Project Cost Estimation: The Ultimate Guide For Stakeholders

To be commercially viable in the current climate, in any industry, companies are getting through the unprecedented change triggered by such factors as the high-level economic power shift, the pace of innovation, generational change, and the arising of forward-thinking players that disrupt conservative sectors globally.

Within the context of these changes, the long-established project management methodologies are no longer seen as valid. In most cases, they are not responsive to rapidly changing customer needs. To make the big time today, a business should be flexible and quick — especially considering the dynamic environment we’re working in and which has raised the risk of software projects not bringing expected profits, departments/partners failing to release on time or within budget, or the results not staying in line with stakeholder objectives. According to the Project Management Institute, firms waste 9.9 percent of every dollar due to bad project performance — which is the equivalent of $99 million for each $1 billion invested.

Project cost estimation and budgeting, along with planning, become more encumbering in the realm of vigorous markets and agile custom app development projects. This is one of the reasons why some companies omit the process of cost estimation in project management since Agile methodologies entail shorter sprints, well-defined deliverables, and regularly updated backlogs. Also, it’s not right. Accurate project evaluation helps managers design relevant development scenarios and win more control over the flow. While management teams can easier establish annual budgets and align their projects with business needs or user expectations. However, let’s start with the fundamentals.

What is ‘cost estimation’ in project management?

In fact, project evaluation is the process of predicting the resources and financial assets required to execute a project within a defined scope successfully. It’s not a guarantee of the final price for the entire software engineering process; it enables you to see how the wind is blowing and secure the required funding for the kick-off.

Talking to our partners and clients, we are often asked: “What’s the difference between an estimate and a quote?” — As we’ve already mentioned, estimation is an approximate counting of cost and effort required to deliver a project, and it’s not the same as the total amount. Whereas, project quote is a legally-binding document that consists of a detailed and precise breakdown of all outlays, final costs, subsequent expenses, and defined risks that can affect the total budget.

Summarizing the above, what are the criteria for defining a successful project? — To cut a long story short, project success means accomplishing project goals on budget and on schedule, giving satisfaction to the stakeholders, and gaining experience.

What Is The Purpose Of Estimation In The Project Planning Process In Software Engineering?

Today some agilists state that software project evaluation is useless or even harmful. This conclusion was made following a ‘Feature Devotion’ approach — a situation where custom software product development teams are focused on ticking off tasks more than on following the actual outcomes of the project. Additionally, stakeholders often omit the fact that project evaluation is a rough assessment of effort and funding resources, and it doesn’t mean the final cost or release date.

However, understanding the reasons why we do cost estimates for app development can help you avoid those unrealistic expectations or workflow misconceptions within the team. The majority of our clients and partners use assessments to answer the following questions:

• How much does it cost to develop an app?
• How long does it take to build an app?
• What will be the stages of the software product development life cycle? What features can be released earlier, later, and which ones we can’t omit at all?

Nevertheless, coherent financial evaluation of projects can also empower stakeholders to make informed decisions regarding the allocation of resources and coordination. Most projects have a fixed amount of people and money; that’s why knowing how much effort each feature will require is crucial for better task prioritization and team management.

What Types of Project Cost Estimations Do Software Development Agencies Use?

In custom software application development, understanding the cost and duration are critical for making accurate strategic decisions, and this remains relevant whether you build a startup, translate new business opportunities into actions, or expand your business to outperform the competition. To answer the most common question “How much does it cost to develop a software program?” the majority of outsourcing providers utilize the following assessment approaches:

• A ballpark or rough estimate is usually ranged (from -25% to +50% variance) and allows stakeholders to decide if the project is feasible or not. It is mainly used in those cases when companies need to figure out if they have enough budget to do the project.
• Budget estimate includes a cost evaluation and timeline to provide business owners with a more accurate effort assessment (-10% — +20% range). This approach is applied when companies have a budget and need more details.
• Statement of Work (SoW) or Software Requirements Specification (SRS) estimate is the final step that pulls together the evaluation and total project budget (with 0% — +15% variance). This type of assessment is employed when all due diligence is completed, and project budget approval is required.

What Does a Standard Effort Estimation Template for Software Development Include?

In most cases, a rough or budget web or mobile app development estimation visualizes the stages of software product implementation and indicates the time required for each step.

• Initiation is usually a short preparatory phase that consists of environment setup, architecture design, and detailed project description.
• Development refers to the actual coding process. Software engineers and project managers outline the features to be built together with the relevant number of man-hours required for a particular functionality.
• Third-party integrations are a common thing in custom mobile app development due to the popularity of social media platforms or in-app payments. This approach can shorten your time-to-market and save budget significantly.

Meanwhile, a detailed SoW project estimate can also include business logic, user interface & user experience (UI/UX), and risk evaluation for all software product development steps.

Some agencies include the ‘idea validation’ stage in the templates, as a preparatory step before a significant investment. Such an approach helps stakeholders challenge their assumptions, discover customer needs, and define a straightforward way for product growth. The most popular methods of product validation are:

• Proof of Concept (PoC) allows businesses to demonstrate the functionality of the product, test minor technical hypotheses, and check if their idea is appropriate for development. A PoC isn’t the first version of your app, and it cannot be released.
• Minimum Viable Product (MVP) is a fully-functioning solution with only the core functionality that is essential to address the needs of the early adopters. It is a market-ready software with the minimum number of features that can be rolled out immediately to verify industry demand and product viability.
• Prototype is created by UI/UX teams, and it is an engaging representation of how your software application will look and feel once it’s implemented. It enables stakeholders to test the idea, get feedback from customers and stakeholders on the product, and make changes if needed.

