities, leading to inflated costs and delayed launches.

Another common issue is underestimating the importance of non-development tasks. From research and design to testing and deployment, these “invisible” elements play a significant role in a project’s timeline and budget. Overlooking them often results in incomplete estimations that can derail even the best-planned projects.

Finally, unclear communication between stakeholders and development teams can create misaligned expectations. Misunderstandings about project requirements or deliverables can snowball into costly revisions and missed deadlines.

Overcoming these challenges requires more than just technical expertise—it demands a structured and collaborative approach to estimation.

Importance of Estimation in Software Projects

Having gained insights into understanding software development estimation, it’s clear that mastering this process is pivotal for project success. Effective estimation in software development not only predicts project timelines and resource needs but also serves as a roadmap for efficient project execution.

Accurate estimation enables teams to: 

✓ Plan effectively

✓ Allocate resources wisely

✓ Manage risks

✓ Set realistic expectations

✓ Control budgets

✓ Optimize time management

✓ Enhance decision-making

✓ Ensure quality

✓ Improve team collaboration

Fundamental Rules for Estimation Integrity

Having explored the essentials of estimating software projects and understanding its pivotal role in project management, let’s now focus on the crucial rules that ensure accurate estimations. In this section, we’ll uncover practical methods and expert tips on how to refine your estimation process. 

Ensuring Clear Understanding of Requirements

Clear and detailed project requirements are the cornerstone of accurate software development estimation. Before estimating, it’s essential to thoroughly understand what needs to be built, including functionalities, user expectations, and technical specifications. This clarity ensures that estimations are based on a solid foundation of knowledge, reducing the risk of misunderstandings or misaligned expectations during project execution.

Avoiding Ambiguous Language in Estimates

Ambiguity in estimation can lead to significant discrepancies between planned and actual outcomes. It’s crucial to use precise and unambiguous language when documenting estimates. Avoid vague terms or overly optimistic projections that could inflate expectations. Clear communication helps stakeholders understand the scope and potential challenges, fostering realistic planning and decision-making.

Preventing Group Bias and Halo Effects

Estimation integrity requires unbiased judgment and objectivity. Group dynamics and biases can inadvertently influence estimations, leading to overly optimistic or pessimistic forecasts. To mitigate this, encourage diverse perspectives and independent assessments during estimation sessions. Be aware of halo effects, where positive or negative impressions of certain aspects of a project influence overall estimates disproportionately.

Acknowledging Imperfection in Estimates

Software project estimation involves forecasting future outcomes based on current knowledge and assumptions. It’s essential to acknowledge the inherent uncertainty and imperfection in software estimate. No estimation can be entirely accurate, but by transparently communicating assumptions, risks, and potential variability, teams can better prepare for contingencies and adapt as the project progresses.

3 Key Factors Affecting Project Cost Estimation

To make the correct project cost estimation, it is worth taking into account such factors as software types, levels of complexity and location of a development team. So, let’s examine them step by step.

Factor #1: Types of Software

Software is comprised of the set of program instructions or data specified for a computer to perform a task or operation. In general, software types are categorized according to what program the product is designed to accomplish. There are two main types of software: systems and applications. System programs are designed to help hardware function and interact with other systems and applications. Some common system examples are operating systems, drivers, file management tools, and service programs. Applications are designed for end-users to help them complete specific tasks such as doing an online search, sending emails, designing graphics, etc. The software suite of applications includes web browsers, word processors, translators, audio/video players, and others.

Each type of software requires different functional features, technologies, and tools to develop a project. Technical requirements vary from project to project, which also influences the cost and estimate. In the table below, we’ve prepared approximate costs for the development so that you can get oriented in numbers before ordering development services on the market. Certainly, these numbers aren’t precise as every single case is unique and requires a more detailed analysis and IT cost estimation.

Factor #2. The Complexity of Projects

Features and functionality of software measure the degree of complexity and determine the following main categories – simple, moderate, and complex. There is software that requires no specific expertise or little time to be developed. It can be built quickly because of simple functionality. Different planners, reminders, productivity apps belong to this category. If more advanced features are required such as complex architectures and infrastructures, safety and security arrangements, multiple integrations, be ready to pay more accordingly.

Considering an hourly rate for app development services in the market, software project estimation examples are displayed in the table below.

Generally, software costs depend on the business goals and what you want to get as a result – whether it’s an app with complex features and functionalities to process payments securely or a simple one that is created for personal use.

The degree of complexity defines many other points that affect the final cost:

• What technologies are used?
• What is the size of a development team?
• How urgent is the project?
• What other extra services are needed?

Using powerful programming languages, frameworks, databases, architectures, and hiring top professionals is half of the battle in development to produce high-quality software. It is vital to carefully choose the necessary tech stack for each project to provide clients with the best digital solutions that are perfectly tailored to their businesses. These outcomes are possible only when the development process is in control of real experts – business analysts, project managers, developers, web designers, QA specialists, DevOps engineers, etc.

