Software projects that outrun their expected budget are not a pretty sight for project managers and business owners. However, unexpected mishaps and escalation of costs at some point are expected, the intelligent price which is why it’s better to stay prepared for common pitfalls like unrealistic delivery schedules, lack of resource and time planning, not taking into account the complexity of the project, unmet design objectives, lack of quality coding leading to multiple code rewrites, lack of clarity on business objectives, not considering extra person-hours and infrastructure failure. 

Planning with the following tips will help you establish a realistic budget for your software project. 

  1. Get multiple estimates

The first step is to devise various budgeting categories as per execution.

If you’re building the project in-house, you’d need to consider:

  • Cost per hire, training new employees
  • Upskilling existing staff
  • Licenses, software, hardware and other associated expenses

If you’re outsourcing:

  • Cost of travel
  • Legal Contractual fees
  • Process/knowledge transfer
  • Communication platforms

Other factors to consider:

  • Cost varying from country to country
  • The challenging aspects that could increase the cost
  • Exploring and preparing for hidden costs
  • Analysing cost of rework and additional work
  • Assess the outsourcing firm’s level of efficiency through a vendor evaluation
  1. Research similar projects 

It’s a wise idea to study projects similar to yours to understand if you should take a smaller or bigger approach to budget in the context of your business goals. First, use business data mining and analytics tools to gain insights from historical data of projects similar in scope, product type or other relevant criteria. Then, devise ways in which the highest cost-intensive part of such projects can now be reduced by applying new technology and tools in the market or better and faster algorithms found in similar projects that can be used for your specific project.  

  1. Get realistic numbers on the core costs

Set your budget around important questions such as:

The size of the software (with execution time and software complexity), the required number of personnel and the quality of the talent pool, required reliability, database size, memory constraints, hardware volatility, response time constraints, quality analysis, testing and deployment. 

The most realistic numbers can be achieved in the following steps:

  • Determine cost-estimating objectives
  • Create a project plan for each resource
  • Determine software requirement and hardware system
  • Use several independent cost estimation techniques to extract from their combined insights.
  • Compare different estimates and iterate the estimation process.
  1. Use different project estimation types

Algorithmic (for developmental flexibility vs Non-Algorithmic (COCOMO, Putnam models) estimates to understand the complexity of system modules), Bottom-Up estimate where you calculate the rates of the individual components of parts of the project plan and add them up. In the analogue style of estimation, you analyse the data in similar projects to decide the cost.

 Top-Down estimate method where you figure out the total and then split it into tasks or milestones. 

Parametric estimations are usually considering more accurate as it considers cost variables and data insights from specific parts of specific projects and applies them to your particular project to arrive at more reliable numbers. The more complex your project, the more uncertain the variables, the more estimation types you should use. 

  1. Assign 150% funding of the original estimated cost

Once you’ve collected estimates from different types aforementioned, combine the best number that seems to lay a good foundation and allocate 150% of the original amount. There may be unknown variables throughout the journey and milestones. It’s safe to set aside an additional comfortable amount to take any unexpected blows. 

As per your previous analysis, allocate a percentage to each phase of the lifecycle, for instance, 10% to design, 20% to development, and so forth, with a significant amount for iterations and maintenance and future upgrades until the revenue starts pouring in. 

  1. Factor in unexpected changes

The hidden costs of software development include the damages caused due to poorly designed and ill-maintained software. Understaffed workers who are pressured to produce more than their competency, the project may go off track and cost even more in course correction. In addition, there could be human-resource-related expenses like coders quitting or extensive rehiring delays. You might also need an infrastructure upgrade and incur additional fees for technical malfunction if enough care wasn’t put in IT/network planning. In terms of development, stay prepared to factor in the cost of three complete code rewrites as is the general expectation. 

  1. Build an MVP

A Minimum Viable Product will help you understand the cost involved in building the core features and extrapolate the additional expenses once you receive feedback and build up the next iteration. Therefore, it’s a prudent move to launch a product with minimal features so that the budget can be controlled initially and scaling up can be done after positive reviews and more interest from the users.

  1. Create practical KPIs

KPIs should reflect action items that are immediately necessary for relevant results. For instance: Actual Cost of Work Performed, determine if the current cost is above baseline amount, (Velocity, Burndown, Augment Flow Efficiency metrics, etc. if using Agile methodologies), budgeted cost of work performed (BCWP), measuring ROI and Added Value (What is the added value provided by the human capital?), calculate the ratio between development cost and total cost and calculate cost deviation through determining the minimum cost for the work performed. 

  1. Get expert opinions

You may have the limited talent in-house or in the outsourcing company. It’s wise to get an incisive estimate and projections from experts like business analysts, strategists, data and systems architects, including financial and security experts. In addition, you’d need guidance on the best communication and project management platforms, including cloud hosting options for which you’d need to consult experts in the domain. 

  1. Review and update in real-time

Testing, retesting, training and applying continuous changes are necessary to keep software projects under the budget. 

Keep the stakeholders informed at all stages. And always be on the lookout for red flags in operations and daily scrums.