Apple is spending $30 billion a year on research and development. Anthropic, a much smaller company, estimates its dev costs for 2024 to be $1 billion — and $10 billion for its next generation of AI solutions. While these are relatively large organizations, the reality of the development price tag is sobering — even for very small companies. This is where software development estimation can make a big difference. With the right software development estimation methods, you can craft a solid, reliable budget that eliminates expensive surprises.
For example, suppose you are working on a legacy application modernization project. Before diving into the planning phase, you need to accurately forecast the required time and effort. With an effective budget, you can secure the necessary funding for the project and enjoy a smooth, comfortable dev life cycle.
In this post, we guide you through software development estimation techniques and why they’re important. Let’s dive in.
What Is Software Development Estimation?
Software development estimation refers to determining the amount of effort required to deliver production-level software. It allows you to accurately predict the necessary funding, resources, and time.
By using the right software estimation methodologies, you can come up with accurate numbers for presenting a realistic budget to other decision-makers. This involves taking a few crucial steps ahead of time, such as:
- Establishing the project’s requirements and scope
- Gathering input from the dev team and other stakeholders
- Using historical budget figures from previous projects — if available
- Pinpointing the risks that could increase the amount of time, skills, or tools you need for the project
- Breaking down each element of the work involved
Producing dependable numbers may take a considerable investment of time and people power. Software development estimation alone can easily take two weeks or longer once you factor in the time needed to discuss each element of the project with different stakeholders, crunch the numbers, and identify issues that could pose risks.
Why Is Software Development Estimation Important?
Without reliable software estimation methods, you cannot predict how much effort, money, and time your team will need to complete the project. On the other hand, with the right software estimation methods, you empower your team to:
- Accurately allocate resources. In this way, you don’t commit too many or too few resources, including both funds and personnel.
- Collaborate around a singular goal. When everyone has the same detailed estimate in hand, they understand what they have to do, by when, and how much it should cost.
- Stress management. Developing software involves many intricate steps, all of which are dependent on each other — and this can stress out even very experienced developers. With the right time and resource estimate, software development projects are less prone to uncertainty, which reduces stress.
- Set the stage for more accurate time and budget forecasts in the future. Your estimation gives you invaluable data, a dependable starting point from which to start subsequent estimates.
However, keep in mind the estimate doesn’t provide the final software cost. Instead, it offers a range of potential expenditures. The goal of the software development estimation is to help you secure a budget and identify necessary resources. Once you have these pieces of the puzzle in place, you can begin development.
Components of Project Estimation
Even though every project is different when it comes to size, complexity, and the technologies needed, the core components of a reliable estimate generally remain the same. As you weave the following considerations into your software estimation methodologies, it’s important to be transparent and allocate resources fairly:
- Tasks. These involve a detailed breakdown of the work that your team or an external provider needs to complete.
- Human resources. Resources involve individual people, and you need to outline the qualifications and expertise of each team member.
- Technological resources. Your development environment consists of computers, IDEs, databases, and collaboration systems — and you have to identify each element and its costs.
- Rate. Your rate consists of a ratio that estimates the cost of production and the time it takes to develop the product. For instance, a small dev team may require $800 per day to complete a project.
- Duration. This is the total amount of time it will take to complete the project, from the moment the team starts building through to testing and your final product launch.
- Third-party services. These include what you may have to pay external consultants or developers to assist with elements of your project.
Steps in a Software Development Estimation Project
Before you plunge into the actual estimation process, it’s important to consider the answers to questions like:
- Do I need to break down the project into smaller milestones? Segmentation makes it easier to identify the resources each phase needs.
- Is it important to start asking questions? Task descriptions do not always offer a complete overview of the project, so asking questions helps you avoid making costly assumptions.
- Can leveraging experience help with the estimation? Have some team members worked on a similar project before? Try leveraging that experience.
- Should I use story point sequences? Developers use these to estimate the work required by tasks of different difficulty levels. For example, you could use small, medium, large, extra-large, XXL, etc. Or you could give each task a number in a Fibonacci sequence, such as 1, 2, 3, 5, 8, 13, etc.
- Should I set a maximum number of hours per task? Setting a maximum number of hours per task enables you to distribute time for the entire project effectively. If a task threatens to go beyond its limit, you can re-focus human, technological, or third-party resources accordingly.