The number of team members and their qualifications also determine the final cost. Well, it seems logical: the more employees work on the project, the more money is spent. For instance, a basic team of 4 members might cost nearly $160+ per hour on average, whilst a pricing rate of the extended team that has 7 professionals starts from $280+ per hour. As a rule, to build a good piece of software, you must have a team of at least 6-10 people on board.

Factor #3: Location of a Software Development Team

How much does it cost to develop a software program in Ukraine or the USA? Mind the fact that the salary level in developing countries is much lower than in developed countries. This means that the cost of developing software in America will differ from the development costs in Ukraine and other regions. So, geographic distribution affects the budget estimation for a project. 

Low costs are usually synonymous with outsourcing, especially in the IT world. However, you aren’t limited to only this option: freelancing and in-house employment are also available for you to cooperate with developers. Precisely due to outsourcing, many companies find the right talent pool for different projects. Indeed, it is hard to staff dev departments solely with local people, particularly when specific expertise is needed. For example, Alibaba, GitHub, Google, and many other top companies wildly outsourced various development tasks to remote workers or offshore developers in times of need.

This way, they reduce overhead and, after all, reduce operational costs. You can get cost savings because of wage differentials not only within countries but also in different cities. Where is it better to outsource today?

Central and Eastern Europe is a great IT outsourcing location for companies in the U.S., the UK, Canada, etc. These regions offer lower costs than those that are available in their native land.

Even when costs are cut when outsourcing, the product quality doesn’t suffer – at least, it rarely happens. However, the first point that should be taken into consideration when outsourcing is the skillset, experience, and reputation of the company or developers themselves. If you neglect these points, you’ll set yourself up to fail.

The Positive and Negative Impact of Various Factors on the Cost

Even when all factors are pointed out and presented in detail, it’s not correct to be restricted to only them. Apart from factors, there are unforeseen costs like resource allocation, senior management involvement, integration with extra services, and so on. Although it’s impossible to foresee every possible expense of software engineering, most unexpected costs are common across projects. That’s why it is vitally important to plan the development process and budget thoroughly and have the resources to fund the project adequately.

On a positive note, it is likely to make the cost of the project less than expected. You can follow today’s growing trend of simplicity. For example, you can make a simple web design for your app, saving some money. But double-check if this decision won’t affect final results negatively – weigh an argument against another in this case! You can even decrease the cost of development by deliberately selecting outsourcing service providers based on rates. For example, in Ukraine, there are many top outsourcing companies offering development services that are no worse than in many other countries in Europe or the USA.

Hidden Costs in Software Development

When planning a software project, it’s easy to focus on visible expenses like design and coding. However, many hidden costs are essential to delivering a high-quality product. Neglecting these can lead to budget overruns, project delays, or subpar results. Let’s look at the key hidden costs to help you plan better.

Quality Assurance Costs

Testing is the backbone of reliable software. Quality Assurance (QA) goes beyond finding bugs—it ensures the software performs seamlessly across devices, meets user expectations, and complies with industry standards. While QA may seem like an extra expense, it’s a critical investment that prevents costly post-launch fixes and preserves your reputation. Prioritizing QA early leads to a better, more trusted product.

Documentation Costs

Good documentation ensures your software is maintainable and scalable. This includes technical documentation for developers and user guides for customers. While often overlooked, clear documentation saves time and reduces costs during updates or team transitions, contributing to long-term efficiency.

Deployment and Maintenance Costs

Launching software is just the beginning. Ongoing costs include hosting, server management, updates, and bug fixes. Maintenance typically requires 15–25% of the initial development budget annually. Planning for these costs ensures your software remains functional, secure, and aligned with evolving user needs.

Team Collaboration Costs

Effective communication between developers, designers, project managers, and stakeholders is vital but often underestimated. Collaboration tools, additional meetings, and aligning diverse team members can add hidden costs. A well-structured workflow minimizes inefficiencies, ensuring smoother and faster delivery.

Simple Methods How to Estimate the Cost of a Software Project

Software development estimation is one of the important steps before making any strategic business decision – be it a startup, business development, or other activities. So, how to estimate a software project correctly? Let’s find out.

Analogous Estimation

Analogous estimation draws on historical data from similar projects to forecast the duration, cost, or effort required for a current project. This method leverages past experiences to provide a quick and rough estimate early in the project lifecycle, based on similarities with previously completed projects.

Bottom-up Estimates

Bottom-up estimation involves breaking down the project into smaller tasks or components, estimating each one individually, and then aggregating these estimates to derive a total project estimate. This method ensures a detailed understanding of project scope and requirements, making it ideal for projects with well-defined deliverables.

