How to Budget for Software in an Agile Environment

Accurately estimating the cost, timeframe, and potential returns for a software project under Agile project management can be a challenge. Such figures are crucial for financiers, as they directly impact the initial investment and ongoing maintenance of a project. To better handle this, this article delves into the process of software cost estimation and explores different approaches that can be applied. Our discussion begins by examining the various aspects of Agile project management and the diverse tactics that can be employed.

The Importance of Agile Project Management

Implementing Agile project management involves a collaborative approach to managing a project. The process includes dividing complex tasks into smaller, more manageable components, and continually seeking input from team members responsible for project execution. This method features multiple shorter phases, commonly referred to as “sprints”, which facilitate team agility and enable quick adaptation to changing requirements or priorities. Furthermore, this approach promotes transparency during the project’s evolution.

Agile project management is a widely used approach for software development in the industry. With this methodology, the development process undergoes iterative cycles, as described in this Works article. At the end of each cycle, the project undergoes an extensive review, allowing teams to identify what tasks should be prioritized and ensure that the project stays on track with the timeline. This approach enhances the likelihood of the project being completed successfully.

Therefore, it is crucial to resolve the problems encountered during agile project management, in order to enhance the project’s quality while maintaining cost-efficiency. The utilization of modern tactics and tools, such as those involving CI/CD (continuous integration and continuous delivery), can streamline the development procedure and expedite project outcomes.

The Different Stages of Managing Agile Projects

The practice of Agile project management can be segmented into five distinct stages:

  1. Envisioning

    During this stage, stakeholders and end-users collaborate to establish the project’s goals and requirements.
  2. Speculation

    During this phase, the team comes together to explore prospective product directions, the methodologies and strategies that will be employed to achieve the project goals, and the technology that will be employed to improve performance. Additionally, this period is also when the project’s definitive timeline is established.
  3. Exploration

    During this phase of an Agile project, team members brainstorm various solutions to fulfil the project’s requirements.
  4. Adaptation

    Utilizing user feedback, the project team evaluates the final deliverables and identifies any necessary improvements. With each iteration, they strive to enhance and refine the product further.
  5. Closure

    When an Agile project is complete, the first step is to identify any issues that arose during and following its conclusion, as outlined in this Works post.

What Led Businesses to Search for Improved Project Management Techniques?

Over the last few years, the importance of IT and software development has skyrocketed, leading to a substantial surge in the adoption of Agile methodology. The genesis of Agile project management can be traced back to the 1940s, with James Martin’s invention of Rapid Application Development, which presented the Rapid Iterative Production Prototyping (RIPP) approach.

Innovative strategies for Agile project management became indispensable, paving the way for the introduction of the two most prevalent Agile frameworks: Scrum and Kanban. Scrum employs time-bound iterations, whereas Kanban focuses on the constant flow of production.

Popular Agile Methodologies

We will juxtapose these two widely used strategies for Agile project management.


Scrum is an Agile project management framework that prioritizes collaborative teamwork to ensure prompt product delivery. The project timeline consists of Sprint cycles of fixed lengths. It is critical for the team, led by the product owner, to establish product backlogs, lists of desired features and functions, and bug lists that are accessible to all members. This ensures that the software is delivered on schedule.

Scrum comprises four ceremonies:

  1. Sprint planning

    At a team meeting, future sprint tasks are extensively reviewed and discussed.
  2. Quick-fire demonstration

    During a meeting, team members exhibit new capabilities or other achievements.
  3. Daily stand-up

    Brief 15- to 20-minute meetings held every day to update the team on the project’s status.
  4. Retrospective

    A team conversation reflecting on the previous sprint’s shortcomings to prevent them from being repeated in the current one.


Kanban is an Agile project management technique that prioritizes effectiveness while minimizing stress. Unlike Scrum, it doesn’t feature a backlog section, making it the preferred choice for numerous teams. Kanban utilizes a single work column subjected to work-in-progress (WIP) limits, enabling teams to finish assignments promptly and optimize their output. As a result, teams can accomplish more in less time than with Scrum alone.

These are some of the components that form Kanban:

  1. Stories, or a collection of stories

    A list of the necessary tasks to be completed.
  2. Swimlanes

    Established on the Kanban board to differentiate between assignments, projects, and users.
  3. Work in progress (WIP) limits

    Determines the team’s efficiency and assigns tasks accordingly.
  4. Continuous delivery

    A fundamental part of the principles of continuous integration and delivery is releasing stories or other tasks as soon as they are completed.

Assessment of Software Pricing

The term “cost of building software” refers to the collective amount of time, money, and resources invested in the creation of a software program. Assessing software project expenses can yield numerous benefits, such as a more precise evaluation of the resources required to complete a project, a better understanding of the potential return on investment, and the ability to establish realistic objectives and deadlines for the project. Furthermore, having an accurate estimate of the expenses connected with a software project can allow decision-makers to make more informed judgments about the project’s potential success.

