Cost Estimation and Budgeting

Why Estimate Cost?

Software cost estimation predicts the effort, time, and money required to deliver a project. Accurate estimates support bidding, resource planning, and tracking.

Cost Components

• Personnel — the largest component, usually 70-80%.
• Hardware and software licenses.
• Training.
• Travel and meetings.
• Infrastructure — servers, network, cloud.
• Contingency reserve — buffer for risk.

Estimation Techniques

1. Expert judgement.
2. Analogous estimation using historical data.
3. Bottom-up summing WBS estimates.
4. Parametric models — COCOMO, Function Points.
5. Three-point PERT.

COCOMO (Constructive Cost Model)

Boehm's COCOMO predicts effort from lines of code (KLOC). The basic formula:

Effort (PM) = a * (KLOC)^b
Time (M)    = c * Effort^d

Three modes:

• Organic — small, simple projects (a=2.4, b=1.05).
• Semi-detached — medium (a=3.0, b=1.12).
• Embedded — complex, hard constraints (a=3.6, b=1.20).

Intermediate COCOMO adjusts the basic effort by 15 cost drivers (product, hardware, personnel, project attributes). COCOMO II adds scale factors and supports reuse and object-oriented sizing.

Function Point Analysis (FPA)

FPA sizes software by counting user-visible functionality, independent of programming language:

1. Count five function types: external inputs, external outputs, external inquiries, internal logical files, external interface files.
2. Classify each as low, average, or high complexity.
3. Sum weighted counts to get unadjusted function points.
4. Multiply by a value-adjustment factor (0.65 to 1.35) based on 14 general system characteristics.

Budget Preparation

Once effort and cost are estimated, produce a budget — a time-phased plan of expenditures. The budget aligns costs with the schedule so cash flow is predictable.

Earned Value Management (EVM)

EVM compares three numbers at any point in time:

• Planned Value (PV) — budgeted cost of work scheduled.
• Earned Value (EV) — budgeted cost of work actually performed.
• Actual Cost (AC) — what was really spent.

Key indicators:

• Cost Variance (CV) = EV - AC (negative = over budget).
• Schedule Variance (SV) = EV - PV (negative = behind schedule).
• CPI = EV / AC, SPI = EV / PV.

Cost Control

Control costs by measuring actuals against the baseline, analyzing variances, forecasting completion, and approving (or rejecting) change requests before they become surprises.

Summary

Estimation is part science, part judgement. Use multiple methods and reconcile them. Track costs with EVM so that deviation is caught early rather than at project end.

Important Questions

1. List the main cost components of a software project.
2. Explain basic COCOMO with its three modes.
3. What is Function Point Analysis? List the five function types.
4. Compare COCOMO and FPA.
5. Define Planned Value, Earned Value, and Actual Cost.
6. Compute CPI and SPI given PV=100, EV=80, AC=90.
7. What does a CPI < 1 indicate?
8. How is a project budget controlled?