How to Estimate Software Development: Factors, Roadblocks, and Success Tips

A table with a clock, a house, and three stacks of coins on it serves as a project cost estimation metaphor—the time and money needed to build a software solution.

Imagine what our life would be like if we all followed the flow and never planned ahead. This would be a world of chaos where decisions are made on the fly, and nobody quite knows what outcomes to expect. Now, apply this scenario to the world of software development, and you have a recipe for projects that go over budget, are overdue, and fail to deliver. 

How many IT projects do you think fail due to poor estimates? We bet you’d be surprised to know that this number is as high as 70%. These statistics don’t look inspiring but don’t be discouraged. Once you master the art of estimating the cost, time, and effort of software development, you’ll set yourself up for success. 

What Is Estimation in Software Development?

Let’s start by understanding what estimation means in terms of software development and why it is so important. In layman’s terms, software development estimation is the process of predicting the most realistic amount of effort, expressed in terms of hours, days, or weeks, required to build a piece of software. In some sense, it’s a guess but one that’s based on a variety of factors, including past experience, technical difficulty and requirements of the software, and resource availability. 

Reasons for Software Development Estimation

Accurate estimation is important for IT projects for a number of reasons. Let’s go over the most important of them.

Estimation Gives You Clarity

When a client comes to a software development company with a project, it’s important to bring everyone on the same page about what needs to be done. When the outsourcing company you’ve hired goes through your software requirements, user stories, and any other documentation you provided, their experts, both business and technical, form independent conclusions about the project time, its complexity, and the effort required to complete it. 

Sometimes, team members will have different perspectives on the problem and how to solve it. Their implementation ideas can be far apart, and the project development approaches they propose may differ from one another. 

For example, a software architect may propose adjustments to your tech stack or offer to use a tool that would drastically improve the quality of your product or speed up the delivery process. This may lead to a somewhat lower estimate for the project. At the same time, a business analyst may identify a serious pitfall in your project documentation or insist on adding a crucial feature others have forgotten about, which may lead to a considerably higher estimate.

When team members provide you with a whole range of different options on how to optimize the development process or the solution itself, these independent conclusions give you a lot of crucial information for further planning and accurate low-level estimation of the project. This means your vendor won’t miss any important signals and will be well-prepared for any turn of events during the actual development phase.

Estimation Helps You Manage Trade-Offs 

If you’re running short on cost and time in the course of development, you will most definitely have to make sacrifices, be it the functional features of your software product or its quality requirements. From serious maintenance and extension issues to a complete failure of your software solution, these trade-offs may lead to a whole variety of problems you don’t want to deal with. That’s what the software development estimation process can save you from before it’s too late.

The estimation process allows your development team to refine your project requirements and adjust the course of action before the actual work begins—before the team runs into any unexpected complications or blockers that would put your project at risk. Such thorough analysis of the project scope helps your vendor identify issues and prepare a baseline to effectively tackle them: adjust the scope, increase the time required for software development, etc.

Requirements analysis in the course of the software development estimation process helps you better manage trade-offs on complex projects. An accurate estimate, whether it is lower or higher than you expected, raises important discussions on the scope of the project. It enables you to: 

  • rethink the set of features you planned for your software solution;
  • prioritize tasks more effectively;
  • identify and give way to a critical component that was buried somewhere deep among the less important ones;
  • scale back your solution to improve your time to market and take advantage of several quick wins.

The estimation phase is the best time for you to raise discussions on scoping and adjustments if you want to keep the project within the allocated budget and time frame.

Estimation Saves You From Getting Lowballed

When your cost and time estimates are significantly off, you essentially kill the project before it even starts. And let’s face it, no one normally overestimates the amount of work to be done—it’s the underestimates that may become the nail in the coffin of your project. A bad estimate is a pitfall you will find extremely hard to deal with the deeper you are into the development phase.

As we mentioned before, an underestimate may serve as a means of deception that a dishonest outsourcing vendor is using to hook you with a lower price tag. However, it may also be the planning fallacy so common in today’s fast-paced digital world. After all, people do tend to underestimate the time needed for a lot of things, from simple chores like cooking breakfast to responsibilities such as implementing a software development project. Another possible cause of underestimation may very well be the aggressive goals you’ve set in the hopes of pushing better productivity or achieving a faster time to market. And the next thing you know, your overly ambitious goals backfire and are rapidly dragging your entire project down.