  1. Evaluates the usefulness of the product from both the consumer and manufacturer’s viewpoint.
  2. The team responsible for the product has a precise comprehension of their goals and the timeframe within which they must attain them.
  3. The entire team shares a mutual comprehension of the tasks required to finish the project.

Agile Estimation Methods

When estimating the cost of software development, product owners may choose to utilise either the traditional waterfall approach or the more flexible agile methodology. To determine which method is most appropriate for the task at hand, it is important to consider the advantages and disadvantages of both approaches. The waterfall approach is highly structured and enables a more precise estimation of budget and timeline, yet does not offer much room for adaptation or modification during the course of the project. On the other hand, the agile methodology is better suited for projects that require frequent changes and adjustments, allowing for greater flexibility and responsiveness. In conclusion, product owners must assess their project’s particular requirements and select the method that is best suited for their needs.

Now, let us take a comprehensive look at the two approaches:

The Linear Approach

Tasks are carried out in a sequential manner, without any evaluation of the previously achieved milestones, as each task is accomplished. This method is characterised by its linear nature, and there are no changes to the project’s features or scope. Nonetheless, the budget and timeline may be adjusted. Defining a fixed scope simplifies the estimation of the project’s cost. However, leaving the budget and timeline open-ended may result in various potential issues.

  1. Conducting user testing is one of the most effective ways to determine whether the enhancements made to a product’s functionality will benefit both its users and its creators. This entails having product users complete tasks with the new features implemented, and then collecting their input on factors such as usability, performance, and overall satisfaction. Furthermore, it may be prudent to consider the consequences if certain features were to be modified or removed in the future. In this instance, having a plan in place for how to execute the necessary changes without causing inconvenience to users is critical.
  2. Preserving profitability typically involves more than just treating costs as a variable. To effectively accommodate shifting priorities, the cost of developing software must often be augmented, necessitating the extension of existing team members’ involvement or the acquisition of additional team members to guarantee that the project is accomplished within the predetermined timeframe.
  3. Keeping a product on hold for an extended duration may cause its market value to decrease. If the product is not delivered on time, competitors may seize the opportunity to introduce similar products to the market.

Adopting an Agile Methodology

The cost of software development can be influenced by the development time required and the personnel involved in the project. Bringing in more team members to extend the project timeframe may result in a significant increase in costs. The agile methodology is a feasible solution to this issue, as it allows for a predetermined budget and timeline while also providing some degree of flexibility in terms of the project’s scope. The following characteristics define this approach:

  1. Dividing the Project into Manageable Segments

    The agile methodology offers an efficient means of breaking down a large project into smaller, more manageable components that can be implemented incrementally. This approach enables a more precise estimation of project expenses and allows for the regular re-evaluation of completed tasks, which can be updated based on user feedback. By providing a systematic approach to address stakeholder requirements, agile project management can be a valuable asset in ensuring the successful completion of projects.
  2. Rapid and Straightforward Modifications

    It is impractical for a team to anticipate every potential issue that may arise during the creation of a successful product, hence it is probable that some adjustments will be necessary throughout the product development process. Adding new features that have analogous functionalities as the existing ones will not result in any additional cost.
  3. Terminating the Project Early

    The client has the authority to request an early cessation of the project if all of the predefined product features have been successfully delivered and there is no financial benefit to continuing with the present project team. This is advantageous to the customer, who receives the requisite product features ahead of schedule and at a reduced fee. A portion (20%) of the remaining contract is allocated to the project team.

Cost Estimation Techniques in Software Engineering

To precisely predict the resources required to accomplish successful software engineering projects, various techniques must be utilised. These techniques comprise, but are not confined to, the following:

  1. Undertaking Size Estimation

    The complexity, features, scale, and potential risks of a project are critical factors in defining its scope. For instance, creating an online marketplace like versus a social networking platform such as involve distinct challenges and scope despite their comparable scale.

    To mitigate the risks and uncertainties related to project estimates, utilising ranges for overall cost, project size, and estimated time is advantageous. Additionally, the characteristics of the product, which are conveyed as stories, can be estimated in terms of story points or ideal days. Furthermore, the duration of a project can be measured in terms of story points or ideal days.
  2. Story Elements

    The size of a user story is calculated in “story points,” which is a standard unit of measurement. This encompasses tasks such as adding new features, evaluating and testing existing features, and improving code quality. For instance, Story A may be assigned 1 Story Point, while Story B may be given 2 Story Points. This enables us to deduce that Story B is twice as lengthy as Story A. Hence, the overall project scope is divided into three tiers.
  3. The Optimal Timeframe

    The project timeline is expressed in days, and the project scope is based on the team’s ability to maintain steady progress. For basic estimations, it is more convenient to use days than story points.


