Many times, we need to provide estimate the cost of a project/feature. For many Agile teams, it will be done by using relative estimate, e.g., story point and convert it to cost based on team’s velocity, like the following formula.
Total # of Sprints =Total Points / Average Velocity
Total Cost ($) =Total # of Sprints * Team’s cost per Sprint
Recently, one project team’s manager asked me why the cost estimate based on story point and velocity was 3 times bigger than the estimate based on effort (man day). When I checked the two estimates, I realized that the project manager convert effort estimate to cost directly, like
Total Cost ($) =Total Efforts of Many Day * Cost per person per day
The problem of this formula is, usually the cost model of a project is based on duration rather than effort. That means team may spend 3 days to finish 1 man day work so that the cost will be 3 days’ cost but not 1 day’s cost.
It is a common problem that people will convert effort estimate based on man day to the estimate of duration and schedule directly. That’s why I don’t like effort estimate because it is so easy to cause confusion about it.
With my experiences, I found story point estimate is actually quite accurate and easy to apply. Because it is relative estimate based on comparison. And according to the research of scientist, human’s brain is really good to compare rather than measure. That means when team considers that one story is roughly 2~3 times bigger than another one, the relative size does make sense most of time.
And the effort estimate (man day) is trying to estimate the effort of each activity, e.g., analysis, development and test. This kind of estimate usually requires more details about the requirements and the solution in order to improve the confidence. It will take longer time and also the deviation will be often big.
When the estimate needs to be converted to duration and cost, the conversion rate for story point is team’s velocity what is the actual data represent the team’s capability at the moment.
And the conversion rate for man day effort is based on general experience rather than team’s capability (except team measure it which is quite difficult and usually will create too much overhead to the team according to my experiences). With that, I believe the estimate based on story point and team’s velocity will provide more accurate forecast about the project.
So when you already have the estimate points and team’s actual velocity, it will be quite easy to estimate the duration and cost. If you find the figure is quite big, usually it is because team’s capability, what is velocity, is not as good as you expected rather than the size of the work has been overestimated. So to reduce the cost, you need to think about what can help the team to improve capability rather than ask team to reestimate again and again.