Comparing Approaches to Budgeting and Estimating Software Development Projects

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Software requirements elicitation, budgeting, and scheduling are highly interrelated – take the wrong approach with one of them and your entire software development process falls like a house of cards. This article argues that although traditional approaches are comforting to senior managers, the research shows that they do not ensure predictability and worse yet result in spectacular levels of waste. Agile approaches to change management, modeling, and documentation are required if your organization is to succeed at becoming more agile with its approaches to budgeting and scheduling. This will require a significant paradigm shift on the part of both IT and business management.

Everyone claims they want to be agile, but when push comes to shove most people will choose the politically expedient approach over actual effectiveness. For example, what is more important to you: to try to estimate the actual costs of a project and then bring the project in on budget or to spend your IT investment wisely? If your answer is the first then you had might as well stop reading. If your answer is the second then this article is for you, and if you think that it’s possible to achieve both then you desperately need to read this article to dispel you naiveté.

In this article I describe, and then compare, three approaches to budgeting and scheduling:

  1. A traditional approach
  2. An agile approach
  3. A middle of the road approach
  4. Comparing the strategies

1. A Traditional Approach to Budgeting and Scheduling

The traditional approach to budgeting and scheduling is to invest the time to develop what is considered to be an "accurate" budget and detailed schedule early in the lifecycle. To do this, a comprehensive definition of the requirements is typically produced during the initiation phase of the project, often simply called the requirements phase. Sometimes a detailed design document is developed, providing more information for the budgeting and scheduling process. "Smart" organizations will develop an initial budget and schedule early in the project, then refine it over time as more information becomes available. Not so smart organizations will assume that the initial budget and schedule are official, and actually hold the project team to them. This is particularly true of organizations which take a fixed bid approach to software development, a spectacularly questionable practice at best.

Traditional project teams take a (near) serial approach to development in which requirements are defined and documented early in the project, the requirements may or may not be reviewed and accepted by the project stakeholders, and then they’re provided to developers who are expected to build a system based on those requirements. Scope creep, also known as requirements creep, is contained by requiring stakeholders to follow a change management process. Traditional change management processes typically involve one or more people, often referred to as a change control board (CCB), who act as a gateway through which change requests are evaluated and potentially accepted. The goal is to minimize, if not prevent, scope creep so as to stay on budget and schedule. This approach sounds great in theory, but in practice proves to work poorly. In Examining the Big Requirements Up Front (BRUF) Approach I describe Figure 1 in detail, which shows that when you take a traditional approach to requirements elicitation and management that 45% of functionality delivered is never used and a further 19% is rarely used. In other words, a serial approach to development results in nearly 2/3 wastage (and that's only considering the projects which actually deliver into production, so the actual figure is much worse).

Figure 1. The cost of serial approaches to requirements.

Fixed price bids/contracts are bad ideas for both IT and the business stakeholders. Sadly, the business thinks that it's reducing its financial risk with a fixed bid, but the reality is that it forces them into a position where their money is almost always wasted (see Figure 1). For IT, it almost always motivates them to reduce the delivered quality due to the realities of the iron triangle.

2. An Agile Approach to Budgeting and Scheduling

Now let's consider the other end of the spectrum. Here, we stop worrying about how much things are going to cost, or how long it will take, and instead focus on spending your money wisely and working in a timely manner. Easy to say, but hard to do. Agile software development teams do this by accepting the fact that requirements change and therefore choose to adopt practices which allow them to react accordingly to those changes. These practices include an agile approach to change management, to modeling, and to documentation. However, to achieve this management must adopt new ways of budgeting and scheduling in parallel.

