How to Budget for an Agile Software Development Project

by Konstantin Ukrainskiy March 22, 2019

What is an Agile Software Development Budget Estimate, and why is it so Important?

Software applications can differ in scope of complexity and use cases, ranging from a small marketing site to a complex online store with thousands of products. Regardless of the scope or complexity of the project, you need to think about the cost if you plan on hiring a software development team.

A software budget details the total amount of funds necessary and available to achieve your particular business goal. On the other hand, your business goal is your cost driver. In other words, complex goals require more features, and more features require more funding.

The software development budget is just one of many constraints that impact any given project. Two other significant constraints are time and quality.

When considering your budget, there are two important things to keep in mind:

  1. The project scope, or the number of features you request, should be very limited in most cases. Many features that are initially thought of as “necessary” are not actually key parts of the application. Therefore, it’s important to think through your features carefully and choose only the important ones.
  2. Software development is never complete. There will always be new features, functionality, bugs, improvements and security updates that business owners and developers will need to address. If a budget and clear goals are not set in advance and updated as necessary, then the software product or project may become a constant drain on company funds.

There are two approaches to budgeting for a software development project. These include:

  1. Run the project without any budget at all. Keep throwing money at it until you get the features you want. (This approach probably won’t return a profit.)
  2. Thoroughly estimate the project budget and make it just enough to achieve your goal. This way, you can achieve your goal of providing valuable features your users will love—even if you don’t deliver every possible feature at launch. (This approach is more likely to be a money maker.)

Here at BIT Studios, we prefer the second approach. It gives our customers the opportunity to spend only the minimum necessary amount.

What Methods Can You Use to Roughly Estimate an Agile Software Development Budget?

One of the questions you will face if you plan to become a software application owner is, “What approaches exist to roughly estimate an agile software development budget?”

There are several approaches.

However, you should be aware that in each of the different approaches estimates are not purely for “development” costs. Software budgets include analysis, prototyping, testing, support, hardware costs and communication, plus a host of other overheads and parameters.

The foundation of any budgeting exercise depends on how much information is already available, as well as your familiarity with the subject matter.

Let’s look at the main approaches to software development budget estimation:

  • Cost-of-time (a.k.a. “top-down”) estimation: Initially, you may ask your internal development team or software advisor how long it will take to develop a specific target functionality. You may then multiply this time by the average cost of engineers. This approach is inefficient because it forces you to add in all non-development activities and expenses as a percentage of the development costs. However, this approach will still give you at least some idea of your project’s financial needs.
  • Impact and potential profit estimation: At first, you may estimate how much profit the application will generate and then, from that, develop an idea of how much you should spend on it. In such a case, agile software development would work best because it allows you to iterate your application until it matches your budget estimate.
  • Comparison estimation: An application’s budget can be roughly estimated if the number of features and the complexity of the application are comparable to some existing application. However, this method may only work if you have significant experience and more than one application to compare. Otherwise, this could very well end up being as good as a guess.

Here’s Why Discovery is the Best Option for Creating a Budget Estimate

Software application discovery excels as the first step in the development cycle. The idea is to hire a team to discover all the technical requirements related to a given project, prototype the application, and then estimate the budget based on these findings.

This step is crucial for information gathering. This information enables the software development team to make informed technical recommendations, an essential step in preparing an accurate cost estimate. Discovery also helps align the team’s mindset with the client’s.

This approach also has another potential advantage: the possibility to proof the software concept through prototyping.

A prototype is a semi-functional graphical representation of a potential product that offers an overall look and user flow for examination before any real development begin. Prototypes often look so natural and complete that they can be handed off to a potential user for feedback!

By the end of the discovery cycle, the following items are delivered to the client:

  • Requirements definition and analysis: These elements offer a review of key aspects, critical functionality and core technical features. The team, to achieve this, dives into the initial requirements, making them more coherent and tying the various proposed elements to each other.
  • Recommended technological stack: An outline of the programming languages and technologies that will best suit the requirements. Often, a comparative table is used to present the pros and cons of each recommended approach.
  • Functional and nonfunctional requirements: This captures the details of the potential product, including vision, scope, and a description of user functionality.
  • Project plan: A step-by-step plan for how the project should run in order to achieve on-time and on-budget delivery.
  • Cost estimation: Detailed cost estimates that provide granular analysis. Usually, at this point, estimates are so precise that budget overruns rarely happen.

From a business perspective, discovery helps uncover new opportunities and/or verify a business idea. The results of this process might influence or even shift the direction of any further product development. In other words, the process provides invaluable insights at a very early stage.

By investing time in discovery, you can minimize the project risks that are associated with cost and schedule overruns.

What Should You do if Your Agile Software Development Budget Estimates are too High?

Sometimes, software development estimates may not align with a client’s available funds. In such a case, what can be done to reduce the estimates?

