Refactor Your PMP – Part 3: Cost Management

Next up is cost management. According to PMI, cost management includes the processes involved in planning, estimating, budgeting, and controlling costs so that the project can be completed within the approved budget. This knowledge area only includes three process, but as you might expect, we are going to put a little different spin on them and see what we can do to make them more agile.

Cost Estimating

PMI Definition: Developing an approximation of the costs of the resources needed to complete the project activities

We discussed in the last post that agile projects typically start with time and cost as the primary constraints and float scope through the life of the project. While this is true, there should always be some sort of assessment at the beginning of the project to determine what value the customer might expect at what level of investment.

The product owner might approach the team with a high level backlog of features that need to make the next release. The team would then estimate the backlog and calculate how many iterations they expect the work to take. There would be a negotiation of scope, team composition, and release duration as everyone comes to consensus around what is possible.

The cost of the project is then established as the product of team size and project duration.

Cost Budgeting

PMI Definition: Aggregating the estimated costs of individual activities or work packages to establish a cost baseline

Agile teams assess the relative size of each item in the backlog. Some teams also put a numeric value on the expected ROI of each feature in the backlog. In aggregate, the size of the backlog determines how many features can be delivered and thus the overall value of the release. Because costs are assumed to be a constraint, cost budgeting on an agile team is much more a statement of how much value can be delivered, over the life the project, for the approved budget.

The budgeted amount of value for the project is represented in the release backlog.

Cost Control

PMI Definition: Influencing the factors that create cost variances and controlling changes to the project budget

With the cost of the project now established as a project constraint, agile project are not nearly as concerned with controlling the costs and variances of individual work items. Agile teams are most concerned with how quickly the project begins delivering value and at what rate. We need to monitor how well we are delivering the anticipated features and if we have deviated from the rate we had originally expected.

If the project is not progressing as well as we might have hoped, we may need to remove less important features from the backlog. This will decrease the value to the customer and implicitly increase the cost per feature. If the product owner chooses to extend the duration of the project, to realize all of the anticipated value, this would increase the real costs to the project.

Delivered value is tracked primarily by measuring project burndown. Here we assess the total value of the release, what value the team had expected to deliver at the end of every iteration, and compare the actual value delivered against the ideal.

By monitoring project burndown the team can assess and control the cost impact to the overall project.

Next up… Scope Management.

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2 Responses to Refactor Your PMP – Part 3: Cost Management

  1. David Bozarth says:

    A very simple explanation, but now where in V1 do I track, monitor and report on Cost, or budget? Executives want to know how much will this cost? How much is it costing? Are we on track with cost? Are we over or under budget? Know the hours, team size and effort length is all well and good, but I need to convert these to dollar amounts and track them via burnup and durndown reports within the product. How do I do this?

    Thanks,

    David

  2. Great post,

    David, have you figured out responses to your very realistic questions ?

    We are facing the same from time to time, and the only way we’ve found working is by better selling the Agile methodologies to stakeholders and establishing the mutual confidence.

    Works well once done, but requires time and efforts and is subject to criticism from time to time, usually when a key personal changes or lightning strikes and you have some aligned bad sprints… never when you manage to overdeliver tough !

    Any taught welcomed,

    Patrick

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