Top 5 IT Software Project Cost Estimation Techniques

Understanding how agencies evaluate efforts involves knowing the most common methods for estimating project times and costs. This part of cooperation lays the groundwork for a booming business, ensures a confident start, and facilitates project planning.

#1 Top-Down Estimation

It’s a useful ballpark assessment approach that is often used in the early project stages when you try to validate if the existing assets are sufficient to deliver a software product.

In fact, the available budget is divided up between the milestones and project tasks to see if there are enough funds allocated to each stage and adjust as needed.

• Advantages: It is a simple and quick project cost estimation technique in software engineering that is appropriate for short-term projects and small teams with limited resources.
• Disadvantages: A top-down estimate is not accurate. Additionally, it suggests that the overall project budget is already determined and won’t range, so any changes in the scope aren’t possible.

#2 Bottom-Up Estimation

Bottom-up assessment is similar to the top-down evaluation, as a project is estimated based on phases or tasks, but your tech partner or team should have a full understanding of the requirements and objectives.

Most companies take a work breakdown structure (WBS) from the project plan to divide the scope into smaller tasks. Each section is evaluated separately and then summarized to define the total cost of developing an app.

• Advantages: It is the most accurate effort estimation technique. Since it’s very detailed, stakeholders can easily check the provided timelines and costs, later on, to make sure that they are on track and within the budget.
• Disadvantages: Work Breakdown Structure (WBS) method is applicative only when you have a detailed scope of the project, with all the requirements, expectations, and business goals. It is time- and resource-consuming, while becoming so granular, it can also inflate the product development cost.

#3 Analogous Estimation or Expert Judgement

This is one of the most popular estimating techniques for agile projects, as it allows development teams to make effort predictions based on their previous personal experience or data from similar projects.

This approach is most rewarding for IT projects that have undeniable similarities in terms of scope, industry, deliverables, and context. The more differences or complexities between the products, the more challenging it will be to make an accurate evaluation.

• Advantages: It is a quick and straightforward method that can be applied with limited information on hand about the software project. Similarly to the top-down assessment, it is often used for rough estimates.
• Disadvantages: Two projects can be similar, but they are never alike, so this technique is not very accurate. Additionally, the analogous method is heavily dependent on detailed and precise historical data that only some of the tech agencies have.

#4 Parametric Estimation

This is a highly accurate software development project cost estimation method that uses the results of the delivered products as a guide for a new application but makes allowance for variables.

It works best for well-defined recurrent tasks or work units. However, it is less effective for creative projects, as work items are often more unique and less comparable by definition.

• Advantages: It is the most precise ballpark method as it takes into consideration various requirements and goals within a new project.
• Disadvantages: With digital projects, it takes a lot to find applicable data.

#5 Three-Point Estimation

Most IT service providers see the three-point technique as the next step, after a ballpark estimation, when a client needs more realistic custom software development cost. This approach comes up with three scenarios: best case, worst case, and the most likely case estimates. To get the average you can use the following formula:

(Most likely + Best + Worst) / 3 = A viable cost estimate

Unlike with various estimation techniques in software development, this method can be applied to the entire project or its features in a WBS. Additionally, this is the only approach where dedicated teams account for risks, bottlenecks, and uncertainties in a given project.

• Advantages: Three-point approach helps clients get a more accurate evaluation, with consideration for risks and unexpected issues in a project. It is the most feasible option for small businesses, due to greater certainty and better management of risks.
• Disadvantages: It requires more time and expertise.

How to Estimate Project Cost and Time: The DashDevs Approach and Software Development Estimation Best Practices

With over ten years of experience in the market, we’ve tried and tested all the pre-mentioned techniques for calculating web and mobile app development costs, and, as a result, we’ve framed our own unique approach. Here’s our step-by-step approach to product development cost estimation:

1. First of all, you fill in our contact form and provide a short introduction to your project or product idea. We schedule a quick call with one of our business development managers to talk about your business objectives and expectations, potential users, functionality, and more.
2. We proceed with a high-level finalization of your project vision that is later converted to a Work Breakdown Structure (WBS). Our team performs the initial business analysis, takes into account product nuances, your business goals, and future scalability plans. The proposed solution is divided into smaller units and tasks to approve the scope and features of the application with the client.
3. Every module of the functionality in the software engineering cycle is evaluated individually, with the use of one or several techniques: Expert judgment, Analogous, or Three-Point Estimation. We engage solution architects, technical leads, or senior software developers to prepare granular feedback with relevant use cases and suggestions ‘on the structure and technical implementation.
4. We hold another meeting with you and your stakeholders to present our outputs, get adjustments, and obtain more requirements. Additionally, we also try to validate the scope of work to prepare a detailed app development cost breakdown.
5. During the next meeting, we provide you with a quote that contains a total project cost with man-hours of work, project technology stack, our approach to architecture design, and a list of features for the initial and successive releases.
6. Finally, we discuss our proposal to come up with the most effective strategy for your business.

We offer full-cycle product development services for web and mobile applications. So that means that software development time estimation covers all the services related to your project, including quality assurance and project management.

Conclusion

Creating an accurate effort estimation is a time-consuming and challenging task, but it can simplify project planning significantly and get both the development and management teams on the same page, preventing frustration.

Today businesses often outsource their software development life cycle time estimation to one of the qualified IT vendors. This approach has multiple benefits, but the main is that nearshore and offshore teams have rich experience and a proven record of successfully delivered products. Consequently, they have extensive knowledge of numerous technologies and tools and can estimate your project at the professional level. In-house professionals often have limited expertise, and thus their evaluations can be inaccurate.

If you’re looking for a skilled and dedicated tech partner — send a short note to our managers to learn more about our background and get a free project cost estimation.