Velocity is a metric that quantifies the pace at which a team completes tasks during a specified time frame, commonly indicated as a sprint or iteration. It is frequently expressed as a range since it can be difficult to ascertain a team’s velocity precisely at the start of a project. For example, a single story may have an estimated point value ranging between 20 to 30 per sprint.

The pace at which a task is accomplished is a crucial aspect to consider when estimating how long it will take to complete work. To precisely forecast the team’s velocity, each story point must be broken down into individual tasks that need to be completed. An estimate of the approximate time required to complete each activity can be made, which includes design, code review, implementation, testing, continuous integration, continuous deployment, and any other necessary steps.

It is advised that the team capacity should not be less than 70% or exceed 100%. There may be some variation in team output at the outset, but once a consistent pattern is established, forecasting the project completion date becomes more manageable.

Elements of Estimation

Analogy, parametric estimates, engineering build-up, and extrapolation from actual expenses are all crucial techniques for forecasting software development costs. The procedure is guided by the available data, which begins with an analogy, and advances to actual costs in the later stages of development. This process is heavily reliant on the current stage of the software development cycle.

Since comprehensive data is not available during the initial developmental stages, the application of analogy as an agile estimating strategy is the most effective method. As the project advances and more information becomes accessible, the estimator can use it to make more accurate predictions of the final cost.

When utilising agile estimation techniques for software engineering cost estimation, a collective effort is the most effective approach. The size of the product is a crucial consideration in this process. Although there is no universally accepted method for assigning user story points, several techniques have been mentioned above. The Fibonacci sequence, “ideal days,” and “small-medium-large” are all commonly used methods to assign story points.

After assigning story points to user stories, the team is responsible for generating the product release from the product backlog. Their velocity is used to determine the sprint schedule, which, in turn, determines the number of releases (a unique gauge of productivity in agile project estimation). This process enables the team to accurately estimate the amount of work that can be completed within a specific timeframe.

The team frequently evaluates which user story to prioritise for the next sprint, considering the number of story points needed for completion. They also assess the complexity of the user stories and their velocity to determine if they can be completed within the assigned timeframe. This continual process enhances the precision of software development cost predictions across several sprints.

The Process of Cost Estimation in Steps

The process of estimating the cost involves several stages:

Creation of Conceptual Outline

At the inception of the project, the team will collaborate to define the key features and functionality requested by the clients, as well as the project’s desired outcome. This process of establishing the high-level ‘epic’ elements will lay the groundwork for the project’s direction. This preliminary stage of the project will include:

  • The company’s vision, which also outlines its overall goals, determines what is to be created.
  • Extraordinary and groundbreaking capabilities that truly assist clients.
  • By employing the MoSCoW framework, we determined what was absolutely indispensable to achieve the project’s completion.


The Product Owner must make a well-informed decision about the project’s continuation, weighing the timeframe, expenses, and volume of data to be gathered. All of these factors must be thoughtfully evaluated before arriving at a conclusion.

Preparation for Release

At this stage, a timetable is established for the availability of each feature. Specifically, this involves:

  • In the Product Queue:

    These are the “user stories” for the product’s most significant features.
  • Estimation:

    Planning poker is a game that teams use to rapidly and consistently estimate the relative size and complexity of user stories. The team is able to arrive at a consensus on the required amount of work by assigning predetermined story points or ideal days to each narrative.
  • Prioritisation:

    To ensure that our client’s goals are efficiently achieved, prioritising user stories is imperative. This will enable us to identify which tasks are the most critical for the client and should be tackled first. With access to both the backlog and the size of each user story, we can effortlessly make this determination and commence working towards accomplishing our client’s objectives.
  • Preparing for release:

    Following the prioritisation of features, the subsequent step is to develop a release strategy and approximate the product’s public launch date. This will guarantee a successful product deployment and offer insight into when the public can anticipate accessing the features.

Consent to a Steady Fee

After completing the preceding tasks successfully, the next step is to develop a fixed-price project contract quotation. It is advantageous to use the most optimal approach when estimating an agile project, which involves maintaining the duration and team size while regarding the scope as a flexible target.

Considering pricing

When evaluating the expenses of an agile project, one should be ready for potential variations in pricing. A significant portion of the total cost increase can be ascribed to the initial investments required during the development phase. Once the product’s release development and launch are finished, the program will be in a stable state, resulting in a reduction in maintenance expenses.

This blog post offered a comprehensive overview of the foundational principles of software engineering cost estimation in an agile setting. It highlights that agile estimation techniques are usually more precise than those used in a conventional waterfall environment. Nevertheless, it should be acknowledged that since every project and team has its own unique goals, there is no one-size-fits-all approach to software engineering cost estimation.

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