Once you’ve answered these questions, you can use this step-by-step guide to structure your software development estimation process:
Assess Your Needs
Your needs include the objectives of the project, which features the final product needs to have, and the dependencies needed to support the front end.
Outline the Scope of the Project
Your scope describes how much work will be involved in building each component and feature. It also prioritizes which features are most important and which deliverables are the most crucial.
Decide on Your Software Estimation Methods
As we will discuss later in this guide, you should decide between methods such as bottom-up, three-point, and parametric estimation.
Delineate the Work Involved
This is where you dig deeper into the more granular elements of the development process. For instance, you should break down the number of hours it will take to build out the UI and UX of each screen.
Identify the Necessary Human and Technological Resources
To avoid overlooking crucial development components, you should assign resources to each element of the development process. While it may seem redundant, this may require writing the same name or development tool again and again throughout your estimation document.
Calculate Your Costs
In addition to people hours, your cost should also include how much you have to pay third-party developers. It also needs to incorporate expenses associated with monthly subscription fees for development tools or platforms.
Generate Your Estimate
Your final estimate should consist of a central document with all essential data points, including visual aids, such as charts and graphs, if necessary. Your goal is to make it easy for all stakeholders to understand. Ideally, the developers working on the project can also use it as a guide as they decide how much time to invest in each task and which ones to prioritize.
Continuously Monitor and Report
You need to assess actual performance versus your estimates. If the actual project requirements deviate from the estimate, you should immediately report this to stakeholders. It’s also important to analyze and report why.
Software Estimation Methodologies
You can give your estimation process some much-needed structure by incorporating one or more of the following time-tested methodologies:
Estimation by Analogy
Sometimes referred to as “analogous estimation,” Estimation by Analogy involves using data from past projects to estimate the costs and resources your project will involve. The key is to use a project that shares a number of similarities with the one you’re about to undertake. For instance, if you’re building a customer-facing eCommerce app, another eCommerce app would make a more suitable analogous example than an internal workflow automation app.
Use Case Points (UCP)
Taking a Use Case Points (UCP) approach involves identifying ways the software will be used, categorizing them based on complexity, and then assigning them weights. The weights then determine how much time each element of development will take.
For example, suppose you’re building an app for automatically updating inventory levels using sales and shipping data. A few Use Case Points may include:
- Listing the products in our existing inventory. Rating: Simple.
- Automatically updating changes in inventory levels in accordance with sales and existing shipments. Rating: Complex.
- Enabling automatic email messaging when inventory levels cross pre-designed thresholds. Rating: Average.
You then assign timeframes for each rating level, such as three days for Simple, 5 for Average, and 7 for Complex.
Bottom-Up Estimation
The Bottom-Up Estimation technique divides a project into tasks and subtasks. Because this outlines all of the tasks involved, you can easily come up with an accurate estimate. Also, the tasks and subtasks are straightforward to define and manage.
Bottom-up Estimation often results in a very detailed breakdown of tasks. To illustrate, suppose you develop for a manufacturer and you’re building an app that automatically sends critical equipment data to your maintenance team. One section of your bottom-up breakdown of tasks may look like this:
Build module gathering machine data
- Transform and clean machine data
- Design filters to remove data produced while the machine is being tested by a technician.
- Transform data by limiting the number of decimal points in doubles fields (Doubles fields are those in a database that allow numbers with decimal points.)
- Decide which, if any, outliers to filter out, depending on their causes.
- Design a system for filtering the applicable outliers based on their deviation from the mean.
Three-Point Estimation
The Three-Point Estimation technique involves providing three ranges of estimates from three data points. They tend to include the “best-case scenario,” “worst-case scenario,” and the “most likely scenario.” Each scenario gets a weighted average, and you factor this into your estimation method.
In other words, you begin with an estimated cost, such as $30,000, and then multiply it by the weighted average of each scenario. If $30,000 represents the most likely scenario, then perhaps the best-case scenario would be 0.88, and the worst-case scenario would be 1.15.
This means in a best-case scenario, the project would cost $30,000 x 0.88 = $26,400, and in a worst-case scenario, the project would cost $30,000 x 1.15 = $34,500.
Parametric Estimation
Parametric Estimation involves a statistical or mathematical approach. There are several steps:
- Pinpointing the requirements, complexity, and technology of the project.
- Analyzing similar projects and determining the amount of work required for software development.
- Determining the cost by analyzing empirical relationships between the total tasks and the factors involved in the project.
