Determining the Cost of Software Development with Estimation & Requirements

Keeping a track of the cost of software development is no less than a challenge for stakeholders and project managers. An estimated 66% of software projects run into budget-related bottlenecks. The key to success in such a situation relies upon estimations and requirements.

Estimations and requirements function as the spine for software projects. Individually, these two components are capable of solving half of the developers’ problems. Estimation leads to an accurate forecast of the execution of a project. While requirements render projects more organized and systematic. It’s upsetting to see how the two still end up getting a shorter end of the stick. Looks like we’ll have to do something about it.

Estimation in Software Development – A Brief Intro

Estimation helps in accurately determining the cost of software development, the effort of resources, and the time essential for the completion of a software project. The whole process becomes easy when your team is equipped with a sound knowledge of complex tools and, well, maths.

Estimation gains further accuracy when developers leave a margin of 5% to 10% error. It also prepares stakeholders for the potential cost of software development they’re about to incur.

For every software project, estimation truly functions like a make or break. It creates a forecast involving an upfront investment of time and money. By estimating correctly, developers get a chance to come up with a product that perfectly matches the needs of customers.

Estimation is hard to get right on the first try. This could be the reason most developers tend to ignore it. However, once opted for, an estimation can enhance team communication while encouraging agile methodology.

Estimations in Agile Methodology

Resonating with what we said earlier. Behind every thriving software organization abiding by agile methodology, there are accurate estimations. Even after receiving the seal of approval from Ken Schwaber and Jeff Sutherland, the creators of Scrum. It’s a bummer to see how many software developers are still reluctant to opt for agile estimation as a regular practice.

It is true that agile estimation may not provide 100% accuracy in terms of cost and time estimation. However, if your project development is long-term then agile estimation would serve as a perfect guide that you and your team can work along.

Estimation in agile methodology assists in planning, managing, and estimating the accumulated efforts that go into implementing, testing, and delivering a product within the fixed deadline.

Unlike waterfall estimation which commits to a fixed budget and prerequisites. Agile estimation offers remarkable flexibility. If you’re certain of experiencing potential budget along the course of project development, then agile estimation is the way to go.

Albeit it is daunting, agile estimation packs an array of benefits. Let’s quickly jot them down below:

Agile estimation assists in…

  • Uncovering potential risks
  • Providing visibility into the project timeline
  • Tracking the progress against a specified deadline
  • Keeping the entire team on track

Agile estimation further breaks down into 8 techniques. As a project manager, you must brainstorm with your team before picking the technique that works out the best for your project.

Estimation – A Quintessential for Defining the Cost of Software Development

If you’ve always confused estimation with ONLY the cost of software development then we’re here to take that confusion away. The two do bear a remarkable resemblance to one another. But, here’s what sets them apart. You might want to put your reading glasses on for this one.

Stakeholders require quite a bit of convincing before setting aside the cost of software development. Usually, they expect project members to present an infallible plan that explains where each penny has gone. Along with insights into time limits and utilized resources. This infallible plan is basically the estimation.

Upon meeting approval from stakeholders, the estimated budget turns into actual, allocated funds. The funds are then utilized throughout the project. All in all, estimation allows project members to calculate the cost, effort, resources, and time required to complete and deliver a project, successfully.

If you’re thinking that estimation provides an exhaustive overview of the cost of software development, then hold that thought right there. Estimation only gives you a field to play along. The key intention behind it is securing investment and getting the project started. Of course, there’s always a chance that the cost may add up as you move ahead toward the development and testing phase.

As a project member, you must ensure that your estimation checks all the boxes of transparency and impartiality. Therefore, while you’re working on creating an estimation, be mindful of including the following:


Talk about all the details of the tasks that will span across the entire project.


Mention all the team members onboard. Remember to highlight the expertise of all the resources and the tasks they’ll be handling.


Don’t forget to mention the ratio of cost to time. Equip yourself with the basics of software development cost estimation before calculating the ratio.


Talk about the production hours or days that your team is likely to spend.

Use of Third-Party Services

Mention if any third-party services will be involved.

Let’s face it, software development unlocks an array of uncertainties: the timeline of the project, the resources needed, the tools and materials available, etc. All these turn into certainties once your team starts carrying out accurate estimations.

