How Should You Estimate Software Development Cost?
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How Should You Estimate Software Development Cost?

Posted By Praveen Joshi

March 18th, 2021

Estimating software development costs is a tough job. It may be more accurate than a fortuneteller, but it is unlikely to make a weather forecast jealous! Developers try to project expected expenses, yet there are continuously fluid variables. Even the requirements could shift as the project progresses.

How Should You Estimate Software Development Cost?

Estimating software development costs is a tough job. It may be more accurate than a fortuneteller, but it is unlikely to make a weather forecast jealous! Developers try to project expected expenses, yet there are continuously fluid variables. Even the requirements could shift as the project progresses.

Some parts of an estimate may come easier than others. For example, there is a clear cost difference between hiring a nearshore software development company or sending it offshore. But that is the easy part, and even in these cases, coming closer than a ballpark figure can be tough.

The problem persists even with different methodologies. Whether you choose to go with Agile or Waterfall, cost estimation is a challenge.

Here are some techniques and considerations to reach a better software development cost.

Pricing Approach: Time And Materials Vs Fixed Price

These are two basic approaches to cost estimation. Time and Materials approach is best when it is difficult to estimate the size of the project. This is especially useful for projects where requirements are likely to be fluid and change during development.

It is worth noting that real-world budgets are not infinite. Even a time & materials approach will likely have a ceiling related to the expense.

A fixed price model is pretty much as the name implies. The client and developer agree on a fixed price for the project. However, given the nature of this approach, there is little room left for flexibility, introducing changes, or customization.

The Business Stakeholder Plays A Role In Cost Estimation

Problems can arise when clients and developers see their estimates as independent from each other. A better approach is for each side to be involved. This allows a shared and common understanding of the project.

Both parties have a stake in the software and an understanding of the goals, requirements, and the process can be invaluable. Reaching an estimate that is congenially accepted by both parties is pretty much the holy grail.

Understanding The Scope Of Development

A software may require different approaches during development. Is a clear roadmap and list of features available for development? Do you intend to release an MVP (Minimum Viable Product) before the actual product is released?

Having a clear scope of the project idea, development, and testing requirements is important. It helps estimate time spent in the development of the software, and by extension, its budget.

The need for a balanced team and educated estimates becomes important here. If a Business Analyst is going to present project requirements to the developers, a balance should be reached. The BA should present clear and straightforward requirements on which the developers act.

Other assessments include considering how much time a lead developer has for development. The lead is going to manage other developers too and the time devoted to development will depend on this function.

Ground Your Development Cost Estimates In Reality

Project estimates should be built on real, hard data. Hiring an offshore software development company does not magically reduce project costs. While there is an obvious cost advantage, viability and an accurate assessment must be considered.

Similarly, it is fruitful to run a small exercise to see how accurate cost assessments are. Setting aside a few hours to see if the team matches the projected speed and development time can save a lot of trouble.

According to statistics collected by Harvard Business Review, 1 in 6 software projects overrun their estimated budget by 200%. While that is not an encouraging number, it serves to highlight the volatility of estimates. The report found the average project overrun to be 27%.

Assessment Should Start Immediately With The Project

A flaw in the cost estimate is better revealed earlier. Begin working on project metrics and goals as soon as development starts. This can reveal problems early. For example, the BA may be swamped writing requirements, while the developers have nothing to do.

Or, the velocity of development may not match the estimate. Each developer has their own pace and time, and development speed is not so easily predicted.

Finding problems like these early opens the door for better solutions. For example, there could be a revision of the estimate. Alternatively, a fix can be found without disrupting development flow.


Flexibility is a hallmark for software in general. It is also a necessity for a bespoke software development project. It is impossible to generate an estimate accurate to the last dollar. Ideally, there should also be room for changes required based on the technology, scope, and timeline of a project.

Of course, any change should be reasonable. However, it is not unheard of for goalposts to shift during project development. A flexible approach allows these changes to be seamless, without overburdening the cost estimate or development.

Using Existing Projects As Your Guide

Experience and availability of data matter. Your experience on other software development projects should be a guide to deciding current estimates. Mapping earlier, similar projects to arrive at a cost estimate is beneficial.

A nearshore software development company may be able to provide considerations of the project related to local information. Small things like holidays and vacations can affect project development and delivery schedules. This can also affect a software’s delivery date deadline and expected costs.

In the same vein, offshore developers can provide the advantage of being available during vacations and moving the project forward. This is simply due to time zones and different countries having some variations in their holidays.

Experience or access to data related to the handling of similar projects can provide the right answer to these considerations. It also reduces the risk of projects grossly overrunning their budget estimates.

Praveen Joshi

Praveen is a seasoned IT Solutions Leader and Director at RSK Business Solutions, a technology-driven IT Consulting Company that specializes in Bespoke Software Development, Agile Consulting, Mobile App Development, Smart Sourcing, and much more. For the last 17 years, he has been delivering quality custom IT solutions that help businesses achieve their goals.

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