  1. Reduce complexity: In many cases, costs rise when software architecture and integration grow in complexity. One common example is integrating an application with several different payment gateways, and then trying to process all of them within the application itself. In a case like this, explore the possibility of utilizing third-party solutions instead.
  2. Reduce scope: To achieve this, you might try using sophisticated techniques like story maps. Alternatively, you can eliminate some of the application’s less-necessary functionalities; if you have a detailed estimate (such as the one you got by going through the discovery phase), this is easy.
  3. Focus on a minimum viable product: In some cases, a minimum viable product (a.k.a. an MVP) is enough to get you to a beta launch while radically eliminating waste.

If your budget estimates are too high, you can use one or more of these methods to bring the costs down. Having a candid conversation with the software development team will ensure that expectations are out in the open and that everyone is on the same page.

What Goes into an Agile Software Development Budget?

Many potential software owners make the mistake of expecting a quote to include everything they will need: software application development costs, hardware costs, management costs, and everything else. This misconception happens because many software companies calculate their estimates only in terms of the time (cost) necessary for raw development.

At first glance, the cost will seem lower and correspondingly more attractive. However, upon further analysis, you will see that many elements were omitted and only surface after the project has already started.

Now, let’s look at what to consider when budgeting for software development:

  • Communication overhead: Communication is perhaps the most obvious but least-remembered activity when budgeting. Communicating takes up a significant amount of working time and includes planning, meetings, and unplanned communication (for example, when seeking clarification on a feature). For some roles, such as project managers, communication can take up as much as 80 percent of work time.
  • Application quality management: Certain actions are necessary for assuring quality and maintainability. For instance, various testing procedures, fixing application deficiencies, supporting code and architecture, and so on.
  • Marketing: Often forgotten is the fact that marketing complements software development by helping bring your application to market and making it visible to potential clients. Marketing may include behavior tracking, search engine optimization (SEO), advertising campaigns, and an array of other services.
  • Support: The very nature of applications means they cannot exist without support. Just think about how often your computer operating system or smartphone needs updating. It’s possible (and likely) that your desired application — while simpler than Windows/ OSX or Android/iOS — will require some budget for continuing support.
  • Hardware: There is almost no application today that does not require some kind of backend hardware to provide services to users. As such, hardware costs — such as hosting or dedicated infrastructure — should be part of your budget estimate.

What Factors Can Destroy Your Agile Software Development Project, and How Do You Avoid Them?

The first critical step for getting started on a project’s financial plan is to create a budget that sufficiently covers your expenses. When getting an estimate from a potential contractor, bearing in mind the need to have a contingency risk amount is wise as costs may vary from team to team.

To avoid the risks associated with poor budget allocation, follow these steps:

  • Allocate your budget with a buffer: Because the cost of software development may vary, it’s always wise to allocate at least 20 to 30 percent more. You won’t necessarily spend this money, but you can use this buffer to finish the application in the case of an unplanned turn of events. There’s nothing worse than halting development at 95 percent completion.
  • Allocate more if you’re redoing an existing application: It may sound counterintuitive, but if you already have an application and want to recreate or update it, it may cost you more than creating an application from scratch. Why is this? Well, first, reverse-engineering is always more complex. Remember NASA? Despite having well-documented the construction of the Apollo spaceships, they can’t build them now because it would be more complex than creating a new one. Also, you may need to support two applications concurrently. Lastly, data migration may be required, which is another non-trivial task. As a rule of thumb, a budget for revamping an existing application should be about 150 percent that of building a new application.
  • Cost estimation differs from team to team: Teams vary in terms of expertise, velocity, quality of team members, and involvement. Let’s say you get an estimate from one team saying this software project requires X hours. You cannot easily transfer that same estimate to another team where the rate-per-hour (for instance) is lower, and expect to get the same results for less money.
  • Project management triangle: With a project management triangle that features time, quality and budget, you can only expect to get two of those items at once. For example, your project may be of high quality and delivered fast, but it will cost a fortune. So, if you have time, quality or budget constraints, you should consider this when budgeting.

How BIT Studios Helps You Run an Agile Software Development Project on Time and Within Budget

At BIT Studios, we do several things to help keep your budget low and prevent overruns.

  • We help you focus on an MVP, and on building features that will later prove useful to your target users.
  • We keep scope changes under control and help you understand the real cost of change. On previous projects, we found that some stakeholders consider agile development an opportunity for endless change. They are later shocked to discover that endless change destroys the timeline and budget. This is something we have learned to help our clients avoid.
  • We create software architecture in advance and inform clients about its limitations. For instance, we’re upfront about the impossibility of architecting software that allows endless changes without having a significant impact on the original architecture.
  • We help you plan any strategic changes, which are sometimes necessary but which almost always impact the project timeline and budget.

In Conclusion

Even the biggest and most sophisticated software giants like IBM only have 40 percent of their projects meet all three criteria of the project management triangle — time, quality and budget. Further, a study published by the Harvard Business Review found that the average budget overrun is about 27 percent, while about 15 percent of all projects exceed their projected budget by a staggering 200 percent.

Unrealistic or inaccurate estimates have the potential to threaten your project’s success by lowering quality, violating deadlines or leaving the project incomplete as a result of budget overruns. Following practical and tested agile software development budget-setting mechanisms, such as those mentioned in this article, can help you push through to successful project completion.