Project Cost Estimating and How Scrum Projects Estimate Cost

If you want to provoke an emotional reaction from a group of software development managers, ask them about their experience doing project cost estimation – WOW. I doubt you will find any of them who look forward to the task. Some of the managers may even become downright hostile. Estimating the cost of a software development for a contract or a proposal can be a punishing experience. And, almost every manager will admit that their estimate — especially for a complex project or one with a long duration — will be wrong (but hopefully not by much).

Why? Because

  • Requirements change during development, which changes the level of effort and therefore the cost
  • The operational environment is not, and cannot be, completely understood before work begins (Unless you have the Johnny Carson “Carnack the magnificent” genie)
  • In order to create a “price to win” in competitive programs, senior management reduces estimated cost and then pushes the team to “work smarter” (HA – can I hear all the groans from project members!).
  • There is a gremlin called “Murphy” who loves to show up on projects and create all kinds of problems*.

The History of Software Project Cost Estimation
In the beginning there was intuition and wishful thinking that drove software cost estimation. A project manager, often not a practitioner or software developer, reviewed high-level requirements and created a cost estimate from that – “I think this should take a couple months.” That approach did not always work well (:-).

In an effort to be more scientific in cost estimating, professionals developed many techniques over the years for performing estimates – historical analogous estimating, parametric estimating, three point estimating (PERT), expert judgment, etc.  In fact, PMI has produced a book called “Practice Standard for Project Estimating”.

The software industry developed one costing method that assessed a cost per line of written code and then estimated how many lines of code would be required to build the software. The success of LOC estimation methods suffered from the reasons listed above as well as the obvious problem that not all lines of code are equal in difficulty. I once asked a senior software engineer, how many lines of code it would take to develop X functionality. He replied, “How many do you want it to take?” He was not being a smart aleck, he was only acknowledging the fact that there are many ways in software development to skin a cat and those options require different amounts of code.

LOC-based cost estimating was followed by function point cost estimation. A function point is an output, inquiry, input, an internal file, or an external interface. In simple terms, you develop a cost estimate by counting the number of function points in a proposed system, assigning a cost per point, and multiplying. More involved function point counting included values for difficulty and importance to the eventual system.
There were many other attempts to develop fast, cheap and simple software cost estimation methods. I could go on for a long time – However, I won’t bore you with the details.  Let’s just say there is no magic book or formula for this critical process!

Cost Estimating in Scrum
Over the last few weeks, I have been writing about using the Scrum framework for software development. Scrum practitioners do not avoid cost estimating challenges, but they have methods to assess project cost that are consistent with Scrum’s approach to project execution. They do not, however, have the magic bullet, either.

All Scrum projects begin with a story (read “high level requirements” for the PMI crowd). What does the product owner want to be able to do when the project is complete? From that vision come the initial requirements. Scrum cost estimating methods use the wisdom of the team to generate estimated effort — acknowledging from the beginning that final cost and duration will vary as uncertainty and changing requirements are reflected in actual development.

When the Scrum team meets for its initial planning, the vision is laid out by the product owner. The team then considers how to create the desired functionality, which are called story points. Each story point is rated for relative difficulty.
Cristopher McSpiritt describes the process this way in “What is Planning Poker?”

The Steps:

  1. The product owner describes a user story/feature the team is estimating. The product owner may provide clarification on the feature in response to questions.
  2. Each team member chooses a development effort card from a deck of values to represent their relative estimate of level of effort. Cards are placed upside down on the table so that they do not influence others.
  3. After all estimates are on the table, the cards are flipped over.
  4. If there is a significant range among estimates, the team members who submitted the high and low values provide a rationale for their estimate.
  5. Once the discussion on the range has been conducted, steps 2 through 4 are repeated until a consensus is reached.

This team process has the advantage of sharing the vision, building the team and gaining buy-in from the Scrum team members who have to actually do the work.

In his book, Agile Estimating and Planning, Michael Cohn reports success using a Fibonacci sequence, such as 1, 2, 3, 5, and 8 … for a relative story point difficulty value scale. The team then considers how many story points it can accomplish during a sprint – called velocity. An experienced team can generate a useful sprint / project estimate from this process. However, an estimate is just that. During actual development (the Sprint), task difficulty and team velocity are routinely reviewed and modified. As (predictable) requirements changes are requested by the product owner through the product backlog, variations in the order of the product backlog (Requirements or features) can be accommodated over the life of the entire project without affecting the current estimates and sprint.

One of the big advantages of this method is that we don’t have to estimate the entire project in excruciating detail or even know the complete set of features at the beginning of the project – this is more real world than the traditional waterfall type of project planning and estimating.
I would love to hear your opinions and thoughts about estimating for projects, both traditional and Scrum.

* Capt. Edward A. Murphy is accepted as the reason for Murphy’s law  http://www.murphys-laws.com/murphy/murphy-true.html

Estimating Project Costs


Establishing a project budget can be as simple as calculating what it will cost to perform each task in the work breakdown structure and adding them to get a total budget. However, as any project manager who has created a project budget knows, creating a project budget is rarely simple or straightforward (and usually not totally in your control!).

The complicating factors include clients who want as much functionality as possible for the lowest cost, business development and sales staff who wants to win contracts, and senior managers who want to maximize profits. In addition, everyone wants the product to work well and be easy to use. The person in the middle of this vested-interest conflict is the project manager.

And for those certified PMPs, there is a whole section in the PMBOK® that talks about this topic.  Planning in chapter 3 talks about estimating costs and then budget as a part of the planning process and then chapter 7 “Project Cost Management” discusses the techniques and best practices for preparing budgets and managing the costs.

Just because creating an acceptable project budget is not simple does not mean you will not have to do it. So, how can a project manager protect the hoped for success of the project and manage risks by not agreeing to do more than can be done?

Not the Dilbert way – of course. Checking out PMBOK, Chapter 7, they suggest beginning with project scope, which may require the addition of design detail to create defendable cost numbers. You also need the project schedule and information on staff availability. Once you know what needs to be done, how quickly and by whom, cost estimating can begin.

PMBOK lists several cost estimating methods that may be done alone or in complementary fashion.

  • Expert judgment – your experience on similar tasks and projects, input from consultants
  • Analogous estimating – other similar organization projects cost history data
  • Parametric estimating – Parametric Cost Estimating Handbook from NASA offers guidance, though somewhat dated. COCOMO II is used in traditional waterfall style software development. According to S. Chandrasekaran from St.Joseph’s College of Engineering, Agile software development requires a different cost estimating model which he describes in his paper, “Multi-criteria Approach for Agile Software Cost Estimating Model,” which can be found with other cost estimating articles at 2Dix.
  • Bottom up
  • Three point estimating – most likely, optimistic, pessimistic
  • Reserve analysis – with a contingency fund to cover uncertainty in estimates
  • Cost of quality – add in

My advice to you is “back up your estimates with data”. Be prepared to justify costs and explain risks – in non-technical terms — of making too optimistic assumptions. Try to achieve reduction in scope commensurate with lowered budgets. Do not feel too badly if you lose some of the cost estimating battles.  The real key is to document your assumptions (like there are 7 modules to design, or we will perform 2 week long tests).

What has been your experience with cost estimating software projects in the real world? Do you pad your estimates knowing you may have to settle for less?  Or do you just add some contingency to duration and costs?

Leave a comment and share your experience!

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