Updated: Oct 27
In this series, we discuss how organisations can estimate budgets for their agile projects. In an agile environment, not all requirements are known at the beginning of the project. This is a way in which Agile project delivery is dissimilar to standard waterfall project management where budgets are calculated upfront. So, when you don’t know everything up front, how can you accurately forecast the budget required to deliver the project?
In our last blog, we covered how to estimate budget costs on agile projects. We promised we will talk more about confidence intervals and levels, and how to calculate contingency funding in a future part of this blog series. So, here we go.
What is contingency budget?
Contingency budget is an amount of money which is estimated for any uncertainty which is not accounted for in the initial cost estimation.
The benefits of contingency budgets are:
Effectiveness of cost control. With a contingency budget in place can help businesses withstand these unforeseen circumstances without having to shut down.
When your project is put on hold, contingency budget enables you to resume delivery quickly.
Protection of resources if the project gets delayed.
Minimize customer inconvenience. Having a contingency budget allows businesses to show their stakeholders that they are resilient and prepared to handle any future disaster or emergency without affecting their service.
Prevent panic. With well-planned contingency budgets, the organisation could easily control the situation and could recover rapidly.
If unutilized, it gets included in any project profits.
Elasticity to stretch the budget when required.
The consequences of not establishing contingency budget i.e., not analysing the uncertainties in the project could lead into:
Failure of the project
Project goes over-budget
Project on-hold, waiting for the budget
Timelines extended for the project
Loss of trust (vendors, resources, organisation)
While calculating contingency cost one needs to quantify risks and assumptions. There are simple approaches to estimate a contingency cost which brings their own cons (as explained in the last blog). However, the best way to calculate contingency budget is analysing and identifying the confidence level.
What is confidence level?
Confidence level (also referred to as a confidence interval) is how confident you are with budget estimate. It is based on the probability of making this project successful within the estimated budget.
How can we determine confidence level?
Each project manager has their own way to determine the confidence level. Below are the few techniques which can be utilized.
High/Medium/Low – The Project Manager, project team and experts can together decide considering the knowns (requirements) and unknowns (risks and issues).
% Of confidence - The Project Manager, team and experts can poll together and then take the average %.
Standard Deviation = Sigma (σ)
To learn how to calculate the value for sigma (Standard Deviation) and the mean estimate, look out for our next blog.
Once the confidence level is determined, the contingency budget can be calculated as below:
Percentage of Project Base Cost Estimate
The higher the confidence the lower the contingency cost we need to keep.
Contingency is calculated as a fixed percentage of the base cost of the project.
Contingency Cost = % x Project Base Cost Estimate
Project Base Cost Estimate = $150,000
Confidence Level - Medium
% Decided for contingency cost - 10%
Contingency Cost = 10% x $150,000 = $15,000
In this method we quantify the impact of any known risks. The confidence/probability of the risk helps to determine the monetary impact which helps us to calculate the contingency cost.
Expected Value = Probability of Risk Occurring x Impact If It Occurs
In this case, you add $2,700 to your budget as contingency cost.
Remember, as agile talks about continuous improvement, the budget estimation of an agile project is highly likely to be an iterative and ongoing process.
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