Core Principles
Software engineering economics is about applying economic principles to software development to ensure projects are not just technically successful, but also financially viable. It involves trade-offs between cost, quality, and schedule to maximize value.
Value Maximization
The primary goal is to maximize the net worth of a project. This means the benefits (revenue, cost savings, strategic advantage) should significantly outweigh the development and maintenance costs.
Trade-off Analysis
There's a constant balance between scope, quality, cost, and time. Making an informed decision on one impacts the others. For example, higher quality often requires more time or cost.
Marginal Utility
As more features are added, the value of each additional feature tends to decrease. It's crucial to prioritize features that provide the most value for the least effort.
How Does Cost Estimation Work?
Cost estimation predicts the resources (effort, time, money) required to build a software system. Accurate estimates are vital for budgeting, planning, and risk management. This section visualizes effort distribution based on two common estimation models.
Economic Models in Software Projects
Various economic models help stakeholders decide whether a project is a worthwhile investment. These models provide a framework for comparing the financial outcomes of different project choices. Select a model below to learn more about its application.
Net Present Value (NPV)
NPV calculates the present value of future cash flows (both inflows and outflows) associated with a project. It accounts for the time value of money, meaning a dollar today is worth more than a dollar tomorrow. A positive NPV indicates a profitable investment. It is the most comprehensive model for assessing long-term project viability.
Example: A project costs $100k and is expected to generate $50k per year for 3 years. With a 10% discount rate, if the NPV is greater than $0, the project adds value to the company.
How Do Quality and Cost Relate?
There is a direct economic relationship between software quality and development cost. Investing in quality early significantly reduces long-term expenses. The chart below illustrates how the cost to fix a defect grows exponentially the later it is found in the development lifecycle.
Measuring Return on Investment (ROI)
ROI is a key performance indicator used to evaluate the efficiency of an investment. It measures the amount of return relative to the investment's cost. A high ROI means the investment's gains compare favorably to its cost. Use the calculator below to explore how ROI is calculated.
ROI Calculator
Calculated ROI
200%