When forced to finish the project on time and within the allocated budget, your development team takes shortcuts, sacrificing features and letting a whole myriad of bugs and errors infest your code. The quality and scalability of the underlying architecture may also be put at risk when rushing to meet a deadline. Suddenly, your software solution is not nearly as polished as expected, and a lot of work is deemed “non-essential” as you’re trying to avoid the financial burden of accumulating even more technical debt. Future extension is slowed down as your vendor is locked in the repeating cycle of fixing bugs and other quality issues.

Code quality requires a lot more work than you normally expect, and it should never be underestimated in the planning phase. Otherwise, you’ll be stuck dealing with functional and non-functional issues for a long, long time. You may not just end up late and significantly over-budget with your release, but the project may turn out such a failure that its future wouldn’t even be worth fighting for. To avoid underestimation and get the quality you’re aiming for, there is a wide range of estimation methods to help you plan software development ahead, which we’ll discuss later in the article.

Estimation Challenges

Now, let’s consider the main roadblocks that may stand in the way of accurate estimation. Understanding the challenges that other founders typically run into can help you be more prepared. 

  1. Lack of Clarity

According to statistics, one of the primary causes leading to 35% of product failures is a lack of clarity in the requirement-gathering stage. Unfortunately, not all founders understand the importance of the initial stage and give developers just a brief description of the app they want. 

Quite often, this sounds like this: “I want an app like WhatsApp.” Naturally, this approach is doomed to lead to misunderstandings. Even if developers try to estimate this project, which many developer shops will do — you can be sure the time estimation for software creation won’t be right.

  1. Project Complexity

Software products aren’t created equal. Some can be rather simple, while others rely on complex technologies, API integrations, or third-party services taking longer to implement. Therefore, it’s a good practice to attract business analysts. They can bring a critical eye to the planning process, helping identify potential complexities and areas where you may need to allocate additional resources and time. 

  1. Changing Requirements

In an ideal world, software requirements shouldn’t change much once they’ve been discussed and agreed upon with the vendor, but this always doesn’t work that way. As your project progresses, you may think about adding a new feature or technology. And if you spend all your available resources early in the SDLC, implementing those changes will put a strain on the software development budget. Never forget that development is a dynamic process, and it’s best to leave some wiggle room, both in time and money, to adapt. 

  1. Time Constraints

The speed of product release is an important factor in the software’s success, and founders often put rather strict deadlines on projects. The problem is they don’t factor in unexpected complexities that may arise during the development process, leading to rushed work, compromised quality, and potential team’s burnout. 

To avoid this mistake, ensure that you have realistic expectations from the start, understand the scope of your project, and recognize the capabilities and limitations of your team. A great formula you can find on Quora goes like this: “Make your best estimate and multiply it with the Pi factor”.

Generally, a basic application without advanced features typically requires around 800 hours of development time, which translates to about 4-6 months of work. Conversely, a more complex project can easily take upwards of 1200 hours to complete, often stretching the timeline to a year or more. These are the average numbers, they  vary depending on the size of the software solution, the team’s skills and expertise, and the required integrations. 

Which Estimation Is Good?

The hallmark of a good estimation is its accuracy, which is typically defined by an error margin of 5 to 10%. As you can see, there isn’t much room for error, making the estimation phase of a software development life cycle (SDLC) the most important of all. However, the time spent on software estimation will certainly not be wasted, as you’ll increase the chance of producing a better quality product that won’t fail. 

Different Aspects of Software Estimation

Software estimation encompasses several interrelated aspects, each critical to the project’s success, including:

  • Software development time estimation;
  • Software development effort estimation;
  • Software development cost estimation. 

We’ll elaborate on each of these below, giving you a better understanding of the methods and techniques that are best used to create accurate forecasts. For now, let’s just say that they are equally important, and without each of them, it’d be impossible to get a clear and accurate picture of the future project. 

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Software Development Time Estimation

Software development time estimation, just as the name suggests, is the process of determining how long it will take to complete the project. This process involves gathering and analyzing the project’s requirements, then breaking them into small, manageable tasks, and then distributing them among the team. 

Predicting the software time frame isn’t always a straightforward process. First, you may work on long-term projects where specifications change over time. Secondly, no one is guaranteed against unforeseen problems that may get in the way of the development process, leading to delays, missed deadlines, and lost revenue. Therefore, it’s necessary to approach time estimation with caution, factoring in multiple variables. 

