General estimation process

Accurate cost estimation is important because it can help to classify and prioritize development projects with respect to an overall business plan and be used to determine what resources to commit to the project and how well these resources will be used. It can also be used to assess the impact of changes and support replanning: projects can be easier to manage and control when resources are better matched to real needs. Customers expect actual development costs to be in line with estimated costs. That is why software cost estimation involves the determination of one or more of the following estimates, namely effort, project, and/or cost.

Most cost estimation models attempt to generate an effort estimate, which can then be converted into the project duration and cost. Although effort and cost are closely related, they are not necessarily related by a simple transformation function. Effort is often measured in person/months of the programmers, analysts and project managers. This effort estimate can be converted into a dollar cost figure by calculating an average salary per unit time of the staff involved, and then multiplying this by the estimated effort required.

Practitioners with the LCAG struggle for three fundamental issues: one, which software cost estimation model to use; two, which software size measurement to use - lines of code (or LOC), function points (or FP), or feature point; and three, what a good unit of estimate means.

The widely practiced cost estimation method is expert judgment. For many years, project managers have relied on experience and the prevailing industry norms as a basis to develop cost estimate. However, basing estimates on expert judgment is problematic. This approach is not repeatable and the means of deriving an estimate are not explicit. It is difficult to find highly experienced estimators for every new project. The relationship between cost and system size is not linear. Cost tends to increase exponentially with size. The expert judgment method is appropriate only when the sizes of the current project and past projects are similar. Budget manipulations by management aimed at avoiding overrun make experience and data from previous projects questionable.