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Development Costs Estimation: How to Calculate the Budget Accurately

Julia Beyers Jul 29, 2019
“I want an Uber-like app, what’s the cost?” — this is a typical incoming request every outsourcing firm receives. Potential customers not only want to know the cost, but they also want it quickly.
For example, according to this study, an application like WhatsApp will cost $150,410-$192,920, and a platform similar to Facebook will take up to $364,000-$403,000 to develop. But that’s not an acceptable budget of a startup. And we don’t even know whether it was a budget for the first version, and how much they spent on updates so far.
In fact, everyone can make rough calculations by simply multiplying the common elements, which form the cost of the app development . More precisely, these are features time, and hourly rates.
This approach fits both developers and clients who want to understand the approximate budget needed for app creation. Keeping this method in mind, we want to describe additional alternative methods used by developers.
So, what are other options for estimating costs? There are a few approaches with varying accuracy. No silver bullet here — every team tries to adapt known practices to realistic outcome. But you’d better be prepared and know about the available options.

When to estimate the costs?

Before jumping to the methods, there is one important detail you should consider. It is never enough to estimate the costs only before the development begins. During the planning stage, estimates are somewhat adjusted, so the team leaders and investors can understand if they want to work on the project.
Once the development is launched, it becomes possible to make more accurate estimates.
It is normal to reevaluate the cost throughout the project. Moreover, it is even necessary to make new estimates at different critical points. You should always be ready for unexpected events that increase the budget of the project. But the longer the task takes, the less accurate its costs estimation gets.
Also, along with some fundamental activities, there are secondary tasks that complement them and pop up throughout the development process. Therefore, we can define the key points when the costs should be evaluated:
When planning the project:
At this stage, you can base the estimate on the judgments of experts or your analysis of comparable projects. This estimate shows a spectrum of costs that can span from -25% to +75% of the real development budget. It helps to understand if the development is feasible.
When defining the development process:
This is usually done after the design and features of the first project version are set.
When identifying the tasks:
Once there is a somewhat defined scope of tasks, and the anticipated results are more or less clear.
When undergoing initial development:
After the development process is launched, and there are clear goals and expected results.

When assigning tasks:
When the number of involved people is clear, and the rate of each specialist is known.

Throughout the development phases:
When secondary tasks or requested changes occur.
Of course, there is no one-size-fits-all solution for cost estimation at different stages of the development. So let’s proceed to the methods of calculation.

What are the main methods of cost estimation in software development?

Here are the most popular approaches and the best practices for cost estimation. The estimators often combine several techniques to achieve maximum accuracy. Thus, they can begin with a less accurate method and gradually move to the most precise one.
Analogous:
This method relies on the experience with past projects. You have three ways to estimate the costs using this approach:
Invite an expert that can define the approximate scope of tasks and estimate the costs; Use your own experience with similar projects; Study similar projects on the market and base your estimate on this data.
This approach is useful in two cases. The first one — the company deals with similar projects regularly. The other scenario — the project is not clearly defined, but you need to show stakeholders the numbers so that they could decide whether they want to invest in the project or not.
With this approach, accuracy usually varies from 30% to 60%. It is not the worst option, but still, one can’t entirely rely on this estimate.
Analytical
This method is the most accurate. It is applicable when the structure and the scope of the project are clear. Therefore, the estimation process can be divided into several stages. First of all, you need to evaluate the cost of every single task and gradually come to the estimated total price of the whole project by summarizing the rates for jobs.
This method takes a significant amount of time though. So, the more complex the development process is, the longer the estimation will take. Still, analytical approach gives precise results. It is often combined with other techniques to make the estimate more accurate and accelerate the calculation process.
Although this method is very adaptable, you can apply it only once the development stages are clearly defined.
Parametric
If the development process consists of similar repetitive tasks, the parametric method is excellent for budget estimation. All you need to do is to divide the development process into units — the tasks that repeat. Next, calculate the price for every part, and multiply the result by the number of corresponding units.
This approach doesn’t perform well for creative projects that have not many repetitive tasks. The parametric method will suit the development process of the complex program. However, it can also be used for baseline estimate at the early stages of project design.

How to avoid uncertainties in cost estimation?

Obviously, the main ingredient of accurate cost estimation is data. When you know the scope of the development process, the price of every separate task, and which possible secondary tasks or changes can occur — you will most likely calculate the budget precisely.
Several details can affect the precision of cost estimation though:
Not enough experience with corresponding projects. In this case, you should invite experts and study similar projects executed by other companies as some of them can publish their case studies.
The project will take a lot of time to complete. For complex development processes, you should reevaluate the costs as the currency rate, salaries of employees, and other details change.
You think that employees are 100% efficient. There are always unexpected situations or events, so while evaluating the budget take the human factor into account. Suppose that your team members are maximum 80% efficient.
Consider all these nuances while calculating the development costs. Also, if you want to have more chances of getting your project funded, add expert opinions and studies of alike projects to the description of your cost estimate. It will give you more credibility and make investors trust your calculations more.

To conclude

Specialists support their opinions with the knowledge and experience they have. Therefore, even if the estimate might seem either too low or too high, you should trust their point of view simply because they have been working with similar projects and know all the nuances you might neglect.
You can always contact several development teams, compare estimates and ask for explanation. And don’t forget, your choice is not only based on numbers, it’s the team you will need to work with. So, you’d better see it as a pleasant sort of cooperation.