Key steps to accurately estimate software development costs 

Project teams often make mistakes when it comes to the costs of developing software. It seems like this happens because of the little things that appear during the project’s development, but in fact, we could have discovered and taken them into account in advance. 

The article contains simple and, at the same time, useful recommendations as well as a method for calculating software costs. This will come in handy to a project manager, architect, system analyst, IT solution sales manager, and everyone else involved in estimating software development cost of fixed format. 

We will only focus on how to calculate software development cost, estimating the duration is a completely different story. 

Why is accurate software development cost estimation important?

Any scale of software development process requires a sufficient budget, which can easily inflate with hidden expenses and grow out of control if not planned and estimated in a timely manner. Software development costs are significant to allocate, since such workflows can be very dynamic and unpredictable. 

Budget overruns 

If you are looking to lead a cost-efficient software project with a clear ROI as the outcome, you want to prevent the budget from being overrun by hidden and unnecessary expenses. The primary reason for unexpected development costs arising is poor and insufficiently accurate project cost estimation.  

Resource allocation 

Efficient project management that drives truly successful cases relies on well-structured software development teams and insightfully distributed resources. A thorough, article-by-article, preliminary cost estimate is at the core of project team structuring, defining the size, skill depth, and productivity of the team.  

Project planning and scheduling 

Without clearly estimated software costs, it is nearly impossible to set realistic deadlines and development process milestones. In turn, the financial predictability achieved through timely and detailed cost estimates helps lead a project confidently and flexibly.  

Workflow confidence and decision-making 

The ultimate effect of accurate software cost estimation comes down to a failsafe, future-proof software development project workflow that’s flexible enough to steer it in the right direction at the right moment. No need to rethink software development pricing models, refactor products, or renegotiate contract agreements mid-project.  

Other risks 

Unpredictable projects are the riskiest. Unexpected, unaccounted-for bumps and challenges can make already complex projects, e.g., custom software development workflows, even more complicated, expensive, and ultimately prone to failure. 

Factors affecting software costs

The vast majority of projects on the market are completed based on a fixed price cooperation (when the budget and terms are planned, at the stage of sealing the deal).  

When evaluating a project, the team must, in addition to standard risks and problems, consider other relevant factors that ultimately impact software development costs. 

Factor 1 — Project scope and requirements 

The breadth and depth of features, functionalities, and integrations play a central role. A project with extensive user roles, real-time data processing, or integration with legacy systems will typically incur higher costs than a simple application with basic features. 

Factor 2 — Technical complexity 

Complexity in design, architecture, and technology — such as advanced security, performance optimization, or high-end technologies like AI and blockchain — requires specialized expertise and careful testing, which drives costs. 

Factor 3 — Team composition and expertise 

The skills, experience, and even geographic location of your development team affect hourly rates and productivity. For instance, teams in high-cost regions may charge more, while leveraging experienced professionals can reduce time spent on rework. 

Factor 4 — Development methodology and process 

Do you follow Agile, Waterfall, or hybrid methodologies? This defines your project timelines, communication overhead, and risk management options. Keep in mind that iterative development approaches may require additional upfront planning time, but can reduce costly changes later. 

Factor 5 — Infrastructure and ongoing maintenance 

Costs for development environments, third-party services, deployment platforms, and post-launch support—including bug fixes and updates—should all be factored into the total cost of ownership. 

As for some pro tips, here’s what can help you smooth out all of the above factors when conducting a software development cost analysis: 

• Obtaining accurate estimates on the budget and terms before writing a technical task, including them in the contract, and then, during the implementation of the project, strictly controlling the budget and terms.  
• Flexibility on the part of software development teams, the implementation of all customer requirements that appear during the project (since the customer often doesn’t know what they want until the middle of the project). 

The development team should be ready at all arms to perform to the best of its ability. And it is the transparent software development cost estimation that helps prepare all the necessary conditions for such performance.  