Establishing the Cost of Software Development with Estimation Techniques

Looks like we’ve had quite an intro to estimation. Now, it’s time to bust out the big guns – leveraging software estimation techniques.

Software estimation techniques enable project members to plan project estimates that coincide with the needs of stakeholders. Once you abide by software estimation techniques, you’d be able to give your clients/stakeholders a realistic outline of the time and budget going into the project.  

Types of Estimation Techniques

Bottom-Up Estimation

Project managers break down the main project into several tasks and subtasks in this estimation technique. The tasks requiring lowest-level activities, or work packages, are aggregated up to forthcoming levels. This process repeats until project managers have reviewed all the work packages and the final cost estimates have been revealed.

Bottom-up estimation provides more accuracy than the ‘top-down’ technique, which we’ll take you through shortly. Around 52% of IT projects suffer due to cost and budget overruns. If you want your project to stay far from budget-related pitfalls then bottom-up estimation is the way to go.

Top-Down Estimation

Top-down estimation evaluates the project on a holistic level and then separates it into several smaller tasks.

In terms of the final estimated budget, this technique emits far less accuracy than bottom-up estimation. Project managers ‘assume’ the total budget based on the size of the project, rather than defining the essentials.

Analogous Estimation

In this estimation technique, project managers compare and review the production cost of past projects with the ongoing ones. The resulting differences can be several including the project scale, the complexity, the deadline, current exchange rates, inflation, and more.

The results of this technique rely solely on how well your project managers have performed the analogy. If you’ve read our previous blog about technical debt management, then you should be able to recall that one size does not fit all. The same happens over here. We’ll quickly elaborate.

Let’s assume your project size is twice or half of the results of the analogy. Feel free to dial down or scale up the estimations to ensure they match your project needs perfectly.

Three-Point Estimation

This technique involves three data points: optimism, realism, and pessimism. Project managers then create three estimation ranges: the best-case estimation, the most likely estimation, and the worst-case estimation based on the data points. After that, an average of all the aforementioned estimations helps in determining the conclusive estimate, which project managers then utilize.  

The three-point estimation provides an accurate cost of software development along with the total time required to complete the project.

This kind of estimation technique works best for large projects.

Parametric Estimation

This estimation technique resembles analogous estimation, but it wins in terms of accuracy. Parametric estimation utilizes a mix of statistics and mathematics to calculate the resources, the time required, and you guessed it, the cost of software development. By aggregating historical data, parametric estimation yields immaculate accuracy. Plus, the more data there is, the more credible the results would be.

The best thing about parametric estimation is that project managers can easily reuse the formula models as a template for future projects. Plus, there’s also room for adjustments depending on the specific needs of a project.

Level of Effort & Effort Estimation – Some Additional Tidbits

Just like estimation plays a vital role in determining the cost of software development. There’s another document equally as important, known as the Level of Effort.

The level of effort offers support activities to all the key tasks of a project. While these support activities don’t exactly yield any deliverables. They’re responsible for speeding up the tasks that do. Overall, the level of effort is basically the accumulative effort required to complete each task. 

To give you a clear idea, let’s quickly walk through some LoE examples. Once again, these tasks don’t point toward a result. Rather, they assist in running the project smoothly.

  • Transparently communicating the ongoing progress to the stakeholders
  • Thoroughly documenting the progress in the form of timely reports
  • Maintaining communication with customers via emails, phone calls, etc.

Elaborating Further

Project managers usually calculate LoE during the initial stages: when task creation is underway. Bigger and more complex tasks require a higher level of effort. And establishing it earlier in the project development phase allows tasks to spread across the entire project more consistently. Team members share an equal workload, and meeting set deadlines becomes inevitable. 

Since we’re talking about tasks and the level of effort that goes within. Project managers can make their jobs relatively easy by practicing Effort Estimation. Allow us to take you through it.

Effort Estimation – The More You Know

A research paper published in 2021 defined effort estimation as a prediction of the effort required to develop high-quality software. Well, we can’t agree more.

Effort estimation is the process of quantifying the level of effort for different tasks along with their deliverables. By calculating correct effort estimation, project managers can gain clarity in terms of how much time, cost, and energy each deliverable would require. On the other hand, inappropriate estimation calculations may lead to badly executed software. And, no one ever wants to be there!

