How to Accurately Estimate Software Development Costs

by David Burkett, Sep 30, 2016

When deciding to outsource software development one of the key concerns of potential customers will be how much the software will cost. If there is little detail about the requirements, then a chicken and egg problem begins because it is impossible to accurately quote on a build if you don’t know what the build is. Most software development companies get around this problem by simply taking the cost of the largest build they have done previously and multiplying it by 3. This - in theory - leaves enough wiggle room for scope creep and some profit. But this is not our recommended practice!

The overall effect on the software industry for this type of costing is negative. Projects fail due to inadequate scoping, or software is built below par because the software development vendor does not truly understand their craft. 

"If you can't describe what you are doing as a process, you don't know what you're doing." - W. Edwards Deming

I believe that we must commit to more design and scoping up front to negate this problem. In fact, I believe we must go one step further and make sure all the scoping documents that are produced are meaningful to software bots so that they can efficiently write code alongside the human software developers.


The first important step in achieving a more accurate costing is to thoroughly scope the project. At the initial stage you are scoping for the minimum viable product (MVP). It is important not to do everything at once but to instead focus on establishing a detailed explanation of the core functionality of the MVP.

This scoping process involves what I call ‘knowledge transfer sessions’ with a client, where you develop rapid iterations of the user flow and requirements. During these sessions it should be established with the client what will be in the MVP scope as well as completing a text-based user flow. By the end of the first session you should come away with a map of how the project will work. The next step is to create a low-fi user experience (UX) to get anidea of what the software will look like. Then you move to developing a hi-fi UX to establish concepts such as branding and colours.

Some software developers will make the mistake during the costing process of skipping the examination of concepts such as the branding of the product. Others may even cut the low-fi user flow out altogether. However, if you don’t have what the application actually is down pat before development then a client will be more likely to face unexpected costs due to changing requirements or functionality. A more thorough scoping process of brief, low-fi then hi-fi with development during ‘knowledge transfer sessions’ will help developers get the requirements right the first time and make for a more accurate cost estimate.

Agile Processes

From here the estimate can become more accurate if the developers work with an Agile methodology. Breaking down the pricing into sprints allows for costing to be assessed per iteration rather than a rough overall figure.

Traditionally, companies work with one big plan which they create by developing a strategy, operation and tactic from the start. They come up with a list of requirements for this plan, evaluate how long the project will take and then provide a cost estimate. The downside to this strategy is that the feedback and learning process then can’t come until the end of development.

One example of this is the massive blowout that happened concerning the government contract with IBM to develop a health payroll system. The project was contracted to IBM in 2007 but was plagued by delays and budget blowouts. When the release finally happened the system failed, resulting in a complete scrapping of the project. However, IBM was still wanting the full payment of around $1.2 billion. This failure can be linked to developing without effective scoping.

Working in iterations allows you to build to achieve smaller targets. At the end of each target you can obtain valuable feedback to assess if you are still working towards the right project goals. This provides huge costs savings because you can pick up changes that need to be made to requirements at a much earlier stage in the build. This prevents situations, like the health payroll system, where customers are not aware of issues until the final product is released and the final payment is due. For example, if you have a plan to develop a project in 3 sprints and through feedback identified changes to the requirements after the first iteration, then you could save on the final two thirds of the cost by picking up on the issue earlier. For this reason the agile methodology can help to give a far more accurate final project estimate.

Developer Costs

After identifying the costs of each iteration, a business should then work out how many developers will be needed to achieve each sprint. This figure is then used in combination with the cost of the sprints and multiplied out. However, this is the part of the process that can often blow up the overall project cost. Generally in Australia the average software developer salary is over $83 000 per year. Additionally, software architects and senior developers can earn on average over $120 000 and up to $176 000 per year. These figures can persuade businesses to turn to offshore software development.

Offshore software outsourcing can appear a much cheaper alternative because of the lower wages afforded to overseas developers in countries like India. However, offshore outsourcing comes with a variety of long term risks and may involve unexpected costs such as legal fees or additional training costs. In fact one of our previous articles about the ‘20 risks associated with outsourcing offshore’ noted that figures suggest the final sum up of offshore development can leave expenditure up to 65% higher than estimated.

Alternatively, WorkingMouse has developed a solution to lower the costs associated with paying for developers onshore. Our software bots are able to generate more than 90% of our code, which significantly reduces the workload of our developers and testers. The result of this is that a project will require a much smaller number of developers and testers to build it. In turn this will help reduce the overall project cost for clients.

Using these three strategies to refine the costing process for building software will greatly help towards achieving a more accurate estimate. Reducing unexpected costs can in turn help maintain a better customer satisfaction level and so is beneficial to both the software developers and customers. More importantly though, implementing a thorough scoping process will lead to a higher chance of creating successful software.

If you want to read more on outsourcing, check out David's article on how you can protect your IP when outsourcing in India