The positive and negative impact of various factors on the cost

In the event of unsuccessful project management (if the team follows the client’s lead), the team easily misses deadlines and exceeds the budget, as the contract is signed and the budget is agreed upon; thus, they work at a loss.  

Insufficient preliminaries 

The estimated software development cost is often determined without a sufficient analysis of project requirements; tasks are insufficiently and incorrectly scheduled, and very frequently, only programming is included in the estimate. At the same time, testing and management don’t receive proper attention. 

Business factor 

When signing a contract, the sellers meet the client halfway by lowering the price, and the team, represented by the project manager, doesn’t defend its position firmly enough. At the same time, all participants are focused on the result — each participant sees/foresees the problem and informs the manager. 

Lack of professionals 

There is also another factor — the variety of projects, systems, and technologies, as well as the lack of qualified specialists. This means that when planning a project, architects or project managers may not consider the possibility of having a specialist on the team who has not previously performed such tasks or someone with insufficient qualifications. In this case, the performance is likely to be lower than expected. 

How to calculate the software project cost accurately?

First, examine the problems and attempt to find a solution.  

Problem 1 — The client wants to know the exact figures for the project’s cost and deadline before signing the contract.  

Solution:  

• Identify and formulate the acceptance criteria for work. How to do it? The customer needs to ask the right questions: “How do you know that the project is successful?” and “Who, to whom, and how will they hand over the system?”, as well as ask the person who will make the decision, “What needs to be done for the project to be accepted?”.  
• Identify as many requirements and, most importantly, constraints to the project (i.e., not only functional but also non-functional requirements) as possible.  
• Test requirements. In simpler terms, confirm that the written requirements are realistic, consistent, and formulated in such a way that it is possible to check whether the solution corresponds to them.  
• From there on out, compose the list and options for solving problems as detailed as possible.  

Problem 2 — The client wants to see a detailed list of works so that when agreeing on the project cost, they can eliminate the most inappropriate items.  

Solution: In the workflow plan, it is essential to highlight all tasks, not just the “visible” ones. For instance, there are user requirements for viewing specific data. The team identified what tasks needed to be completed and estimated the total amount of work at 56 hours, breaking them down as follows:  

• ability to view all records — 8 hours 
• filtration by field 1–8 hours 
• filtration by field 2–8 hours 
• sorting by field 1–8 hours 
• sorting by field 2–8 hours 
• grouping by field 1–8 hours 
• grouping by field 2–8 hours 

But as a matter of fact, these tasks have basic functionality — creating tables in the database, storing procedures or views for selection, building business objects, connecting them to the security module, connecting to the logging module, configuration, and so on.  

What happens if the customer says, ‘No, it’s taking too long’? Let’s reduce and eliminate the grouping and sorting tasks (resulting in a 32-hour reduction). At the same time, the seller, who is discussing the work on the project, has nothing to say. On the other hand, the entire volume cannot be reached in 24 hours.  

How to calculate software development costs in such a situation? I recommend highlighting the basic functionality. In this case, this “Fetch data from the database” task takes, say, 28 hours, and the other tasks take 4 hours.  

This will allow the seller to behave more correctly. By removing unnecessary features, sufficient development time will still be available.  

Problem 3 — A detailed analysis of the requirements, the composition of a technical task, and a clear area of work on the project occurs after the contract is signed. 

Solution:  

• Identify as many requirements and constraints for the project as possible that need to be implemented in the system, and determine how to formulate and verify each requirement correctly.  
• Very often, it turns out that the tech reference points the client removed previously still appear. You must handle them anyway, and that’s why it’s best to specify limits to the project’s scope in the contract. It should include all items that the customer removed from the proposed plan, as well as any other items that the team identifies as clearly outside the scope of the project. All software development methodologies focus on this. In fact, this can be formalized as an addition to the contract or as part of a technical assignment.  
• It’s very important to define the work that needs to be done by the customer. This should be recorded in the contract (annexed to the contract, or in the terms of reference), along with the indicated deadlines.  

