The Right Way to Budget Agile Projects

Clear budget parameters are essential for any project’s success and it’s no exception when it comes to Agile software development. When financial constraints are established, stakeholders can prioritize and make crucial decisions about the project’s intended trajectory. 

However, many Agile teams struggle to create and stick to accurate budgets, with just a quarter of enterprise IT initiatives reaching release within their planned budgets, and up to two-thirds exceeding their initial budgets by 100% or more. These cost overruns can raise doubts about the team’s efficiency, skill and value. 

To be fair, several aspects of the software development process are challenging to anticipate fully. Yet, many software development budgets fail to account for known cost factors or build in leeway for potential roadblocks. Regardless of how modest or ambitious your software project is, an overly optimistic budget might doom your team to failure.

In this article, we’ll walk you through the two approaches that can help calculate budgets for Agile teams

Waterfall vs Agile budget management

The traditional approach, which involves top-down decision-making with rigorous gatekeeping on expenditure and a detailed business case at the start of the project, is not suited to the volatile, uncertain, complex and ambiguous (VUCA) nature of software development. 

In contrast, in agile, everything is frequent and flexible, providing you the freedom to change course as circumstances dictate. 

Benefits of Agile Budgeting

With Agile budgeting, financial decisions become closely linked to the project’s circumstances, providing significant advantages:

Agile budgeting process

Now that we’ve grasped the concept of Agile budgeting let’s explore the basic process of calculating budget for dedicated software development teams:

1. Rough estimation based on project’s requirements

This initial ballpark figure is based on the digital product’s expectations and requirements provided by the product owner, including its target users, purpose, and what problem it is meant to address. This estimate is then further revised with more detailed information through a product discovery workshop.

2. Product discovery workshop

In this event, we gather the entire dedicated software development team, comprising designers, developers, QA specialists, etc., along with the Scrum Master and the Product Owner. The goal is to thoroughly examine the business idea and product details to precisely determine the necessary work - including budget considerations. During the workshop, the team delves into the following topics:

• The business concept and its purpose
• The product’s maturity level
• User stories
• Technology stack
• Potential solutions
• Project risks

3. Set the budget

• A blended rate

With some companies, project managers are not privy to individuals’ compensation information. Hence, we rely on a standardized ‘’blended rate’’ of $150/hour, which HR calculate to represent the total loaded cost of the firm. 

Let’s assume we have a dedicated software deelopment team roster of 14 people, but 4 of them worked only half-time, resulting in a total of 12 full-time equivalents (FTEs)

=> $150 x 8 chargeable hours per day = $1,200 fixed burn rate per person 

=> $1,200 x 12 FTEs on my team = $14,400 fixed burn rate per day

=> $14,400 x 10 chargeable days in a 2-week iteration = $144,000 fixed iteration burn rate

• Specific Labour Categories

In some enterprises, the project manager is required to allocate labour costs based on specific categories. In this case, we can’t oversimplify the issue with a blended rate

=> Annual loaded cost of each team member / number of theoretical iterations in a year = fixed burn rate per iteration for that team member

=> sum (every team member’s specific fixed burn rate per iteration) = fixed iteration burn rate

• Monitor and adjust the budget

For every sprint, the development team will conduct sprint planning, review and retrospective sessions. This process involves monitoring the budget and adjusting it, if necessary, at the turn of the program increment or product iteration.

What’s the significance of this?

With a fixed, reliable iteration burn rate, you can have some convincing talking points around common conversations:

‘’Yes, {project manager}, we can implement the eKYC feature. Yet, the team estimates it will require an additional two iterations at a cost of $20,000. Can you approve the extra funding?’’

‘’Yeah, you can take the senior developers off my project. However, that will result in $30K failure of my current iteration. Furthermore, the team believes this decision will increase the risk of missing the deadline for the remaining $400K worth of work by 20%. That translates to a total financial impact of  $30K + (20% x  400K) = $100K. Are you willing to incur these costs?

Calculate and Adjust

It's hard to predict how a project will turn out in advance. However, as a dedicated software development team manager, you have access to data that may help you improve the accuracy of your cost estimates.

Dedicated software development teams employ numerous estimating methodologies to determine the scope, risk, and complexity of each demand when starting a project and once all client requirements have been grasped. Based on the duration and number of sprints, as well as the size and cost of the team, the project manager may estimate the entire time and money necessary for the project.

Calculate expenditures for each step of the project by using your team's day rate. If a shop landing page is expected to take four weeks to develop and your team costs $10,000 per week, you may budget $40,000 for the landing page. Maintaining budget control requires keeping track of project velocity as it progresses. It will assist you assess whether your estimates are realistic or need to be altered.

Involve Clients in the Process

It's critical to keep communication with the customer as the project advances once you've agreed on the budget and results. Client cooperation is a key component of Agile methodologies, yet some software development teams fail to request client feedback on a regular basis. Teams may default to a waterfall attitude, believing that they know what the customer wants and that they only need to connect with them again at the conclusion of the project to present the final product, especially if they are new to Agile. Due to issues such as scope creep, a lack of communication greatly raises the danger of going over budget.

You can guarantee that the project stays on track by connecting with customers at frequent intervals—ideally after each sprint. Changes to requirements can be accommodated as they happen, rather than trying to incorporate them towards the conclusion of the project, when the budget may be depleted.

As the customer sees what has been given and as other circumstances play out behind the scenes over time, what the client wants is likely to alter. When you show the client the results at the conclusion of each sprint, their comments can help you prioritize the backlog and decide which features to add or eliminate.

If you're modifying the scope, your input on prioritizing is extremely critical. If you've decided to keep the budget the same but change the scope, you should only focus on the most important jobs.

Even if your velocity is as expected, changes to a project's scope may be essential. Some product features may out to be more difficult than anticipated, necessitating extra work, time, and money. Project goals and deliverables must be revised to avoid overspending.

Your client should also be aware that the scope of work must be flexible. It may necessitate the omission of certain stories, but it will allow you to complete your project on schedule and on budget. This is a significant departure from waterfall projects, which have a predetermined scope. A classic problem is imposing a fixed-scope project charter on a dedicated software development team, which eliminates any flexibility.

Offering your customer access to a burndown chart, where they can see project progress, including what has been accomplished and how many sprints remain, is one method to keep them informed. This will provide them with a better understanding of how their money is spent.

Balancing the Budget

Using what you know while admitting and providing room for what you don't is the key to managing finances for dedicated software development team projects. Use the facts you have to figure out what you can do with the time, talents, and money you have, but have an open mind and communicate openly to allow for genuine adaptability. You can perfect this balancing act by properly defining expectations, mentoring your customer and team, and revising objectives as needed.

Our experts' best ideas for creating a successful approach that clearly defines expectations at the start of a project are combined in this dedicated software development team budgeting and forecasting infographic. As a result, the final product will be in line with customer requests, user needs, and budgetary resources.

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