Because requirements change frequently you need a streamlined, flexible approach to requirements change management. Agilists want to develop software which is both high-quality and high-value, and the easiest way to develop high-value software is to implement the highest priority requirements first. Agilists strive to truly manage change, not to prevent it, enabling them to maximize stakeholder investment. Figure 2 overviews the agile approach to managing requirements, reflecting both Extreme Programming (XP)’s planning game and the Scrum methodology’s approach. Your software development team has a stack of prioritized and estimated requirements which needs to be implemented – many XP teams will literally have a stack of user stories written on index cards although some teams use spreadsheets or databases to manage their requirements stack. The team takes the highest priority requirements from the top of the stack which they believe they can implement within the current iteration. Each requirement is initially estimated when it is identified and put on the stack, but when it comes time to implement the requirement some model storming may occur to ensure that the estimate is accurate. Scrum suggests that you freeze the requirements for the current iteration to provide a level of stability for the developers whereas in XP the current requirements can also change as long as you’re willing to drop some requirements out of the iteration/timebox if needed. Managing Agile Projects

Figure 3. Agile change management.

Developers are responsible for estimating the effort required to implement the requirements on which they will work. Although you may fear that developers don’t have the requisite estimating skills, and this is often true at first, the fact is that it doesn’t take long for people to get pretty good at estimating when they know that they’re going to have to live up to those estimates. Smaller requirements are easier to estimate. Shall statements, such as “the system shall convert feet to meters”, are an example of very small requirements. User stories are a little larger but still relatively easy to estimate. Use cases, a staple of the Rational Unified Process (RUP) and the Agile Unified Process (AUP), can become too large to estimate effectively although you can reorganize them into smaller and more manageable artifacts if you’re flexible. I describe a wide array of modeling techniques, including the requirements models mentioned in this paragraph, at

So how does this pertain to budgeting and scheduling? An agile approach to requirements enables you to take an agile approach to budgeting and scheduling because of the higher level of control it provides business stakeholders:

  1. Stakeholders get working software on a regular basis, enabling them to determine if the project is going in the right direction.

  2. Stakeholders get their requirements implemented in the priority order which they define, enabling them to prevent wastage.

  3. Stakeholder can control how their money is being spent because they can always reduce/remove funding to the project team.

In other words, if you don’t like what you’re getting for your IT investment you simply reduce funding to the project, and even potentially stop funding it. If you like what you’re getting you can increase funding to the project team. In other words, stakeholders now have complete control over how they invest their money in IT, enabling them to get the best value for their investment. With this approach, your budget is always whatever stakeholders are willing to spend and the schedule is always however long it takes to build. When you think about it, isn't that the true answer for any software development project, regardless of the approach? The primary difference is that with the agile approach we maximize stakeholder investment.

With this level of control, do you really need to develop a fictional budget, or schedule, at the beginning of the project? Unfortunately, the answer is probably still yes in most organizations. Even though the financial people within your organization hold out little hope that the IT department will actually get the estimates and schedules right, they naively think that they're reducing financial risk by doing so. This leads us to the "middle of the road" approach to budgeting and scheduling.

3. A "Middle of The Road" Approach to Budgeting and Scheduling

With a middle of the road approach you do just enough requirements envisioning up front to identify the scope of the project, and just enough architectural modeling to determine a potential strategy to build the system. This modeling efforts provides just enough understanding to put together an initial budget and schedule without paying the price of excessive documentation. The most effective strategy to put the initial budget and schedule together is to gather a small group of people who have relevant experience from similar projects in the past, and more importantly have a stake in the new project (e.g. they're on the team and accountable), and ask them to provide a good guess. Realistically at the beginning of the project this guess should have a +/- 30% range, some research suggests a 50% range, but unfortunately on average organizations ask for a +/- 11% initial estimate even though their actuals come in at +/- 19% after considerable "fudging of the numbers" in many cases (see the DDJ State of the IT Union July 2009 survey results for details and Lies, Great Lies, and Software Development Plans for an overview of the ethically questionable fudging strategies).

Agile modelers understand that because requirements evolve over time that any early investment in detailed documentation will only be wasted. Instead they will do just enough initial modeling to identify their project scope and develop a high-level schedule and budget: all you can really hope to achieve at this point is a good “ballpark” estimate, so you should only do enough work to get you to that point. Figure 3 overviews this Agile Model Driven Development (AMDD) approach.

Figure 3. The AMDD lifecycle.

During development they will model storm in a just-in-time (JIT) manner to explore each requirement in the necessary detail, and at that point produce an accurate estimate for that bit of work. The developers should still be responsible for estimating their work, as described above, and stakeholders responsible for prioritizing the requirements.

