9 Ways To Avoid Software Development Cost Estimation Mistakes (2024)

The world has seen a staggering number of software development projects come crashing down because they failed to consider cost estimation.

Following are a few business-critical questions you must ask before software development cost estimation: 

• Why does the software development cost increase? 
• Why is it important to calculate the cost involved beforehand? 
• What are the dependable ways to do software development cost estimation?

If you don’t, you may encounter major business failures due to poor cost-related decisions.

“For every $1 billion spent on projects in the U.S., there was a loss or waste of roughly $122 million—meaning that 12% of the budget for projects, on average, was wasted due to poor management, counterproductive behaviors, and bad decision-making”

Therefore, It is pertinent for you to understand what may lead to a sudden increase in cost to layout a low-cost mechanism. The question of the project timeline is as important as the case for cost estimation. When projects overrun deadlines, the cost is bound to increase.

“On average, large IT projects run 45 percent over budget and 7 percent over time, while delivering 56 percent less value than predicted”

To make it easy to understand, schedule overrun means the late completion of a project from the decided timeframe. But why does it happen? 

• Inaccurate project estimates
• Project with design flaws
• Leadership or administrative flaws
• No backup plan to resolve sudden issues
• Not having the required team
• Site management issues.

These factors are bound to influence the estimated project cost and therefore they should be given prior consideration. 

Recommended: Secrets to Achieve a Fault-proof Software Development Process

Why do most Software Projects Fail?

Project management tools used are statistical and often overlook the emotional components (human customer considerations) of the project. When in reality, these emotional components add greatly to the success of the project. 

Find below why most projects fail:

• Technical (Project management techniques and processes developed).
• Individual (Project Leadership, communication mechanisms, project scope, a timeline of the project, etc).
• Stakeholders (involved parties' input, involvement, and goal specifications).
• Technical debt (incremental costs because of poorly taken decisions to save time and money). 

9 Precise Ways to Estimate the Cost of Software Development Projects

Before jumping onto the cost estimation ways, it is equally important to understand its meaning, and of course what value it owes to the entire software development lifecycle (SDLC). Cost estimation is the process to calculate the overall project cost in relation to the specified timeframe and project scope. 

Make Stakeholders a Part of the Process

The involvement of stakeholders right from the start can lessen the chances of miscommunication in setting up the project scope. This allows everyone to set realistic expectations from the start to avoid schedule overruns ultimately exceeding overall costs. 

By doing this, you can facilitate the alignment of project objectives and cycles between the technical team and the business leader, ensuring mutual agreement. You can hold everyone involved accountable for the initial estimate.

Research and Research Well!

Never downplay the importance of research while putting together an estimation. Do market research on  “why most software development projects fail,” the strengths and weaknesses of the team deployed on the project, and the project feasibility in light of the ongoing trends, and financial and technical resources.

The more time you will dedicate to research, the more chances of you not falling into the pit of skyrocketing outlays. This is why extensive research always comes in handy and is an investment. 

Software Size and Complexity

The software size is the key driver in estimating the overall development cost The more complex the software, the more time and expertise it will require which in turn leads to increased costs.

It is important to determine the size beforehand and prepare accordingly. The cost will vary depending on the size and complexities of the functionalities. 

Factors that add to the complexity are:

• The complexity of product code
• Prototype and design
• Required technologies and tools. 
• Architecture components
• Third-party integrations

Project Leadership and Clarity of Requirements

After finding out  “Why do most software development projects fail?” you will stumble upon one common theme which is “Poor leadership and clarity of requirements.” You can hire the best technical resources in a bid to reduce costs and meet the deadline simultaneously.  But if you don’t have the right leadership, unfortunately, the chances of failure increase manifolds.

Perceptive leadership clearly understands the project requirements and conveys them to the team efficiently. They decisively handle unforeseen situations, significantly minimizing cost hikes. On the contrary, leadership that lacks clarity will deliver a flawed project, never on time, and far from anticipated business requirements.

Therefore, it is pertinent to enforce a systematic mechanism and end-to-end documentation of the software product requirements and anticipations. Below is what the tried and tested project management looks like at InvoZone.

Project Management Steps

#1: Active Listening - The Business Analyst digs deep into the client's idea of the product to create a mental image.

#2: Documenting the Idea - The Business Analyst outlines the technical and business requirements that eradicate any ambiguity regarding the product goals.

#3: Selling the Idea - The Project Head and the QA Analyst are brought on board. They take care of the due diligence required in their domains and create a realistic project plan with objective outcomes.

#4: Implementing the Idea - The development team is onboarded with a clear project plan that they implement throughout the limitless iterations. Every iteration promises a deliverable that keeps the stakeholders informed and allows for course correction.

#5: Reviewing the Product - Design, Code, and Quality are reviewed in parallel with the development process as well as at the end of milestones. This ensures that the scalability, reliability, and extensibility of the product are never compromised.

#6: Maintaining the Product - Once the product is available for the end-user to interact with, feedback coming in, positive or negative, is documented via ticketing systems that act as guiding lines for the future direction of the product. 

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Breakdown the Requirements to Enhance Transparency

The process of breaking down the requirements will not only simplify the tasks for better understanding but will allow you to dedicate each task to one team member. This will help deal with cost and time limitations.

• Besides, unclear requirements increase the project timeline and budget up to 60%.

When requirements aren’t split into parts, it becomes difficult to predict costs regarding the time required. This builds transparency among the stakeholders and the technical team involved regarding the time required to complete the project. Setting milestones is another great way to motivate and keep track of progress. 

Detailed yet Brief Documentation

Documentation is one of the initial and critical software development phases. Future-forward software development firms make sure to meticulously follow the below steps:

• A business analyst prepares the cost estimation document to make it accessible and repurposable.
• The document will clearly outline the objectives, scope, deliverables, timeline, and technical baselines for the estimate.
• The project’s life cycle cost will be mentioned.
• Outline guidelines and rules
• Estimation methodologies are discussed to explain each breakdown.
• Mention the results of uncertainty and risk analysis and if any contingency funds were identified.

In-house or Outsourcing Can Make a Difference

The software development cost varies with resource allocation methods. Outsourcing software development does cut costs, but at the same time, an in-house software development team has its own perks. Outsourcing is a great option if you can find an expert developer who can deliver a quality product in the decided timeframe.

Consider Initial Problems

If problems start to show up from the initial phase then it indicates that your chosen cost estimation metrics as discussed above aren’t working. Metrics help you measure each team member's performance individually.

It’s rare, to find all developers working at the same pace. After finding out the performance metrics, you will get a clear idea of task completion to avoid cost overruns.                               

If a few tasks aren’t getting completed on time, you can check where the friction lies. You can identify the causes of the delay and rectify them in time. It is better to identify a problem at the start and have it resolved before the final product release.  

But Most Importantly, Be Realistic!

Be realistic in your approach, expectations, and strategy for a project. This piece of advice weighs higher than every other when it comes to software project cost estimations. One of the reasons why software development projects fail is because the initial estimation and approach are set on unrealistic objectives.

Be realistic in the research, development, and testing phases of software development to avoid setbacks and failures.