**06**

*Jul*

### What is Cost Estimation in Software Development & Learn to Calculate it?

Are you planning a software development project? If yes, then welcome to the club! Software development projects are a lot of fun. However, they can also be quite challenging if you don’t know how to plan your time and resources right. Software development cost estimation is one of the most crucial aspects of any software development project. It is so important that many organizations have dedicated teams solely for cost estimation and to figure out **how to reduce software development costs**.

This article will give you an in-depth understanding of what cost estimation is? and how it plays a vital role in software development projects.

**What is Cost Estimation?**

Cost estimation is an attempt to predict the cost of a project and decide how much budget to allocate for it. The estimation also plays a significant role in determining the scheduling of various stages involved in the project. If we clearly understand the cost estimation of our project then we can properly allocate the resources and accordingly plan out the activities we need to do during the project.

Cost estimation consists of two parts:

**1. ****Analysis**

The analysis part helps you understand the cost of various activities that would happen during the project.

**2. ****Estimation**

The estimation is what you do to come up with a rough estimate or a range of costs for the project.

You can divide the project into various project parts for analysis and estimation.

**How to Calculate Cost Estimation in Software Development?**

The cost estimation in software development will be slightly different for every project. You can move forward with it according to various approaches. Some of them are:

### ● **Activity-based Cost Est Ascertainment**

Activity-based Cost Estimation is a popular technique used to estimate future project costs based on actual work spent on each item. Each activity in your project is assigned a value. The sum of the values assigned to all activities is calculated as your cost estimation.

The advantage of this approach is that it does not require the estimation of specific project tasks, but only the cost of the underlying activities. It enables the software development cost estimation for more general tasks such as project management, software development, and testing.

### ● **Person-Hours Estimation**

This method estimates future costs based on the number of hours spent on the project. In this case, the cost for each activity is multiplied by the number of hours that activity takes. The two most important factors here are the rate used to calculate the person-hours and the number of hours used to calculate the cost.

For example, if the rate is $100 per hour and the number of person-hours used is 40, the cost estimation is $4,000. This method doesn’t require you to estimate project activities and is an excellent method to estimate future costs if your project scope includes work you have done in the past.

### ● **Task Duration Estimation**

This estimation technique uses the duration of project activities as a factor in determining the cost estimate. In this case, each activity has an assigned duration, and the duration of each activity is multiplied by the cost of that activity.

The total expected duration of the project is then divided by the total estimated cost to get the cost estimation per hour.

The advantage of this method is that it is an estimation technique that does not require you to estimate project activities. We can use it for projects where there are no previous projects that you can use for reference.

### ● **Weighted Average Estimation**

This method is likely the most straightforward and commonly used technique. It uses a weighted average to estimate the cost of your project. The sum of estimated costs is divided by the number of hours to get the cost estimation per hour.

The method is straightforward but requires you to estimate the required hours to get the work done. While it is a good estimation technique if your project scope includes work you have done in the past, it is not a good technique for estimating future costs if your project scope includes work you’ve never done before.

### ● **Sum of Products With Multiplication**

This estimation technique is a combination of weighted average and multiplication. It is one of the most accurate estimation methods, but it requires a certain level of advanced analysis, so it’s not a technique that you should use lightly.

The estimation technique works by estimating the duration, cost, and quantity of your project elements and then using the summation formula to multiply the cost by the quantity to get your cost estimation.

This method is used to get the cost estimate for each element and is not used to get the project's total cost.

### ● **Minimizing Change Marks**

It is an estimation technique used to estimate the cost of correcting errors on the project. The cost of changing a project due to errors is known as a change mark.

It is estimated by taking the estimated cost of the project and subtracting the cost of correcting the errors on the project. The result is the cost of minimizing the change mark. It is best for projects with a high level of control and accuracy.

### ● **Using Historical Data to Estimate Future Costs**

This estimation technique is used to get the cost estimate for projects that are similar to your project. The project elements in your project are assigned estimated values, and the cost estimate is calculated by multiplying the estimated values with the cost factors.

For example, if your project elements are Man-hours, Software, and Hardware, the estimated values are 20, $1,000, and $10,000, and the cost factors for each item are $100 for man-hours and $10 for software and $10 for hardware. The cost factors are assigned predictably and used as the basis for assigning values. You can use the estimated values as a reference to estimate your project cost.

### ● **Using Analytics to Estimate Future Costs**

This is a sophisticated method that uses advanced analytics to estimate the cost of your project. The estimated cost per hour is calculated by multiplying the type of analysis (e.g. project management, granular, specific code audit, etc.) with the cost factor (e.g. $100 for project management, $10 for granular code audit, $1 for project risk audit, etc.).

The more advanced the analytics, the more accurate the estimated cost per hour. The advantage of this method is that it is an estimation technique that does not require you to estimate project activities. It can be used for projects where there are no previous projects that you can use for reference.

**Conclusion**

Now that you understand how to calculate software development costs, you can use these techniques in your projects. When you comprehend how to calculate cost estimation in software development, you can better manage costs, reduce software development costs and ensure that your company always has enough funds to complete projects.