Problem 4 — Almost until the middle of the project, the customer does not know what they want (not to mention the stage of collecting requirements).  

Solution:  

• Include a time frame for possible changes (i.e., at what stages changes are possible);  
• Schedule periodic demonstrations (for example, once a week during the requirements gathering and planning phase, and once every two weeks during the development phase) and factor in the labor costs of preparing and running them.  

Demonstrations should be carried out not only for business clients but also for employees of other customer departments potentially involved in the project (system administrators, target audience of users, security service, etc.)  

This will enable the receipt of comments in the early stages, facilitate discussions on pressing problems, and allow customers to become accustomed to the user interface and software functionality.  

Problem 5 — The client wants the team to be flexible about their wishes (changes, additions) and implement them within the project, and not within the framework of subsequent improvements. At the same time, the client absolutely doesn’t want to hear anything about the changes in the budget. 

Solution:  

• In the project plan, we explicitly include time for possible changes (we lay a buffer in terms of time and budget, outside the inherent risks), which, at the request of the client, will be spent on the changes and improvements needed. This, first and foremost, makes it possible to work on changes within the project. Secondly, it prompts the customer to think carefully about change requests, as this resource is already clearly limited.  
• Consider an iterative design approach and plan the iterations accordingly. Take into account the number of meetings, performances, demonstrations, and other events.  
• As mentioned above, in the contract (as an addition to the contract or in the terms of reference), we include a condition that describes everything beyond the project’s scope.  

Problem 6 — The client requires extensive documentation on the underlying framework.  

Solution: We include the cost of creating documentation in the software development cost calculator.  

Problem 7 — If the project team is formed anew, there is a risk that the qualifications of one or another specialist may be lower than expected.  

Solution: When calculating how much it costs to have software developed, planning tasks, and time for their implementation, it is necessary to focus on specialists at a level lower than expected to be involved in the project  

Problem 8 — IT technologies and tasks are becoming increasingly complex, making it more challenging to identify the pitfalls of selected technologies at the early stages. 

Solution:  

• It is necessary to include a specific time for risks in the plan, which the team can use at its discretion.  
• Carry out tasks related to risky technologies as early as possible.  

How to estimate software: Best practices

IT technologies and tasks are becoming more complex. Identifying the pitfalls of selected technologies is a challenging task. How to estimate software development costs, where to start? In short:  

• Understand what needs to be done to achieve the project goal and deliver in the best possible way 
• Identify as many requirements and constraints for the project as possible 
• Test the received requirements 
• To determine how much it costs to develop software of a particular type, involve all relevant professionals 

Apart from these brief pro tips, make sure to also explore some of the standard best cost estimation methods, like the following approaches to project-wide  

Parametric cost estimation 

In terms of a parametric approach to software cost analysis, you take historical data and run it through pre-planned mathematical models against a set of project parameters. In simpler words, you use existing software, data on its creation, and formulas or industry benchmarks to get a precise outlook of every article of expense.  

For instance, parametric software cost estimation helps identify and segment the primary variables that drive costs, such as lines of custom code, hours per project task, and features.  

Pros: 

• It is more accurate than analogous estimation if reliable historical data is available 
• Scalable for different project sizes and complexities 

Cons: 

• Requires detailed historical data for a precise estimate 
• It can be complex to implement without proper models 

Analogous cost estimation 

Alternatively, this approach involves comparing analogous projects, i.e., those similar in structure or previous projects, to identify rough edges and stand-out expenses. Here, past project data is typically used to conduct an audit, inform expert judgment, and create rough estimates.  

The outlined differences in project scope, structure, and technical complexity can help eliminate extras and adjust costs accordingly.  

Pros: 

• Fast and easy to apply, especially in early project stages 
• Useful when limited data is available for new software development 

Cons: 

• Less precise, as no two projects are exactly alike 
• Subjective and dependent on expert experience 

Bottom-up cost estimation 

A bottom-up cost estimation process allows for breaking the project into smaller parts, conducting an accurate cost estimate for each, and summing them up for a final breakdown.  

