How to Estimate Software Development: Factors, Roadblocks, and Success Tips
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 software development costs, time, and effort required to get the project up and running, you’ll set yourself up for success.
Key Takeaways
- Project estimation is about the most important step in software development that determines whether the project will fail or succeed. When done correctly, it allows you to predict the amount of effort required to get the project up and running and prevent costly setbacks.
- There are a number of good reasons behind the need to do the estimation of an IT project. From giving you clarity on the project’s scope and requirements to helping you manage trade-offs between cost, time, and features, accurate estimation is key to preventing issues down the line.
- Lack of clarity, project complexity, changing requirements, and time constraints are the main roadblocks making the process of project estimation tricky and often leading to failures.
- A good estimation is defined by an error margin of 5-10%.
- Project estimation encompasses various critical aspects, including time, effort, and cost estimation. Only through accurate estimation of these three areas can a development team ensure that the project is feasible, meets stakeholder expectations, and can be delivered successfully without compromising on quality or budget.
- Project estimation can be done once the goals and requirements of the project have been determined and is measured in man-hours, man-days, man-weeks, or man-months.
- Project estimation involves various techniques, including traditional, agile, top-down, and bottom-up approaches, each suited to different project needs.
- The software development estimation process involves several key stages, including a presale, high-level estimation, discovery, and the final phase, If final estimates are acceptable, a delivery agreement is signed, marking the start of the development phase.
- Projects can be done in many different ways, which impacts the estimate. Depending on the chosen features, solutions, and integrations, the overall cost and timeline can vary significantly.
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 affect the accuracy of the software development cost estimate. The insights into the challenges faced by other founders will help you better equip yourself and be more prepared should any issues arise.
- 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.
- 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.
- 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.
- 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.
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 might 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.
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.
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 might 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.
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 Software Development 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.
By and large, there are three main factors that directly affect the cost of software development.
Type of project
Depending on whether you’re working on a new project or enhancing the functionality of the existing product, the cost of software development will differ. Should it also require new integrations that haven’t been implemented before, the price tag will go even further. So, the type of project is the first step that should be taken into account when doing software development cost estimation.
Project size
Along with the type of the project, teams consider the project size. This factor is often associated with the difficulty of the project, though it doesn’t always have to be the case. In general, projects can be broken down into three categories:
- Small projects – require minor tweaks or minor bug fixes. Oftentimes, these types of projects can be completed without the active involvement of the client.
- Medium projects – changes in these projects are usually more substantial, while the projects themselves typically call for more development effort and need more interaction with the client.
- Large and enterprise-scale projects – these are the most labor-intensive types of projects that require multiple integrations, security layers, advanced functionality, and high-level management.
When making the software development cost estimate, determining the scope of the project is vital.
Development team size
The next step is to decide on the composition of the development team. Typically, the average team is made up of three key roles such as PM, developer, and QA engineer. Most often, on smaller projects, project managers tend to fill multiple roles, doing the work of a Business Analyst and sometimes even a Product Owner. However, when moving to larger projects, the team needs to grow accordingly. Naturally, the more specialists and the higher their level of qualifications a project needs, the more expenses should be allocated at the stage of software project cost estimation.
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.
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.
“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.)
Let us help you assemble a team with the skills and domain expertise that suit your goals best
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.
“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:
- Predicting the events or conditions that may occur in the course of software delivery.
- The likelihood of their occurrence.
- The impact they may have on your project.
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.
“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.”
Software estimation techniques in Agile projects
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.
“Risk mitigation is particularly important at the early stages of a project when risk is typically at its highest.”