How to Estimate Software Development

At Varyence, one of the most common questions we hear from our clients is: “How much will this cost? “.  It’s an important question—after all, accurate estimations can be the difference between meeting deadlines and running into resource and capital issues.

To help answer this, we’ve created this guide on how to estimate software. This guide breaks down the essentials of how to consider timelines, cost, and effort. It also covers techniques to avoid common mistakes that can derail a project.

The art of software estimation is something we’ve been working with for over a decade, and we’ve refined it with our team over the years. Misleading estimates can lead to missed deadlines, budget overruns, and even worse, failed companies. So, let’s dive into how we approach the process and the methods that work best in different scenarios.

Why Is Software Development Estimation Important? 

The main goal of estimation is to provide an approximation of the time, cost, and resources require to complete a project. Accurate estimates help everyone — whether it’s project managers, developers, or clients — understand what’s achievable within certain constraints. For instance, if a Product Owner needs to know when to release a new feature, they’ll make the decision based on estimated timeline and effort required. 

A recent client came to us asking for a complex feature addition to their SaaS platform. They had a rough idea of what they wanted, but we needed to align the timeline and resources. Using an accurate estimation, we presented a detailed plan, ensuring they didn’t experience scope creep or delays.

Effective software development estimation helps:

• Set realistic goals 
• Align project requirements with client expectations 
• Create a detailed scope and timeline 
• Choose the right project team 
• Provide cost estimations

Software Development Estimation Techniques: Finding the Right Fit

Let’s dive into various software development estimation techniques. We will explore when they work best and discuss the pros and cons of each method.

Over the years, we’ve refined these methods to ensure we provide more reliable and accurate estimates possible.

Please keep in mind that an estimation is just that, an estimation.

1. Analogous Estimation

This is one of the most popular methods, especially for projects that resemble ones we’ve done in the past. Analogous estimation involves comparing the current project to similar past projects, using historical data to predict the effort and time required for the new project. As a company with 12+ years of experience in technology we use these techniques to estimate regular software development projects where possible.

Often times clients would like us to create bespoke products which have no similarity to past projects. In some cases, the request pushes current technical boundaries and we need to first determine if the request is technically feasible. In those cases, we may perform a Proof of Concept (POC) or technical feasibility study. 

1. Perfect when:
   • You have a consistent team working on similar projects within a defined timeframe.
   • The project has similarities to past work.
2. Pros:
   • Quick and simple to implement.
   • Low resource requirement, saving time estimating.
   • Effective for high-level initial estimates.
3. Cons:
   • Less precision if the project has unique features.
   • Can lead to inaccurate expectations if over-simplified.

2. Expert Judgment / Planning Poker

This is where you bring the team together to share the collective experience to estimate the project effort. Planning poker is a gamified version where team members anonymously assign values to tasks, then discuss their estimates.

You can collaboratively assign time estimates for various tasks, and by leveraging everyone’s domain knowledge, compile a more accurate estimate.

1. Perfect when:
   • You have experienced professionals on the team. 
   • You want to leverage diverse perspectives to reach a more accurate estimate.
2. Pros:
   • High accuracy due to input from experienced professionals. 
   • Encourages team collaboration and knowledge sharing. 
   • Works well when project details are sparse or unclear. 
3. Cons:
   • Time-consuming, as it requires extensive discussions and consensus-building.
   • Can be biased by overconfidence.
   • Requires a high level of team engagement and involvement. 

3. Bottom-Up Estimation 

Bottom-up estimation breaks the project down into smaller tasks or components, estimating the time for each, and then summing these to produce an overall estimate.  

This approach is particularly well-suited for projects with detailed requirements.

For instance, when developing a multi-phase SaaS applications, we utilize bottom-up estimation. By assessing and estimating the time required for each individual task, such as integrating a subscription management platform or integrating a payment processing gateway, it provides more granular estimations regarding resource allocation and project timelines.

1. Perfect when:
   • You have the time and resources for detailed planning. 
   • You need granular estimations for the project’s scope and timeline. 
2. Pros:
   • Results in highly detailed and often more accurate estimates. 
   • Allows for early identification of bottlenecks or high-risk areas. 
   • Facilitates better resource allocation and task prioritization.
3. Cons:
   • Time-consuming and resource-heavy, particularly for larger projects. 
   • Can become overwhelming due to the sheer volume of tasks to estimate. 
   • Prone to micromanagement if not approached properly.  

4. Top-Down Estimation

Top-down estimation begins with a high-level project overview, followed by identifying essential tasks and estimating the overall project effort. It’s often used to set broad guidelines early in the project. 

When a new client approaches us with a vague idea, this method helps us set a rough estimate before performing detailed planning and estimation.

For example, when we started working with a new startup recently, the client wasn’t sure of the exact scope, so we provided them with an overall estimate based on their high-level vision.

