Software development cost estimation refers to calculating the overall costs linked to successfully completing a software project within the specified scope and time frame. It typically includes direct and indirect expenses, including equipment, infrastructure, licenses and other types of costs. 💸
Early calculation of estimated time and cost of software development is crucial for project success. With these estimates, you can predict how much staff you are going to require, develop contingency plans and track your project progress effectively.
Read on to learn how to estimate direct software development costs and grab the following free software development cost breakdown templates for Google Sheets.
How to Estimate Software Development Cost
🧠 Perform requirements analysis
The first step towards successful software development cost estimation is building a project brief – a short and concise pitch describing the software project to stakeholders and the product owner.
A good software development project brief outlines problems that the software is going to solve, its description and positioning on the market, target audience, functional and non-functional requirements.
At this step, you get familiar with the type, size and complexity of the software project and can proceed to developing the scope of work, the project plan and estimated software development costs.
📝 Develop the scope of work (SOW)
After project requirements have been approved by the relevant parties, you can move on to developing a project scope – a document outlining the work to be performed on the project, which includes project timeline, milestones, deliverables and reports. To create an accurate scope of work, consider creating a work breakdown structure – an essential tool for defining the project scope.
Work breakdown structure (WBS) is a visual deconstruction of a project displaying hierarchical organization of project activities, their dependencies, priorities and durations.
Start with listing out project phases, features or deliverables relying on project requirements. Use your expert judgement or review historical data from your time tracking software to make rough time estimations. If you want to calculate rough software development cost estimates at this stage, add responsible people across every project phase or deliverable, calculate their average hourly rate and multiply it by estimated number of hours.
Get your top-down software development cost estimation template
Note that time and cost forecasts made at this stage are based on generalized knowledge and don’t reflect reliable timeframes and costs. Yet, if you have a record of successfully delivered software projects, you can discuss your predictions with stakeholders to manage their expectations.
🧩 Divide the project scope into tasks
More accurate project time and cost forecasts can be made by the means of bottom-up estimation. Now that you’ve listed out all project phases, you can create a project schedule by breaking phases down into tasks and specifying dependencies. Remember that tasks should be specific, doable and assigned to a single person, meaning they usually don’t take longer than 60-80 hours. Draft a list of tasks, assign responsible people and pass on to task estimation.
Get your free bottom-up software development cost estimation template
📐 Estimate each project component independently
Now that you have a draft of the project schedule, it’s time to develop the most accurate time and cost predictions using bottom-up estimation. Review historical data of the previous projects and make your time range predictions for each item, taking risks and contingencies into account. For the most objective and reliable results, develop best-case, realistic and worst-case estimates.
Share a clean copy of the project plan with your team, get them to make their own estimates for tasks assigned to them, compare their estimates with yours and discuss the differences and potential risks at a meeting. Together, negotiate estimates for each project task.
💰 Estimate software development cost
Finally, with a well-rounded project schedule, you can easily get a reliable estimate of software development costs with bottom-up estimation. Go through the project schedule once again to make sure that there are no assignment overlaps and all risks are taken into account. Now add hourly rates of people responsible for project activities and calculate potential budget deviations – best-case, realistic and worst-case cost estimations.
Get your free best-case, realistic & worst-case cost estimation template
How to Track Software Development Costs
Software development cost tracking is easy: you already know (or can easily calculate) hourly rates of your staff – all that’s left is their working hours tracked across project tasks. Cost tracking becomes especially tricky if your staff works on several projects simultaneously – managing time and costs manually in spreadsheets turns into hassle and not tracking time and costs at all is a grave mistake.
To achieve streamlined project time and cost tracking and build customer trust with accurate reporting, we recommend using a time tracking system. We recommend you to be picky about the choice of the software as it should not only meet your resource tracking needs but also ensure full compliance with internal processes.
actiTIME is an example of flexible time and work management software that allows you to distribute project work across employees, track their performance and see if your project goes as planned.
What’s most important is that actiTIME allows you to set up tasks from the project schedule with estimates, deadlines, work rates and other parameters. After your team logs some of their working time, you can review their productivity and project health using real-time widgets and reports. Review project profitability, costs, profits and losses, staff performance, estimated vs. actual time performance and more.
If you have doubts about whether actiTIME will fit your project needs, you should have none because actiTIME provides maximum flexibility and customizability. Set up work structure, manage user roles and permissions, assign individual, overtime and type of work rates, customize reports view and create report templates.
actiTIME integrates with Slack, Trello, Jira, GitHub, GitLab, API and 3,000+ other integrations with Zapier. Give it a try – start with a free 30-day trial (no credit card required) and continue with a free plan anytime.
