Budget Calculation for Agile Project

This has been one of the most widely ask question I have encountered. How to perform budget calculation for Agile Projects where scope is variable?

I can understand why businesses would like to know how much it would cost them for a particular project. They will feel more comfortable to know their "risk" or investment boundary. While I always reminded them that they should focus on both Profit & Lost of the project rather than just the cost alone, I do share with them some approach of Project Investment model that they could consider.

1. Using the traditional way of project budgeting, while in traditional project budgeting where they need to dive deep to get accurate estimation, they should just stop at high level estimation and apply some extra percentages for buffer. For example, they should be able to derive some guesstimate at the feature level. First by determine number of feature they wanted to build, estimate efforts for each feature, apply 30% onto the estimation as buffer. They do need to remember that they need to allow the scope to change and hence not all features may be built when they the budget is finished. They need to make decision to trade off feature for every change.

2. Extension to the method above, the business should make decision after every release. They could just approve the budget for first release, at the end of first release; they then decide again the budget for the next release. In this case, they do not have to approve a big amount up front for the entire project. This would help better cash flow control of the company. With Agile project management, it allows the business to have early release compare to traditional approach. The business could then use the feedback gather from the release to decide the budget for the next release.