How to Calculate Development Cost

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MARYNA DEMCHENKO

Published: 10 Aug 2022

Software development cost

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Calculating software development costs is a complex task that requires a lot of skills, expertise, and attention to detail to come up with a reliable estimate. Based on the outcome of the estimation, businesses set priorities, develop business plans and strategies, distribute resources, and control expenses as the project runs its course. 

So, how to calculate development costs? There are several tried-and-true methods of software cost estimation that you can use to find out how much your project is going to cost. We will highlight them in our post: You can pick just one or use the combination of them and compare the outcome – the choice is always yours. Before you dive into the process of estimation, you need to take a few steps. 

How to estimate development cost: Steps

First off, project estimation is an act of resources (time, budget, human resources, team composition, etc) prediction a project or product will take to be developed. Here are the basic steps you can take as you prepare to address the question of how to calculate development costs. 

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Step 1. Project Scope

The first step to knowing how much your project is worth is to define the scope of work. The Project Scope can only be defined by the person who initiates and drives software development - a stakeholder(s) who owns a product idea and has an understanding of business objectives, expectations, market, and more. The future product and its functionality will be described in the Project Scope – a key document that outlines the following: 

  • The works to be performed by a team;
  • Milestones and time-frames;
  • Final deliverables;
  • Acceptance criteria;
  • Exclusions that are not part of the project;
  • Risks that may affect the outcome of the project.

Project Scope is the first step toward giving an early-on answer to the question of "how to calculate development cost." 

READ ALSO: How to Reduce IT Development Costs

Step 2. Project Estimation Team

In many cases, project estimation is a team sport. It's a rare occasion that companies rely on a single person to come up with a precise estimation, even if they have worked with a similar project in the past. 

For your Project Estimation Team, aim to pick specialists with expertise in your vertical and the technologies you are going to use, including software architects, CTOs, business analysts, and senior software developers. These can potentially be specialists who take your project to fruition. Essentially, they should be well-versed in the software development approaches (Waterfall, Scrum, Kanban, Incremental) and how to calculate development costs based on hours and human resources needed within the software development model of your choice. 

When you build a Project Estimation Team, it's important to select people who already know how to estimate development costs and have a track record of successful estimations. The general recommendation is to avoid both overly optimistic estimates (which often speak about the lack of experience in project implementation) as well as pessimistic ones, pertaining to people who tend to overestimate the risks. 

Now that you have a Project Estimation Team and Project Scope on hand, it's time to roll up the sleeves and address the question of how to calculate development costs in practice. 

READ ALSO: What is Software Development as a Service?

Common methods of software cost estimation

Expert estimation

This method of software cost estimation relies on the company's previous experience to generate an estimation for a new project(s). It's probably the quickest way to resolve your "how to calculate development cost" conundrum, as you'll be able to get the preliminary cost fast, given that your team has already dealt with such kinds of projects in the past. 

On the other hand, if it's not your typical project, you will have to find an expert with relevant business acumen. The downside of the expert estimation approach is that you depend on the competence of the expert and their potentially subjective opinion. Thus, engaging more than one expert and comparing their estimations is recommended. 

Top-down or Analogous estimation

This method of software cost estimation is based on data from previous projects (a.k.a. "analogous projects"). The entire project can be broken down into several sub-tasks aiming to find similar parts in your previous projects. Then, the found data can be projected onto your project in question. You can combine this approach with Expert estimation, as in involving an expert to help you deconstruct the project and locate similar tasks completed in the past. 

This approach is preferred when you have existing expertise in-house thoroughly documented in case studies. It can hardly work for completely new projects outside your competence. 

READ ALSO: Software Development Agreement: Checklist

Bottom-Up estimation

How to calculate development costs using a Bottom-Up method? This approach assumes that you start estimating the project by outlining various possible ways that may take you to your end goal. In other words, your task is to create a roadmap to implement your project. In many cases, it takes the work of the whole team to define and describe a set of tasks on your journey from the project's beginning to the final solution. 

Three-Point estimation (PERT)

PERT is one of the most common and simple methods of software cost estimation. How to estimate development cost using PERT? It is based on three types of evaluation:

  • optimistic (O = Optimistic),
  • pessimistic (P = Pessimistic),
  • realistic/medium (M = Middle or Most Likely)

PERT is widely used for projects with a low level of predictability. Using this approach is an easy way to define the sequence of tasks you need to fulfill and the relationships among them, which is at the same time, the biggest challenge of this method. PERT is often a go-to approach for new, ground-breaking solutions.  

Use Case Points

The foundation of this method of software cost estimation is based on use cases, a set of possible scenarios of interactions between systems and users aimed at achieving a particular goal. The idea behind this method is to describe all possible use cases in detail and estimate the scope of work related to them. 

The Use Case Points approach comes in handy when you are at a stage of outlining the functional requirements of your software product. After you’re through, you will be able to estimate the project cost on short notice. Its main challenge is to identify common use cases, which can be problematic for complex projects. 

READ ALSO: Pros and Cons of Custom Software Application Development

A software development cost calculator: Potential challenges

If you underestimate the project cost or time-frames of critical tasks, it may lead to foiled deadlines and create huge pressure on the development team. When you have to adjust to new budgets in the middle of the software development process, it’s always stressful. 

You may wonder how to calculate development costs precisely. We've described the common ways to estimate the project’s price, but it can be challenging to get an accurate estimation on the first try, especially when you’re handling projects that are “terra incognita” for your organization. 

The more assumptions your Project Estimation Team makes, the more inaccurate the estimation will be. An Expert’s subjectiveness or inclination towards optimism or pessimism when it comes to the project cost also increases the likelihood of error. If you have a preliminary budget you know you can't go over, it may affect the accuracy as well, because then you may succumb to compromising between the cost and quality. 

As an alternative, you can rely on a software development cost calculator provided by seasoned software development vendors, for example, nCube. It can be a good idea to compare estimates done by your team and the vendor’s team. 

We build teams of remote software development specialists in Eastern Europe and Latin America. If you lack the internal expertise to estimate your project, including such skills as project management, software architecture, business analysis, or senior software developers, let's connect.

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