An Economic Analysis of the Software Cost Function

Abstract

*† From the perspective of economic theory, the standard cost estimating relationships that cost estimators use should be consistent with an underlying production function. Economic theory implies that the prices of the production inputs (wage rate and cost of capital) should be inherent to a proper cost function. However, none of the standard or commercial cost models include the price of production inputs in the structure of their cost functions. In this paper we try to explore the implications of the form used by the typical cost estimating relationships (CERs) of standard cost models. This study seeks to verify if the wage rate is a statistically significant determinant of software development effort and to analyze the results from the perspective of economic theory. The results, based on JPL and NASA data from 1980 through 2000, indicate there is insufficient evidence to disprove the functional form of the CERs for ground software. However, given the data, the wage rate is significant with respect to cost for flight software. The results also indicate that flight software and ground software have significantly different underlying production functions. This study is an extension of an earlier study by Lum and Hihn in 2002, which only used NASA data for ground software developments from the 1980’s.