This method relies on a Work Breakdown structure (described below), which is a common task sub-division approach.  

Pros: 

• Detailed and accurate, perfect for highly complex software. 
• Provides transparency in cost distribution. 

Cons: 

• Time-consuming and resource-intensive. 
• Requires a well-defined project scope to be effective. 

Costs of developing software — Useful tips

To correctly estimate software costs, follow these rules:  

• To achieve the project’s goal, break it down into custom actions, which in turn break down into tasks, and these tasks break down into subtasks, and so on. And so on, until each task becomes understandable to a junior specialist and has clear criteria for checking its implementation 
• Remember to highlight basic tasks that cannot be ruled out 

Don’t forget to consider the following tasks:  

How to estimate a software project example

At DICEUS, we prefer employing well-tried and tested approaches — the Work (or Project) Breakdown Structure (WBS) for dividing projects into milestones and elements, and Critical Path Analysis (CPA) for sequencing tasks and activities.  

The convenience and efficiency of these approaches lie in breaking the big picture of the project down into smaller parts and components. Thus, you can cover the entire project scope in detail, step by step, without missing any minor details.  

A CPA plan is based on WBS, meaning that the known project scope (terms, team composition, budget, etc.) must first be broken down into tasks, each with the respective number of hours required for completion. Everything should stay sorted.  

Steps to take to estimate software project cost

There are many ways to estimate software development cost metrics, but the main trick is to keep things gradual and segmented. Here’s what you can do.  

Use a Work Breakdown 

First, a Work Breakdown Structure helps put everything into shape:  

• Categorize and sort project tasks by priority, with each task under the responsible employee 
• Set the time each task will take to complete based on your employee’s capabilities.  
• Define connections and dependencies between the tasks 
• Establish milestones that the project is to go through and deliverables it must bring as a result 

Continue with Critical Path Analysis 

Critical Path Analysis should take place based on the sorted tasks. Essentially, you need to review each task and its associated work hours and identify the most vital sequence (the longest path of completion).   

Based on that, you can make adjustments — prioritize some tasks over others, move some activities ahead of others, and identify where possible downtime would cause the least harm.  

With such planning in hand, you’ll easily calculate the most realistic deadlines and project frames, including the earliest and latest dates, optimal start and finish dates, healthy downtime, and deadlines. 

Example of calculating the costs of developing software

Here’s how we approach in-house development team’s performance. Suppose we need to create a new software feature that requires two specialists — software developers and QA experts — to handle full-on frontend-backend development of an asset. Each specialist has underlying stages to complete, including development, testing, deployment, and review 

We take our two specialists, assign the basic tasks to them, and define how many hours each would take to complete:  

Developer tasks	Hours	QA Expert tasks	Hours
Tech task breakdown	0,5 hrs	Specification review	1 hrs
Frontend	12 hrs	Test cases preparation	1 hrs
Backend	6 hrs	Test cases execution	6 hrs
Unit & integration testing	2 hrs	–
Code review	0,5 hrs	–
Code deployment	1 hrs	–
Total	22,5 hrs	Total	8 hrs

All in all, we can see that the whole scope of work involving these two specialists would take approximately 30,5 hours. Always count the longest outcome possible to have backup hours for unexpected situations. With this number of hours in hand, you can now easily calculate the cost of implementing an asset based on the rates you offer.  

If you need to analyze a more complex and multifaceted process with many tasks to be implemented, use the same scheme for each separate feature and activity.  

Final thoughts

The cost of software development is paramount to plan through, estimate, and double-check at the earliest stages of the project. The consequences of failing to do so may be just too complicated to handle, and, in any case, the budget shapes the capacity of the development workflow you launch.  

Do you have a software product vision in mind that calls for a cost-efficient software solution development workflow? 

Seasoned specialists at DICEUS consult and guide project planning, implement technical parts of any complexity, optimize and integrate existing software, and offer more custom software services.  

FAQ