In helping companies adopt Scrum and Agile I regularly get questions about project budgets. Let’s look at the simple way we calculate a cash burn rate for a project and then use that for creating predictions of total spend.
First, let’s start with the premise that we are doing Scrum correctly, and that means a cross functional, dedicated team. If you are trying to do Scrum with part time team members who work on other projects then a fundamental premise of Scrum is broken, and I recommend fixing that problem before moving forward (see my articles on using Scrum pilots).
If we have a dedicated cross functional team, a Scrum Master and a Product Owner, then we can budget based on the assumption of full time staff, with little need for others to bill the project. This cleans up our resourcing needs and the number of people coming in and out of the project substantially. In fact, if the team is working full time on this project, why do we need time sheets for them? We’ll save that discussion for another time.
When budgeting for full time staff we consider the loaded cost. Loaded cost is an average of salary, benefits, rent, internet, power, work from home setups and other fixed costs the business pays in order to employ staff. If you don’t know the loaded cost for your organization then I recommend asking the accounting department or a controller, they should be able to tell you. Loaded cost is a budgeting number and it may include costs that are included elsewhere by accounting, however for consulting companies those costs will usually be rolled into the consulting rate.
Some example loaded costs I have come across:
- Mid sized western insurance company $88 CAD/hr
- Large US software company $143 USD/hr
- Large Canadian Mutual Fund $150 CAD/hr
- Small software startup $60 CAD/hr
- Oil and Gas Engineering firm $100 CAD/hr
- The most common range I hear is $100-120/hr
So if we know the loaded cost of staff we can calculate the burn rate of the project. For example:
- 6 team members + 1 Scrum Master + 1 Product Owner = 8 staff.
Assuming a loaded cost of $100/hr and 37.5 hour weeks, the weekly burn rate is 8X100X37.5 = $30,000 per weekAssuming a 2 week Sprint, the loaded cost is $60,000 per Sprint. So staffing for a 6 month project would be ~$780,000.
In software development labour makes up the bulk of the costs. Let’s look at some other line items we should include:
- Servers and computing hardware specific to the project (ie not PCs or hardware covered in loaded cost)
- Software licenses
- Cloud computing rent
- These additional costs are usually much smaller than the cost of labour.
You could estimate these line items directly or estimate them as a percentage of loaded cost. My starting point is 15% of labour costs, with hardware costs and cloud computing rent being highly variable depending on the type of project.
So for a 6 month project we have $780,000 + 15%X780,000 ~ $900,000
Now how did I arrive at the time frame of 6 months? We’ll take that topic up in a future article.