Three-Point Estimation (PERT)

Three-point estimation, or PERT (Program Evaluation and Review Technique), uses three estimates (optimistic, pessimistic, and most likely) to calculate a weighted average, providing a more realistic estimate that accounts for uncertainties and risks. PERT is valuable for complex projects where variability in task duration or effort exists.

Parametric Estimation

The parametric estimation method uses statistical relationships and historical data to predict project parameters such as cost, duration, or effort based on measurable metrics (e.g., lines of code, and function points). This method relies on predefined models or algorithms and is effective for projects with standardized processes and data.

Use Case Points

Use Case Points estimation quantifies the functional requirements of a software system based on the complexity and number of use cases. Each use case is assigned a point value, considering factors like interactions, transactions, and technical complexity, to estimate effort or cost accurately.

Expert Judgment

Expert judgment relies on the insights and experience of subject matter experts (SMEs), stakeholders, or experienced professionals to estimate project parameters. This method is subjective but valuable in early project stages or when historical data is limited, providing qualitative insights and considerations.

PM Methods How to Estimate Software Development Cost

Software project management includes all the processes related to development – planning, budgeting, monitoring, and delivering. Hence, a good sample of cost estimation software development is considered to have effective methodologies like Agile, Waterfall, Kanban, or Scrum. A project manager puts such 5 project constraints as:

1. Scope: How much work is to be done?
2. Schedule: How quickly must it be completed?
3. Budget: What is the budget required to deliver the product?
4. Resources: Who will work on software development?
5. Risks: What are the possible consequences that may impact the project?

Agile methodology is often used in software development settings to accurately estimate the project and turn it into reality. This method allows developers and PMs to be a collaborative, self-organizing and cross-functional team working on a new product meeting all the requirements from a customer.

A ‘what-if’ analysis helps PMs measure all possible risks and avoid them in the future while dealing directly with the stakeholders of the project. Outside of a common way of estimating the scope of work, it is crucial to identify the possible risks and provide assumptions on how to solve potential problems without failure in delivering an end product of high quality.

Agile Estimation Methods

Did you know that agile estimating methods allow teams to predict the effort, time, and cost involved in delivering software, while remaining flexible and adaptive to changes? Here are the most commonly used approaches:

Story Points Estimation

This method assigns a relative value to user stories based on their complexity, helping teams understand how much effort is required compared to other tasks. It’s ideal for predicting the overall workload.

Sprint Velocity Calculation

Sprint velocity tracks how much work a team completes in a given sprint. By measuring the number of story points completed per sprint, teams can predict how many sprints are needed to finish the project.

Release Planning Estimation

Release planning focuses on breaking down the entire project into manageable phases or releases. This estimation ensures that the project delivers value incrementally, and helps to prioritize features based on the available time and resources.

Common Pitfalls in Estimation

Estimating software development projects accurately is crucial for project success, but it’s not without its challenges. Here are some common pitfalls to be aware of when estimating software projects:

✖ Underestimating complexity

✖ Inadequate requirement gathering

✖ Ambiguous scope definition

✖ Not considering technical dependencies

✖ Ignoring testing and debugging

✖ Overlooking risks 

✖ Neglecting historical data

✖ Ignoring team dynamics

Best Practices of Project Cost Estimation at Mangosoft

With vast experience in software development, our team manages to estimate projects properly. However, it often occurs that during the initial stages of estimation, the requirements are feebly-marked and little information is available to estimate the product to the fullest extent. 

1. In a real-case scenario, we can adhere to a ballpark estimate when similar situations arise to have a baseline for further discussion with a customer. This approach is based only on assumptions after knowing the basic needs of an app or any other piece of software. Usually, it takes about 1-2 days, and the calculation accuracy will be about 60-75%.
2. If you are interested in a more accurate estimate of the cost of your project, we can offer an MVP estimate. What is the MVP? It is a minimally viable product with some basic features to achieve the main goal of the product. This will take a little longer – about 3 days, since the MVP must be formulated with all the necessary features, at least virtually. But keep in mind that the accuracy of the calculation is more than 75%, but not more than 90%.

Conclusion

What ensures the most accurate software cost estimation? Detailed project estimation using various techniques, supported by our Business Analyst (BA) and Project Manager (PM). These specialists bring extensive experience in the planning and development stages, accurately estimating costs and the hours required to implement any idea. They engage directly with clients to understand project goals, needs, and requirements. Subsequently, they compile all necessary technical specifications for developers to commence work on the product. This thorough process typically takes 1-2 weeks to deliver precise results.

To enhance our accuracy in cost estimation, we’ve developed our own software development cost calculator, extensively utilized by our project managers. This tool swiftly provides detailed insights into the rates of each specialist essential for the project’s successful completion. Feel free to reach out to us to experience its capabilities firsthand!