Right alongside resource and cost estimation, effort estimation fulfills a core purpose as well. Together, these estimations lay the basis of an all-inclusive, and infallible software project plan.

Looks like we’ve covered estimations as thoroughly as we could. Now, let’s move towards another software development essential, i.e., the requirements.

Requirements in Software Development – A Quick Walkthrough

Your estimations were perfect, and your product has hit the market. Does your job end there? Not really. With new hardware and software advances, the chances for your software or website to go outdated will always loom in the corner. This is where updates step in and save the day. And, to make these updates happen, project managers would introduce some new requirements.

As per IEEE standard 729, a requirement is a condition or a capability…..

  • Needed by a user to solve a problem or achieve an objective
  • Must be met or possessed by a system or system component to satisfy a contract, standard, specification, or other formally imposed documents
  • Is a documented representation of a condition or capability as in 1 and 2

In easier words, a requirement provides an indication of a must-have, could-have, or should-have to an existing product.

Classification of Software Requirements

You’ll find software requirements divided into two types: functional requirements, and non-functional requirements. Let’s get right to the details.

Functional Requirements

Functional requirements usually target a specific function that software must offer. A function usually comprises the inputs that go into the software system. The inputs can be data manipulation, business processes, user interaction, or any other function which would enhance the overall usability of the product.

Functional requirements pack several benefits. FR helps in checking whether your application is offering all the required functionalities; defining the functionality of a system or a subsystem; identifying missing requirements to define the expected system or behavior; fixing errors without causing financial damage and lastly, providing support to user-related goals, activities, and tasks.

Non-functional Requirements

Non-functional requirements – NFR – involve system characteristics including scalability, reliability, maintainability, usability, performance, and security. NFRs are just as crucial as functional requirements. They uphold the usability and efficiency of the entire software project.

Failure in meeting non-functional requirements renders the product incapable of meeting user, market, and business needs altogether. Implementing non-functional requirements leaves very little room for error. There’s no way you can overdo or underdo this.

Speaking of which. In case of overdoing, project managers might have to incur an added cost of software development. Whereas, underdoing renders the product incompetent to meet its intentional purpose.  

Why are Requirements Indispensable for Effortless Software Development?

Requirements play a vital part in software development for several reasons. They assist in determining the following things for a product: vision, cost, scope, and schedule. Additionally, the same components also ensure that the finished product is coinciding well with the quality and performance standards.

Another reason that earns requirements a point is their ability to bring all the stakeholders on a single page. From marketing to software engineering, requirements provide a uniform set of goals for stakeholders from various departments.

Moreover, sticking with requirements ensures that there are fewer instances of loopholes in design and functionality. And your end product turns out exactly how planned – accurate, and efficient.

Estimation & Requirements in Software Development – What’s the Connection?

Let’s rewind a little. We took you through estimation. Told you how it assists in predicting the cost of software development, the resources, their efforts, and the time the whole project is likely to take. Then, we took you across requirements. And discussed, how they help your final product survive the ever-growing competition. Now, let’s bring everything together and head toward a conclusion.

Once estimations are in, project managers use requirements to identify which business units would be functioning as the key stakeholders. And, which business units would be busy with the project, from start to finish.

Requirements also allow project members to track the progress and milestones completion. In case things begin to seem a bit ambiguous. Project managers can always revert to the original requirements and figure out their progress.

Lastly, requirements favor the overall cost of software development as well. Project managers and stakeholders can effortlessly monitor the actual amount spent v/s the allocated budget. Plus, unsolicited budget overruns also become a longshot.

Summing All Up

For software engineers, estimation turns into a nightmare for all the flaws it usually unlocks during the development phase. Hopefully, by reading this piece you’re confident enough to carry out accurate estimations. Remember, only through correct estimations would you be able to meet your project’s requirements effortlessly.

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Harris Solangi
Key Contributor:
Harris Solangi

VP Engineering
Disciplined with over 10 years of experience, Harris is highly regarded in the Technical Debt and Technology Asset domains.
Edited by Tissam Khan – Putting spellchecks behind bars, and producing tech-centered content from the Bat Cave read: home

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