Representation of our project cost estimation process from pre-sale, high-level estimation, and resource analysis to discovery phase and signing of the contract

How to Measure an Effort in a Software Development Process?

Software development effort estimating is typically measured in man-hours, man-days, man-weeks, or man-months and is performed once the scope and goals of the project have been determined. Precise estimation helps make sure your team isn’t overwhelmed and no one is left behind, as is often the case with traditional settings where internal testing teams may sit idly waiting for tasks. More importantly, it allows you to better plan the time and cost required for the project completion, preventing resource leakage. 

What Is Cost Estimation?

Software project cost estimation is a crucial step, particularly in outsourcing. When done right, it creates a solid foundation for all of the subsequent decision-making efforts and management stages and helps avoid any ambiguity or false assumptions that could jeopardize your entire project.  

Software Development Estimation Tools

Estimating the cost, time, and effort of building a software solution can be extremely difficult without external help. Even experienced project managers with hundreds of completed projects behind their backs may struggle to provide accurate estimates. Hence, the use of specialized software development estimation tools becomes essential. Below, we break down the most popular tools used by vendors to estimate software development time and enhance the accuracy of their forecasts. 

  • Project management software. Tools like JIRA, Trello, or Microsoft Project offer functionalities that help in breaking down projects into tasks, assigning timelines, and tracking progress. The great thing about them is that they also include features for estimating time and effort, making it possible to anticipate the outcome based on task complexity and team capacity. 
  • Cost estimate software. These tools focus on calculating the financial aspects of a project. They can include features for budgeting, forecasting, and financial analysis, giving you a clear picture of the financial health of your project. 
  • Effort estimation tools. Tools like Planning Poker or COCOMO II are used to estimate the effort required for software development. They often employ various estimation methodologies to provide a more accurate effort forecast. 

It’s important to note that while these tools can aid in estimating the development process, they shouldn’t be viewed as a substitute for human judgment and experience. The most effective approach often involves combining the use of these tools with the insights derived from brainstorming every specific task. 

Key Estimating Software Development Factors

Now, let’s consider the key factors that affect the precision and quality of a software development project estimate:

Project Scope and Deliverables

This means a detailed breakdown of what each service your vendor will provide on the project entails. This includes design, development, testing, deployment, and maintenance combined or as separate tasks/stages depending on a particular work order. When you have all the specific goals, tasks, and deliverables well documented, it helps you avoid any confusion and disputes on the project. You will know exactly the range of services your vendor is obliged to cover for the agreed reward and what things will most likely come at an extra fee.

Resources

The biggest price component in project cost estimation in software development outsourcing will always be person-hours—the number of specialists and the effort needed to complete each task or activity in the course of a project. The number of hours required to deliver the project will mainly depend on the skills and experience of the engineers and managers involved in the process. Therefore, it’s crucial to make sure that the vendor you hired for the job has a clear understanding of the scope of your project so that they can provide you with an accurate cost-to-time ratio. They must also pay attention to the required skill level (junior, middle, senior) to allocate people as efficiently as possible. This is especially important for long-term projects.

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“For example, it would take 15 hours for a senior engineer to complete a particular task, while a middle developer would be able to carry out the same work in about 18 hours. Yes, a senior engineer would complete a task slightly faster. However, given that their time costs nearly twice as much as that of a middle developer, hiring a senior engineer for a small, simple project that a middle could easily handle might be an overkill.”

Roman Lyha, Head of PMO at QArea


Roman continues:

“On the other hand, when we’re talking about large projects that rely on complex software architecture, you absolutely must entrust building one to the most experienced and skilled engineers in order to ensure that you have a high-quality foundation for further development and encounter no blockers along the way.”

Person-hours is not the only component of an estimate. There are other expenses that usually make up no more than 10% of the budget. This includes:

  • reusable software components (e.g., third-party APIs, libraries, frameworks, etc.)
  • equipment (custom hardware, server equipment, IoT devices, etc.)
  • third-party services (hosting, on-demand computer system resources, platform fees, etc.)
  • accounts and licenses (Google Play or App Store accounts, validation services, industry-related licenses and accreditations, etc.)

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 Timeline

As part of a project plan, a timeline serves as a concise representation of the steps required to complete each piece of work. It shows the project duration in days, weeks, months (sometimes even years) to give you a high-level understanding of the time your vendor needs to complete the project. Timeline highlights every important dependency, milestone, and deliverable. It shows the time each phase is scheduled to begin and end, as well as the team members involved in each stage.

