SharePoint development environment configuration depends on the processes, type of engagements and type of work. The most popular solution that addresses the development scenarios is using local SharePoint farm, separated from the production servers, with the single installations of the SharePoint server on the development boxes. This provides isolation for builds, tests, and debugging across different teams, projects and production environments. The local environment is mostly isolated by development box and is installed on the host server or on virtual server. The following procedure is an overview of the steps that are required to create a typical SharePoint development environment.
Development Box installation
Chose development tools
There are varieties of tools that can make development fast and easy – from commercial to open source and Microsoft products.
Microsoft recommends to use “Visual Studio extensions for Windows SharePoint Services” (VSeWSS), which simplify code-up solutions for SharePoint (e.g. Web Parts, List Definitions, Site Definitions, etc) via UI and allows reverse-engineering existed site to extract definitions for SharePoint entities.
The disadvantages of VSeWSS are:
1) not intuitive for beginners;
2) doesn’t provide usability to change all properties of the features, and other SharePoint items easily
3) Cannot use VSeWSS projects without VSeWSS extension.
Others 3-rd party tools, which simplify development, are:
1. Management Tools
• SharePoint Spy (http://www.echotechnology.com)
• SharePoint Manager (http://www.codeplex.com/spm)
• SharePoint Analyser (http://community.bamboosolutions.com)
These tools help to manage services of SharePoint farm and get detailed information about configuration settings.
For example, screenshots of SharePoint Analyzer (left) and SharePointSpy (right)

2. Visual Studio Tools
• STSDev to create project files (http://www.codeplex.com/stsdev)
• SPSource to get site sources (http://www.codeplex.com/spsource)
These tools create Visual Studio projects with the SharePoint 12-hive structure, and provide build settings to build/deploy/retract WSP packages directly from IDE. STSDev is the best tools to create a variety of projects – from simple features and Web Parts to Custom Workflow projects:

3. Development Tools
4. Other Tools
• U2U CAML Builder – editor for CAML queries (http://www.u2u.net)
• SharePoint Feature – set of different development and debugging plugins (http://www.codeplex.com/features)
Such tools give your additional flexibility in everyday development stuff, providing different editors, log viewers and analysers to make SharePoint development easier and faster.
Setup Deployment environment
Configure Continuous Integration (CI) system to build SharePoint solution, compile output to WSP packages, prepare deployment scripts and deploy WSP to Test Environment. Team Foundation Server (TFS) is one of the recommended tool for this task. There are several articles describing how to adopt SharePoint solution for CI, setup builds and configure TFS Deployer to deploy SharePoint packages across different environments:
http://www.azsharepointpros.com/ShareAndEnjoy/Lists/Posts/Post.aspx?ID=10
As to SharePoint Visual Studio Templates, CodePlex has a “SPTemplateLand” project that provides “12-hive” structure for SharePoint projects and deployments.
This solution was slightly modified by Microsoft SharePoint Consulting Services guys to have single deployment package for multiple projects and support packaging additional SharePoint Artefacts (site definitions, root files). This project is published there http://blogs.msdn.com/gderun/archive/2008/01/11/sharepoint-visual-studio-project-and-deployment-templates.aspx
Configure testing environment
The following diagram depicts the most common development environment, which is recommended by “SharePoint Guidance patterns & practices” team.

The staging environment represents the target production environment as closely as possible from the perspective of topology (for example, the server farm and database structure) and components (for example, the inclusion of the Microsoft Active Directory service and load balancing, where applicable).
Michael Nemtsev is a Microsoft MVP and an expert in SharePoint and .NET technologies. With the strong software engineering and development background, Michael has been leading development projects for industry giants like Microsoft, IBM and Dell since year 2000. Michael runs "SharePoint Tips & Tricks" site http://sharepoint-sandbox.com, SharePoint blog and tweets actively (via @laflour)
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