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How to estimate the cost of a software development project?

What to consider when assessing the cost of the project?

The first question that the customer is interested in when developing custom software is how long it will take to be created and how much the services of an IT outsourcing company will cost. There are no identical projects to use the same cost estimation method for everyone. They have different goals, volumes, deadlines, and budgets. The success of teamwork largely depends on the latter factor. Let’s figure out what should be taken into account when calculating the cost of a software development project.

Why is it important to estimate the cost of the project correctly?

Estimating the cost of a project is not an easy task, because unforeseen situations may arise in the course of work, which in turn provoke additional costs. Nevertheless, a correct assessment helps to determine the scope of work, as well as the timing and engineering resources for creating software. An accurate estimate allows you to understand what money is being spent on and how to prioritize the implementation of certain tasks more effectively. The budget also helps to define and coordinate the main stages of application creation.

Usually, in practice, several types of software cost estimates are used: an approximate estimate, a detailed estimate, and a final estimate. 

Approximate estimate

This type of assessment is used when it is important for the customer to understand beforehand whether the project meets the allocated budget. In this case, the client receives a very approximate price to imagine whether it is possible to implement the project at all. If there are, for example, assumptions that software development will cost $ 100,000, then it is worth considering the possible difference of +/- 25-50%.

Detailed estimate

An accurate assessment of the project is usually carried out when the customer has provided clear requirements. In this case, the service provider for custom software development makes a short project plan with cost calculations and deadlines. Compared with the approximate estimate, the final figure may be higher and include +/- 10-20% error.

Final estimate

The final cost should be as accurate as possible and include an assessment of each stage. At the same time, take into account possible risks. For example, if a team of IT specialists considers that the project costs $ 100,000, you should throw an additional $ 15,000 for unforeseen expenses or changes in requirements. This may mean an error in the calculations of 0-15%.

What affects the cost of software development?

Usually, projects are created on the basis of a cooperation model accepted by both parties: “Time and Materials” (T&M), “Fixed Price” (Fixed Price), and the like. In many ways, the type of pricing and the work format depends on the quality requirements for the product, the planned changes, the scale of the project, and the timing.

Usually, in the absence of documentation or its incompleteness, IT outsourcing companies do not decide on a fixed price, because it is very difficult to clearly evaluate the product. The cost in this case is calculated based on the working hours worked according to a pre-approved hourly rate.

To work on a fixed-price model, it is important to have clear design requirements or specifications. In this case, it will be easier for the team to determine the deadlines and budgets for custom software development services. All these data are included in the contract, and the team strictly adheres to them during SDLC. But there are other factors that affect the project cost.

Project size

It is logical that the number of stages and tasks that need to be completed depends on the project scope (requirements design, prototyping, design, programming, quality assessment, technical support). The project size also depends on how many people will work on it. Usually, at least four roles are used: project manager, designer, developer, and QA specialist.

As a rule, experts divide projects by size into the following types: 

  • A small one that requires minor changes or adding simple functionality. Usually, such software does not process huge amounts of data and it does not need to be integrated with third-party services. Development in this case may take from 1 to 2 months.  
  • The middle one is where you need to add more functions with payments, integrations, and analytical solutions. Such a project has a more complex design and takes from 2 to 6 months. This is usually a small mobile application or web interface. 
  • A large one, which involves creating a comprehensive design, connecting a full set of functions, and ensuring performance and compatibility with third-party systems. An application running on multiple platforms (iOS, Android, Web) falls into this category. 

Number of specialists involved in the project

Depending on the project scale, IT specialists calculate how much time and effort must be spent to implement it. The effort is the number of working hours that will be required to solve tasks. Time is the period from the beginning to the end of the project. For example, 48 hours of effort can be invested in one working day if 6 developers do the work together. Or it may take more than a week for these 48 hours if one programmer is working on the tasks. In both cases, the effort is the same, but the timing is different. 

Therefore, based on the efforts that need to be applied to the project and the time, the optimal team size is selected. As mentioned above, it includes PM, QA, and programmer. If these efforts are not enough to complete the work on time, more programmers join the team, as well as a business analyst, IT-architect, designers, and so on. Accordingly, the final cost of the project depends on the number of specialists involved, their hourly rate, and the time they give to complete tasks.

Moreover, the calculation does not always occur according to the formula “Project resource cost * project time = project cost”. In practice, it may be that one specialist plays several roles on a project: for example, a programmer codes and tests, and a project manager closes the tasks of a business analyst. It is also not uncommon for an employee to work on several projects. In this case, the customer pays for the skill set and the percentage of time spent by the specialist to solve certain tasks.

Quality requirements

Well-developed requirements are the key to the success of any project. After all, in ideal conditions, the creation of a software product is faster and better. There is no need to spend many hours clarifying and approving documentation. Programmers don’t need to come back to rewrite or fix the code.

But, unfortunately, this does not always happen. And in the absence of requirements or their imperfection, the business analyst and project manager have to spend time working through documentation. It is important that programmers write high-quality code right away, there are fewer bugs in the application, and that the product comes out on time.

In the opposite case, clarification of requirements by developers and incorrect functionality will increase the time of software implementation, which will ultimately affect the cost of the product. After all, any bug is found in the last stages of the project. The delay in the release significantly increases the price of the software, reducing the profitability of the product.

Conducting testing

It would be a strange and thoughtless decision to release untested software into production. As a rule, application errors and poor product reviews repel other potential customers. Consequently, the business loses money due to a faulty mobile or web app.

The assessment of quality assurance costs largely depends on testing (for example, user testing for the attractiveness of an online store or security for a banking application), the scope of the project (throughout all stages of SDLC or at the end of development), and the level of automation. Consequently, these costs are taken into account when calculating the total cost of the project.

Compatibility with third-party systems

Often the software needs to be integrated with other systems. The more third-party resources you need to combine your product with, the more difficult and expensive it is to carry out this procedure. Because integration, for example, with an outdated system will take more time (to study technologies, get acquainted with APIs, data structures, protocols, and so on).

The cost of a project usually increases when it is necessary to combine data on one platform or transfer it to a new system. To transfer data, appropriate scenarios are needed, the development of which takes a lot of time and effort.

Software development time

If speed becomes the main advantage of custom software development for the customer, then in order to complete the project faster, additional hands may be required. For example, to connect more developers, testers, or other specialists. And, of course, its cost will depend on the number of employees involved in the project.

To correctly estimate the time and cost of software development, it is necessary to involve all specialists to work on the project. According to the authors of the book “Project Management for Engineering, Business and Technology” by J. M. Nicholas and H. Stein, “Project participants who are closest to the sources of costs should be involved in the estimating and budgeting.”

Own team or outsourcing specialists

As mentioned above, the total cost of the project depends on the hourly rate of specialists. It can vary significantly in different countries. As a rule, developers in India have the lowest hourly rate ($ 60-70), and in the USA – the highest ($50-200). And Eastern Europe occupies the golden mean ($ 20-170) while maintaining optimal quality.

Accordingly, if the company is located in the USA, it can hire specialists from Europe or Asia to reduce the cost of the project by up to 40-50% due to such a wage gap. Or create a distributed team of the “best specialists in the world” at a lower price.

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