It is important to point out that the estimated person-hours and the estimated timeline are two drastically different things.

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“The important difference is that person hours represent the total time a specialist will dedicate to the project, while a timeline breaks this time into phases. Say, an engineer needs 20 hours total to complete a task, but in fact, it will take them two weeks as their involvement in the completion of the task will depend on other people’s work through different phases.”

Roman Lyha, Head of PMO at QArea


Risks

In project management, a risk is any unexpected event that could jeopardize the timely and on-budget delivery of your software product. As one of the key factors to project success, risk assessment plays an important role in project cost estimation.

Assessment of potential risks can be broken down into three stages: 

  1. Predicting the events or conditions that may occur in the course of software delivery.
  2. The likelihood of their occurrence.
  3. The impact they may have on your project.

“Risk mitigation is particularly important at the early stages of a project when risk is typically at its highest.”

Beware of outsourcing vendors that are overly optimistic in assessing the risks of your project. In the hopes of enticing you with a lower price tag, they may ignore potential issues and the long-term consequences these issues can have on your project. And remember that even the most experienced software engineers can’t guarantee that your project won’t face any blockers. So go with a software development company that provides you with realistic risk analysis and a percentage of contingency built into an estimate.

“Contingency is the amount added to the estimate in order to cover potential project risks. The calculation is performed for every identified project risk and then added together. It’s a crucial part of risk management that helps you minimize the probability and mitigate the impact of unfavorable events.”

The more accurate the risk assessment is, the better prepared your project will be to deal with potential issues. This also means that your vendor will be able to build stronger risk management plans and lower the likelihood and impact of unfavorable events and conditions with efficient mitigation strategies.

Project Estimation Approaches and Techniques

There are so many software development projects, each with different requirements, goals, and conditions, that there is no single, perfect way to accurately estimate them. But it’s your vendor’s job to analyze your project documentation and find what development approaches and technologies suit your project goals best. As such, your vendor may have to apply a whole range of different techniques to estimate the project adequately.

Further down, we’ll share with you the most common software project estimation techniques companies use to gauge the cost, time, and effort required to complete the project based on the project management methodologies. 

Traditional Approach

While the Waterfall Model is far from being perfect, its main strength is that it doesn’t imply evolving requirements. In this model, the vendor breaks the project into a number of tasks under the Work Breakdown Structure (WBS) and then estimates the time and resources needed for each of them. At this stage, they may use the following techniques:

Analogous (Comparative) Estimation

As a combination of expert judgment and historical data analysis, estimation by analogy requires your vendor to involve experienced specialists to produce an accurate output. The scope, resources, deliverables, timeline, and risks of similar projects are reviewed and compared to what you have in mind with your project—the more similarities, the better. When the best analogy is found, and the possible differences are analyzed and considered, the resulting cost estimation should be fairly accurate.

The comparative estimation approach is preferable when the information you possess about the project is limited. These high-level estimates usually take no longer than a couple of days to pull together and serve as a good tool to make sure everyone is on the same page before either you or the software development company you’re about to hire invests any more time into further project planning. It’s worth mentioning that for analogous estimation to be accurate, your vendor must have many years of experience and a pretty solid portfolio.

Delphi Technique 

When decisions need to be made quickly, the Delphi technique comes into play. This method is particularly popular in situations when the project comes with lots of uncertainties and/or a lack of derivables. The main principle of the Delphi technique is that decisions are made by experts involved in the project from the outside. They all evaluate the project and then share their vision based on their hands-on experience and expertise. 

The only downside of this approach is that it’s easy to make wrong decisions if the participants invited don’t have a deep understanding of the nature of the project and give you just generalized advice. Therefore, it’s highly important to ensure that the vendor you choose attracts experts with extensive niche expertise.

roman lyha

“Expert judgment means that we involve a niche specialist with broad experience in a particular area to help us with the estimates. They will either do the job themselves or refine the estimates developed by a different specialist who is possibly not as experienced in the relevant tech or business domain.”

Roman Lyha, Head of PMO at QArea

Agile Software Estimation Techniques

Three-Point Estimation

When it comes to agile methodologies, the safest and best way to estimate the time, effort, and cost of a software development project today is the three-point estimation technique. Rather than assuming one estimate, software development companies use this estimation technique to calculate the most optimistic and pessimistic values that are then averaged to determine the most likely cost of a project. Thus, we get three points:

  • optimistic estimate;
  • pessimistic estimate;
  • most likely estimate.

