Scrum Masters and Agile Project Managers experience difficulties when we are talking about project estimation. Many people think costing and budgeting for Agile projects is pointless and even counterproductive.
There’s even a whole #NoEstimates movement. After all, isn’t cost estimation against Agile principles, since they cannot be determined in advance? The project will be completed when it is completed and when the client likes the result. And then maybe we’ll find out how much it cost us.
Traditionally, in Agile projects that use Scrum (and in Agile there are traditional things :), the amount of work is measured in Story Points. These are relative and not absolute measures of the volume of work on the project.
The number of points does not depend on the speed of work (productivity) of the individual team members. If they agree that one task is a volume of 10 Story Points, some may complete it in two days, others in four days.
But if they agree that another task is 20 Story Points, it means that the same people think they can finish it in four and eight days, respectively. In this way, the team calibrates its relative rating scale and can evaluate the workload of one project in proportion to the volume of another project.
But this does not mean that the points are equivalent to the amount of work in hours worked and the costs determined on the basis of man hours and hourly rate. In fact, Story Points are not intended to be a tool for estimating project costs.
Now back to the question. There are actually two questions:
1. Do we need to estimate the cost of Agile projects? 2. Can we estimate the cost of Agile projects?
Let’s start with the first question. There are two cases where we have to estimate project costs and Agile projects are no exception.
First, we have to do it when working for an external client. Don’t we want to work at a loss? Therefore, we need to know what our costs will be. Of course, we can arrange for the client to pay based on actual hours worked (or some other similar principle) and then we are insured against loss. But not every client would agree to this approach, and certainly no client would agree to make an unlimited cost commitment.
Second, we need to estimate the cost when that assessment is needed to make a management decision. Generally, when we want to know if a project is profitable and for this purpose we compare the estimated benefits with the projected project costs. The general rule applies here (which is not abolished even for Agile projects 🙂 that the benefits must be greater than the cost. If the expected benefits are less than the expected costs, what is the point of the project?
Agile project benefits> Agile project costs
In most cases, we measure the benefits in money and in order to have comparability, we must also measure the costs in money (not in Story Points). There are cases where benefits can be measured in another way – in health, human happiness, a better environment, etc. Then it is not necessary to measure the cost in money to judge whether the project is profitable. If 1 Story Point raises the Human Happiness Index by at least 1 percentage point (and in this case, the person is the Project Sponsor), then this is a great project!
But let’s not overdo it. Safer transactions, more satisfied customers, more reliable information, faster work, and the like are nice things, but not so much that we don’t strive to value them in money. If we want to have a real estimate of the benefits of the project, we will also have to estimate the costs.
Now let’s look at the second question – can we estimate the cost of Agile projects?
And why can’t we?
Because these projects are flexible (and therefore can take one direction or the other)
Because they include requirements that change and evolve
I agree that it is very difficult and often pointless to try to make a bottom-up assessment, to estimate the costs of performing the individual tasks and to aggregate them into the overall budget of the project.
But we can apply a top-down assessment, and the approach here is no different than that of all innovative projects:
We can compare our project with other previous similar projects for which we have information (benchmarking)
If we have information about the actual costs of our previous Agile projects, we can obtain estimated costs for our new project by applying the Story Points ratio for the two projects (if estimates are given by the same team or, more precisely, by teams, calibrated with the same scale of assessment)
We can use a parametric model to estimate project costs
And if there’s nothing else we can do, at least we can do a cost estimate :), based on our experience and skills.
The main difference between bottom-up and top-down cost estimates is the accuracy. Therefore, estimating the cost of Agile projects is quite possible, but we need to be satisfied with a lesser degree of accuracy. We can assume that the accuracy we can achieve is not less than the accuracy in conceptual cost estimation of the project: -25% to + 75%.
If the most likely cost estimate for an Agile project is $ 300,000 and our accuracy estimate is -25% / + 75%, then actual costs could range from $ 225,000 to $ 525,000. the cost is reflected in the reserve to the project budget. In this case, we add a reserve of BGN 225,000 to the project budget of BGN 300,000 to get a total budget of BGN 525,000.
If the expected benefits of the project are BGN 550,000, then in the best case the net benefits would be BGN 325,000 (550,000 – 225,000), in the most likely case they would be BGN 225,000 (550,000 – 300,000), and in the worst minus BGN 25,000 (550,000 – 525,000).
However, if the expected benefits are BGN 320,000, the project could result in a loss of up to BGN 205,000 (525,000 – 320,000). Would you start this project?
In the most likely cost value of an Agile project, we need to budget all the most likely iterations (sequential upgrades) of the project product, with the most likely effort for those iterations. The reserve will go to possible greater efforts for planned iterations and possible additional iterations.
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