1. Perfect when: 
   • You’re in the early stages of a project. 
   • You need a quick, strategic overview to guide initial decisions. 
2. Pros:
   • Fast to implement, saving time in the early stages. 
   • Provides a broad view of project needs and scope. 
   • Effective for rough, high-level resource forecasting. 
3. Cons:
   • Lack of detail can lead to vague or inaccurate estimates. 
   • May overlook finer aspects of the project, leading to scope creep. 
   • Can be overly optimistic, as it doesn’t dive into specifics. 

5. Three-Point Estimate / PERT Chart

In many cases, we use a PERT (Program Evaluation Review Technique) chart, which allows us to account for uncertainty by considering optimistic (O), pessimistic (P), and most likely (M) estimates —to calculate a weighted average of the project duration using the formula:

PERT Estimate = (O + 4M + P) / 6. 

• Optimistic (O): The shortest possible time to complete the task. 
• Pessimistic (P): The longest possible time to complete the task. 
• Most Likely (M): The most probable time to complete the task.

For example, during a recent product launch, we employed this method to predict the project timeline. By factoring in the potential risks associated with external stakeholders and dependencies, such as delays in deliveries or unexpected issues, we were able to create a more realistic and robust project schedule.

1. Perfect when: 
   • You need to account for variability and uncertainty in your estimates. 
   • You want a more nuanced forecast, factoring in best and worst-case scenarios. 
2. Pros:
   • Helps quantify uncertainty and risk. 
   • Gives a clearer picture of the possible variations in project timelines. 
   • Effective for projects with high uncertainty or variability. 
3. Cons:
   • Requires gathering multiple estimates.
   • The formula-based approach may oversimplify complex situations. 

6. What-If Analysis 

What-if analysis involves evaluating hypothetical scenarios to understand how changes in the project’s scope, timeline, or resources might impact the overall outcome.

This method helps us assess how potential changes might affect the project. For instance, when our team had to adapt an existing app to a new regulatory standard, we used What-If analysis to model different compliance scenarios.

1. Perfect when: 
   • You need to assess the impact of potential changes or risks to the project. 
   • You want to prepare for uncertainty by testing different scenarios. 
2. Pros:
   • Helps identify risks early.
   • Better informs decision-making.
   • Enhances planning accuracy. 
3. Cons:
   • Can be time-consuming if there are many variables to consider. 
   • Requires deeper knowledge of the project and its potential risks.

7. T-Shirt Estimation

T-shirt sizing is a flexible estimation technique used by agile teams to categorize user stories based on their complexity (XS, S, M, L, XL, XXL), instead of assigning specific numerical values.

1. Perfect when: 
   • You are working in agile environments where flexibility is essential. 
   • You need to prioritize tasks quickly without needing precise time estimates. 
2. Pros:
   • Quick and easy to apply, promoting agility. 
   • Simplifies the estimation process, making it accessible for all team members. 
   • Flexible and intuitive, especially for complex, multi-faceted projects. 
3. Cons:
   • Lacks precision for detailed budgeting. 
   • Misinterpretation of complexity can occur.
   • Not suitable for large-scale or resource-heavy projects that require detailed planning.

Steps for a Successful Estimation Process 

The process we follow at Varyence is structured and helps us avoid missing critical steps. Keep in mind, no process is perfect and an estimate is, well….an estimate.

1. 1. Create a Discovery Plan
   Develop a roadmap for the discovery phase, outlining objectives and timelines.
2. 2. Understand Project Goals
   The team aligns on vision and scope from the start.
3. 3. Break Down Tasks
   Decompose the project into manageable components.
4. 4. Prepare Estimation
   Define user interfaces and interactions early on to provide more clarity.
5. 5. Leverage Historical Data
   Use past performance to help refine estimates.
6. 6. Plan for Risks
   Incorporate buffers for unforeseen challenges.
7. 7. Communicate Clearly
   Share estimates with client and stakeholders, ensuring transparency and alignment.

How to Avoid Common Estimation Pitfalls?

Over the years, we’ve identified common pitfalls and how to avoid them:

1. Missing Scope Elements
   We conduct additional workshops to help ensure scope validation, often within an analysis phase. 
2. Poor Change Request Management
   We have a structured process for handling change requests.
3. Inaccurate Bug-Fixing Estimates
   We allocate time for QA and bug fixes, ensuring collaboration with developers.
4. Underestimating Communication Time
   Meetings and updates are essential for staying on track.

Conclusion

Estimation is key to successful project delivery. By combining solid techniques with a transparent approach, we can help ensure we’re on the right path. At Varyence, software estimation isn’t just about numbers—it’s about understanding the goals, aligning with the client’s vision, and delivering value.

Whether you’re a startup or an enterprise company, adopting the right estimation approach can make all the difference. Explore different methods, tailor them to your project’s needs, and embrace a culture of continuous improvement. With the right strategy, you can join the ranks of successful projects delivered on time, within budget, and with high-quality craftsmanship.