As you have probably figured out, the optimistic estimate is your best possible outcome that represents the expected amount of effort, time, and money required to complete a project, assuming there will be no blockers or unfavorable events hindering the delivery process. 

Then, there’s a pessimistic estimate—the worst-case scenario that takes into account all the possible risks that might affect the delivery process and result in cost escalation. 

By calculating the average between these two extreme points, we get a somewhat realistic estimate. This would be called the triangular distribution of three-point estimates—an ideal solution for estimating small, simple projects where there is no reason to dig deeper. 

However, this may not be the best case for complex, large-scale, and enterprise-level projects where you need to be more thorough with risk assessment and really tighten the most likely estimate. In this case, the project should use PERT estimation.

PERT (Program Evaluation and Review Technique)

The PERT distribution of three-point estimates implies overweighting the most likely estimate to convert a simpler triangular three-point curve into a bell-shaped one. The PERT method provides you with a better, more accurate means of estimating probabilities of ranges of expected values. 

It’s also advisable for complex projects to go the extra mile and enhance the precision of your software development cost estimation with other task-level techniques such as expert judgment, analogous estimation, and parametric estimation.

Parametric Estimation

Both parametric and analogous development time estimation techniques use historical data to produce estimates. The parametric method, however, requires a higher effort upfront and is often perceived as a more accurate alternative to the analogous method. What makes a substantial difference between the two is the process each of the approaches uses to perform the calculations.

While in the analogous approach, your vendor would simply compare and adjust values from past projects with a similar scope, parametric estimation provides an additional estimation layer on top of that using a set of algorithms. It applies a statistical or mathematical approach to the historical data your vendor has collected—uses the relationship between variables (i.e., unit cost/duration and number of units) from similar projects and applies them to the one at hand to estimate the cost, duration, and effort needed. 

“In parametric estimation, units represent the parts and tasks required to complete a project. The software development estimate can be broken down into units such as deliverables, actions, and stages. Such an approach makes it easier to calculate and compare the number of units, cost per unit, and time per unit on a current project against historical data from similar ones.”

Simply put, this is how it works:

  1. The team pinpoints the units based on project requirements, complexity, tech, and other variables from similar projects with consideration of the scale differences.
  2. The data on the required effort/cost/time to complete one relevant unit is then calculated against the total number of such units in the current project.
  3. The estimates are derived from the empirical relationship between the relevant unit rates and the total number of such units.

Top-Down Approach

The top-down approach is a project-level estimation technique that uses known data points and specific parameters to first establish the scope/cost/duration of the entire project and then apportion this data into individual tasks and deliverables using the task-level techniques listed above. It is generally restricted to projects where your vendor deals with a predetermined project budget and/or duration.

For example, you have determined the budget in advance and set a strict deadline for the project. Using the top-down approach, your vendor will take these parameters and break them down into the effort, time, and cost estimates for each activity within the project. They will analyze the impact on project complexity and see how realistic the project scope is against the given time and budget constraints. If the matter is open to debate, your vendor will offer a range of solutions to how they could adjust and optimize the scope to make the project viable (in case it isn’t).

Similar to the analogous technique, this rough approach is mostly used for the initial stage of project cost estimation to see if the project can be implemented within the given parameters. It also helps with strategic decision-making in situations where the information on the project is insufficient, or the requirements are still floating.

Bottom-Up Approach

The exact opposite of the top-down approach (as you have already guessed), the bottom-up estimation approximates the cost, duration, and resource requirements of the project at a very granular level. This technique involves working your way up from estimating individual low-level activities and work packages to phases and deliverables to, eventually, rolling these up into overall project estimates.

Bottom-up estimation is significantly more accurate, but the trade-off is that it is a lot more time-consuming than the top-down approach. This is because your vendor has to gradually collect the smallest pieces of information into a whole and thoroughly estimate each and every one of them to get a good understanding of the big picture at play.

The level of detail available for estimation will highly depend on the maturity of the project and the quality of documentation you provide to your trusted software development partner. Therefore, it’s probably the wrong path for immature projects with little information and floating requirements.

Software Development Estimation Process Step by Step

Clients come to us with all kinds of different requests we need to thoroughly analyze and provide accurate estimates for in order to get a green light for the delivery phase. Considering the variety of requests we get and the broad range of services our company provides, every project requires a unique approach and has a different life cycle.

Some clients come to