This technique enables easier scalability without having to sacrifice accuracy. As the number of tasks and factors increase — or decrease — the cost of the project shifts accordingly.
Relative Sizing
Relative Sizing performs estimation by comparing or grouping different tasks together. For example, while using Relative Sizing, you might say, “Task A rates as a 3. Task B is twice as complex as Task A, so we give that a 6.”
You then assign cost estimations based on the relative sizes of each task. In some cases, this may result in very straightforward calculations, especially if you use a baseline cost for each unit. For instance, you could give a cost of $1,000 per unit. Using the example above, Task A would cost 3 x $1,000 = $3,000, and Task B would cost 6 x $1,000 = $6,000
Wideband Delphi
Wideband Delphi involves getting experts to estimate costs and then discuss discrepancies between their estimates until they reach a consensus.
To use a Wideband Delphi approach, you give each expert questionnaires, serving them in multiple rounds. You also have a facilitator, and their job is to summarize the findings of the survey.
Using Wideband Delphi, you may be able to reduce the cost and time it takes to develop your estimation, particularly if you condense the sessions into a relatively short period of time, such as three days.
What Are the Different Software Development Estimation Tools?
By combining the above methods with the tools below, you get a well-organized, easy-to-implement estimation system.
Work Breakdown Structure
The Work Breakdown Structure (WBS) is a tool that decomposes a project into smaller components. It provides the necessary framework for detailed cost estimation and control. Also, it supplies a guide for schedule development and control.
There are two representations to Work Breakdown Structures:
- Outline View, which gives a representation of the entire project. It uses numbers to record the various stages of software development.
- Tree Structure, which displays the final deliverable on top. Also, it shows a row of all project stages underneath.
Read: 5 Powerful Productivity Tools For IBM i Software Developers
PERT Chart
PERT stands for Program Evaluation and Review Technique. A PERT Chart enables you to schedule, organize, and coordinate tasks within a project.
A PERT Chart utilizes a three-point activity estimating technique — M, O, and P.
- M refers to the most likely time and money required for the project.
- O stands for optimistic situation. It refers to the best-case scenario for completing the project.
- P stands for the pessimistic situation. It refers to the worst-case scenario.
When combined with actionable numbers, MOP simplifies the estimation process while also adding pragmatism to the process. This ups the ante for dev teams that may find themselves competing with other departments for funding.
Product Backlog
A product backlog is a prioritized list of tasks that need to be done to complete the project. It’s one of the more useful tools for software development estimation because you use story points to estimate the product backlog. It allows you to get an idea of the effort required to complete the project based on individual elements of the process. The most important tasks are shown at the top of the product backlog. Therefore, the development team knows what to deliver first.
Software Development Estimation: Do’s & Don’ts
Here are some best practices and things to avoid during the software development estimation process:
Do’s
Ö Break down large tasks into more manageable ones. The work and time involved in completing larger tasks is far more difficult to estimate than what goes into individual chunks of each milestone.
Ö Use historical data and previous experiences. The amount of time it took to do certain tasks provides a good starting point for estimating current to-do items.
Ö Use estimation methodologies. The methodologies outlined above add structure to your estimation process. They also make it easier to replicate when you have to assess the costs of future projects.
Don’ts
X Blindly guessing. You don’t want to just use a “gut feeling” as you estimate
X Using a one-size-fits-all approach. Due to the complexities of tasks, especially when you have to factor in different app requirements and development environments, each project is unique.
X Ignoring external factors. You have to also take meetings, code reviews, extensive testing, and other non-coding tasks into consideration.
X Setting your estimation in stone. Every estimate has to be flexible to account for real-world development conditions.
How can LANSA Help your Software Development Estimation Effort?
LANSA offers expert application development services, bringing over 35 years of experience to help your organization. Our deep development history makes us a reliable resource for both building your solution and giving you accurate estimations. Whether you need a detailed estimation via a consultation or you’d like us to take on some — or all of your dev process — our team is ready to put our expertise to work on your behalf.
Contact us to get started today.
References
Crowther, David. “Apple Releasing New iPhone but Still Trying to Find Next Big Thing.” Sherwood News, 6 Sept. 2024, sherwood.news/tech/apple-its-glowtime-iphone-event-finding-next-big-thing.
—. “The Billion-Dollar Price Tag of Building AI.” TIME, 3 June 2024, time.com/6984292/cost-artificial-intelligence-compute-epoch-report.
