Agile Project Budgeting

Agile Project Budgeting
THE PROBLEM WITH TRADITIONAL PROJECT BUDGETING
Traditional project budgeting uses a bottom-up approach that requires a forecast of all involved tasks for the entire project development process and estimates of their corresponding costs and durations, all in the pre-project phase. In today’s fast-paced business world where changes represent the norm and few things are predictable, this approach has resulted in ineffective project budgets.

AGILE PROJECT BUDGETING
Agile project budgeting is created by combining both a top-down approach and a bottom up approach. A top-down approach is applied by management to set up a budget pocket for each group of projects (i.e. a project category) for a fixed period of time (such as 3 months or 6 months). A bottom-up approach is applied by project teams to detail tasks in their projects for fairly short time boxes (such as 2 weeks per iteration and 2 months per increments) when realistic cost and schedule estimates are possible.
As long as the budget pocket isn’t breached, the project teams are free to allocate resources (cost and time) to where and when they are needed and to re-allocate the resources to accommodate the inevitable changes during the entire project development process. The goal is to maximize value delivery by aiming at higher quality of deliverables for the customers.

IMPLEMENT AGILE PROJECT BUDGETING IN 3 STEPS

Step 1. Establish budget limits for project portfolios
Define a budget limit for each value creating business line (or product line) for a fixed period of time, such as a trimester (or 6 months). And all the projects in this business line are managed as one project portfolio.
Step 2. Set up budget pockets for project categories
Divide each project portfolio into different categories based on the projects’ nature (e.g. IT projects, or marketing projects, etc.). Each of such category is given a proportion of the portfolio budget limit as its budget pocket for the trimester.
Step 3. Allocate resources to each project based on real capacity and time-boxes
Each project in each category is divided into time boxes of increments (e.g. 2 months per increment) and each increment further cut into smaller time boxes of iterations (e.g. 2 weeks per iteration) along the project time line. Then within the same category, the project teams are free to allocate and re-allocate required resources to the time boxes (increments and iterations) within their project or between the projects of that same category to accommodate changes when projects progress, as long as it’s within the category budget pocket.

Source:
Collet, B. (2017, Oct. 23). "How Traditional Budgeting Kills Agility", retrieved from brunocollet.com/post/how-traditional-budgeting-kills-agility.

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Hong Sun
Management Consultant, Canada

The Precision Alignment Approach for Calculating the Budget of an Agile Project
To measure an agile project's budget and schedule, multiple approaches are readily available for agile teams working with methodologies like Scrum and Extreme Programming. They are mostly size-based estimation techniques including "Planning Poker" and "Affinity Grouping," which are applicable only to making technical decisions such as "What features can we finish in next iteration?" or "How long will it take to finish the following features?"
When it comes to strategic decisions, such as "Do we have enough fund for the project (i.e. whether to even start it)?" or "What is the range of budget that is required to finish the project?" a time and money-based budgeting technique such as "Precision-Alignment Approach" is the right answer.

Precision-Alignment Approach is quite straightforward, easy to grasp, and appropriate for both IT and business agile projects. To better illustrate the principles of the approach, we will use a business agile project as an example--building a website for an online bookstore:

The desired and prioritized features of the website are listed below (which should be known by the bookstore owner):
1. Search Books Function
2. Checkout Function
3. Manage Inventory
4. Landing Page
5. Preview Inside of Book

Based on previous experiences or some guidance from developers, an estimation of what each task would take in terms of time and money can be obtained:

1 Search Books Function: 4 - 6 weeks; $40k - $60k
2 Checkout Function: 6 - 8 weeks; $60k - $80k
3 Manage Inventory: 4 - 8 weeks; $40k - $80k
4 Landing Page: 2 - 4 weeks; $20k - $40k
5 Preview Inside of Book: 3 - 6 weeks; $30k - $60k

This gives a budget range of $190k-$320k. If the bookstore owner's budget limit is $350k, he would know that he has enough fund to launch the project; and if he only has $180k available, he can't start the project at all.
However, if the budget limit is $200k, the information so far is not enough to make the decision, so the next step is to spend more time to estimate the three most important features with more precision:

1 Search Books Function*: 5 weeks; $50k
2 Checkout Function*: 7 - 8 weeks; $70k - $80k
3 Manage Inventory*: 6 - 7 weeks; $60k - $70k
4 Landing Page: 2 - 4 weeks; $20k - $40k
5 Preview Inside of Book: 3 - 6 weeks; $30k - $60k

* displays the revised time estimation

Now we have a more acceptable budget range of $230k-$300k, which allows the bookstore owner to make the decision as to whether to launch the project or not.
This budgeting process takes substantially less time (completed in a day) than traditional methods and provides the business with enough data to not only make a decision to go ahead, but a reasonable budget range to manage the project.

Sources:
Agilest. (n.d.), "Agile Budgeting: How Much will it Cost?"
Madden, D. (2014, Dec. 29). "Your Agile Project Needs a Budget, Not an Estimate".