The good news is that is still reasonably agile: remember, agility is situational. At first, you only need a high-level, loosely detailed schedule; the details are identified throughout the project JIT. Similarly, at first your estimate will involve a large range (if "greater accuracy" is needed, provide a figure closer to the top of the range and hope for the best) which will be narrowed down as the project progresses. The end result is that based on your actuals you will update your estimates throughout the project, narrowing the estimate range over time. These narrowing estimates are referred to as a "cone of uncertainty", a phrase coined by Barry Boehm.

Better yet, forgo the questionable concepts of schedules and estimates completely and simply choose to spend your money wisely as implied by Figure 2.

4. Comparing the Approaches

The following table compares and contrasts the three approaches. Each approach has its advantages and disadvantages, you need to identify which one is most suitable for your situation and then tailor it to meet your exactly needs.

Approach Advantages Disadvantages
  • Accepted within many organizations.
  • With significant up front work, it's possible to develop accurate estimates and schedules.
  • In practice, this approach results in significant wastage.
  • Projects are often over budget and/or schedule anyway.
  • Stakeholders in complete control over how much money is spent, for how long, and on what.
  • Currently not well accepted by senior management because it is different from their existing (and typically wrong) expectations.
  • Requires a trustful relationship between IT and their business stakeholders.
  • Requires the development team to work in a disciplined manner.
  • Requires business stakeholders to be actively involved with the team and accountable for their decisions.
  • Possible to create a reasonable estimate and schedule without much effort
  • Stakeholders in complete control over how much money is spent, for how long, and on what.
  • Initial budget and schedule may not be perceived as sufficiently detailed.
  • Requires business stakeholders to understand the realities of IT estimating.
  • Requires a trustful relationship between IT and their business stakeholders.
  • Requires the development team to work in a disciplined manner.
  • Requires business stakeholders to be actively involved with the team and accountable for their decisions.

Suggested Reading

Disciplined Agile Delivery This book, Disciplined Agile Delivery: A Practitioner's Guide to Agile Software Delivery in the Enterprise describes the Disciplined Agile Delivery (DAD) process decision framework. The DAD framework is a people-first, learning-oriented hybrid agile approach to IT solution delivery. It has a risk-value delivery lifecycle, is goal-driven, is enterprise aware, and provides the foundation for scaling agile. This book is particularly important for anyone who wants to understand how agile works from end-to-end within an enterprise setting. Data professionals will find it interesting because it shows how agile modeling and agile database techniques fit into the overall solution delivery process. Enterprise professionals will find it interesting beause it explicitly promotes the idea that disciplined agile teams should be enterprise aware and therefore work closely with enterprise teams. Existing agile developers will find it interesting because it shows how to extend Scrum-based and Kanban-based strategies to provide a coherent, end-to-end streamlined delivery process.
Managing Agile Projects Are you being asked to manage a project with unclear requirements, high levels of change, and/or a team using Extreme Programming or other Agile Methods? If you are a project manager or team leader who is interested in learning the secrets of successfully controlling and delivering agile projects, then this is the book for you. From learning how agile projects are different from traditional projects, to detailed guidance on a number of agile management techniques and how to introduce them onto your own projects, we have the insider secrets from some of the industry experts – the visionaries who developed the agile methodologies in the first place. Managing Agile Projects is edited by Kevin Aguanno, a noted speaker and educator on agile project management, and includes contributions from many noted figures in the agile movement.

6. Let Us Help

We actively work with clients around the world to improve their information technology (IT) practices, typically in the role of mentor/coach, team lead, or trainer. A full description of what we do, and how to contact us, can be found at Scott W. Ambler + Associates.

Disciplined Agile Delivery: The Foundation for Scaling Agile Agile Modeling: Practices for Scaling Agile Agile Data: Practices for Scaling Agile EnterpriseUP: Agility at Scale AgileUP: Towards Disciplined Agile DeliveryAmbysoft Inc. Software Development Practices Advisor Scott Ambler + Associates Follow @scottwambler on Twitter!

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