Software Development Cost Estimation: Best Practices in 2022

Congratulations! You came up with a terrific software idea and can’t wait to bring it to life. So, you make a list of apps that look similar to yours, roughly sketch your business model, and head off to software development companies to find out the cost of your future project.

But here’s the catch. Anyone who will give you a software development cost estimation before collecting requirements increases your chances of failing. Indeed, according to the PWC Annual Global CEO Survey, poor software development cost estimation during the planning phase is one of the most common (32%) reasons for IT project failures.

What do you do now? First, shortlist your search to the vendors that ask for your requirements before estimating the project cost. Second, keep reading this blog post to see how proper requirements collection can make or break your solution.

Software development cost estimation: what is it?

As the name suggests, software development cost estimation is a calculation of funds needed to create a product. This is a very important aspect of development because the client who applied for the service of software creation, in the first place usually is interested in the cost of service and timing. However, even companies with extensive experience in implementing IT projects of varying degrees of complexity are not always able to immediately give specific numbers and dates.

Estimation of software development cost is one of the most difficult questions in the industry, which puzzled the financiers and appraisers, analysts and developers, as well as heads of companies. There are different valuation methodologies, but in our business activity, Perfsol primarily focuses on labor input, measured in man-hours.

Benefits of requirements collection

Requirements analysis is the initial phase in the software development process. Basically, it allows transforming vague customer needs and desires into specific, measurable, and achievable specifications. This stage is an important pillar of your future project, so take it seriously and don’t skip it. Otherwise, you risk turning a hasteless software development process into chaos.

Start your every project with requirements collection. This will help you:

Stay on the same page with the development team

Often a part of the discovery phase, requirement analysis helps avoid miscommunication between the stakeholders and developers and make sure everyone understands the project’s goals and features for further software development cost estimation.

During this stage, the Software Requirements Specification (SRS) document is created. It describes the functional and business requirements of the project, as well as the product goals and the desired outcome. Simply put, it’s a roadmap of your project and a single source of information for developers, designers, QA engineers, and managers. It’s very important for proper software development cost estimation.

Identify risks at the very beginning

No one likes unpleasant surprises. But a thorough requirements analysis will help you avoid them. Together with the development team, you will discuss and resolve any ambiguities and unrealistic expectations before the development kicks off. This will save you time, money, and a whole lot of grey hair.

Another crucial aspect to consider when estimating software development costs is the ongoing maintenance and support of the software solution. After the initial development phase, it's important to allocate resources and budget for continuous updates, bug fixes, and enhancements. Software maintenance ensures that the application remains secure, compatible with evolving technologies, and aligned with changing user needs. Consider implementing a well-defined maintenance plan, which may include regular software updates, performance monitoring, user support, and scalability improvements. By factoring in the long-term maintenance costs, you can ensure the sustainability and longevity of your software solution while delivering a satisfying user experience

Achieve a desirable result

It’s no surprise that cooperation is more fruitful when the stakeholders and the development team are on the same page. The development team understands the scope of the project and its goals, while the client is aware of the development stages and timeline. This makes the favorable outcome far more predictable and realistic.

Get accurate software cost estimation

Finally, the more requirements you provide, the better the development team will estimate software development cost. Knowing your goals and needs will allow them to map out the exact timeline and budget. It’s also helpful for prioritizing features, allocating your resources, and planning your spendings in advance.

Software development cost estimation approaches

There are plenty of ways to estimate software development cost. Nevertheless, the most often used are the following:

Fixed Price

Working on a fixed price implies the estimation of the project, detailed development planning, and further work according to fixed agreements.

• Fixed parameters: Volume, Price
• Changing parameters: Scope, Price, Quality
• Flexibility: Low. Changes are made rather painfully.

Time and Materials

In this software development cost estimation model, payment is based on the actual hours worked. This type of contact doesn't exclude project estimate, but it plays more of a decorative role and just helps to understand how much time the project will take, without imposing restrictions.

• Unchangeable parameters: Quality
• Changeable parameters: Volume, Price.
• Flexibility: Maximum. The client can afford to do anything in any volume. Changes can be made with greater speed.

FFF - Fixed time, Fixed budget, Flexible scope

This type of software development cost estimation allows your management to work with the developers. Here we have a certain budget, for example, $ 10000, and the amount of work on the client's tasks, e.g. X hours. If the client with his new ideas exceeds a $ 10000 budget, we either move some of the functionality (old or new) to the second release or reject the idea, without increasing $ 10000 and do not change X. The basic principle: in the current iteration, we do not change the budget and terms under any circumstances

• Unchanged parameters: Price, quality
• Changeable parameters: Volume
• Flexibility: High

Stages of software development cost estimation

It happens that a potential customer asks for software development cost estimation, not realizing the final function set of the future software product, describing everything only at the level of ideas. To give an adequate estimate business analysts need to study a subject area in detail, define the boundaries of the project (what exactly will be done, what technologies are used), and describe the concept of the product.

Therefore, the following software development cost estimation tactics are used for the most effective interaction:

• At the negotiation stage, the analyst records the basic requirements of the customer, and suggests something based on practice and global experience. If necessary the client may be asked to fill in a questionnaire template.
• As a result of preliminary negotiations and questionnaires the analytical note with general requirements and in some cases conclusion is made. For example, whether it is necessary to carry out an additional survey for specification of requirements and their detailing.
• Non-standard requirements of the customer are also characterized, and brief recommendations for their implementation are given, based on common practices and experience in similar projects.
• On the basis of the analytical note the boundaries of the project become clear, and therefore we can tell the approximate cost and timing.
• After that a document with the cost is prepared and provided to the customer.

The bottom line

Even if you were skeptical at first, we hope you’re convinced of the importance of requirements collection in software development cost estimation. So if you’re looking for a vendor to implement your software idea, make sure it’s someone who takes estimation seriously. Someone like Perfsol.

The Perfsol team will help you identify the requirements of your product, analyze the technical aspects and the business processes, and create a go-to-market roadmap for your future project. We put every effort into understanding the requirements of our clients and delivering exactly what is expected. So don’t hesitate to contact us and discuss your ideas. We will be happy to help you build a stunning product.