Software Project Estimates are Not Budgets, and That Matters

Estimates and budgets are not the same thing. Both have value when used properly. But, naively treating an estimate as a budget for a software project can result in a host of problems, including unhappy project managers and stressed teams. Here are some ways I keep the two in their proper places on our software projects and during pre-project consulting.

Estimates are for predicting scope and guiding development.

Estimates serve as a critical tool in the initial and ongoing planning phases of a project, focusing on predicting the scope and guiding the development process. Atomic teams estimate features to create a shared understanding of the landscape of scope and complexity within a project. We create estimates during our pre-project consulting and sales process to help evaluate appropriate budgets.

Estimates are crafted through understanding the project’s requirements, helping teams and clients form a shared understanding of each task’s complexity and scale. Additionally, they lay the groundwork for meaningful conversations about project priorities, potential trade-offs, and alternative strategies. These discussions align expectations with project realities and ensure the team focuses resources on delivering the highest possible value.

Further, estimates are inherently subject to refinement. As the project progresses and more detailed information becomes available, teams must revise and adjust initial estimates to reflect new insights and requirements. This iterative refinement is crucial for maintaining the adaptability of the project plan, enabling teams to navigate uncertainties and address complexities effectively.

Budgets allocate resources and define constraints.

While estimates give us an idea of the scope and complexity of a project, budgets allocate resources — primarily time and money — and set firm boundaries within which the team must deliver the project. Budgets define the amount an organization or client is willing and able to spend on a project. This financial commitment is usually based on the perceived value the completed project will deliver versus the cost to create that value.

In crafting these budgets, teams and clients must agree on what constitutes a successful outcome based on the resources available. Estimates are more fluid and can be refined as a project progresses and understanding deepens. In contrast, budgets are generally set and have less flexibility. They represent a commitment to a project’s financial boundaries that you can’t easily adjust without renegotiation.

Budgets help stakeholders manage expectations realistically and prepare for financial commitments. Effective budget management ensures that a project can progress within predefined financial constraints, and it aims to prevent overruns that could jeopardize project completion or result in financial loss.

What goes wrong when we treat estimates as budgets?

Mistaking estimates for budgets typically creates constraints on time and funding that are insufficient to complete the agreed-upon goals. This creates many problems. Here are some key issues that arise.

1. Unrealistic Expectations

When estimates, which are fundamentally best guesses, are treated as budgets, it leads to unrealistic expectations around what can be delivered within cost and time constraints. Estimates often don’t account for risk or leading/trailing work, like planning and deployment and support, to a significant enough degree. An intentional budgeting step, with the estimate for context, can help teams account for that work and set more realistic expectations about how much can be delivered with a timeframe and cost constraint.

2. Financial Overruns

Treating an estimate as a budget can result in financial overruns. This is especially true when the scope is inflexible or if the team experiences setbacks. The lack of sufficient funding to cover risks results in pressure to deal with unexpected costs.

3. Weak Projections

When stakeholders treat estimates as budgets, teams may decide to stop updating them to avoid uncomfortable conversations. When estimates become frozen and stop reflecting a team’s changing understanding of scope, they lose their ability to help guide the team. Teams with frozen estimates may be surprised by unexpected scope or surprise their clients with financial overruns.

4. Stress and Burnout

Misunderstanding the roles of estimates and budgets puts undue pressure on project teams. If you hold teams to estimates as if they are fixed budgets, this can lead to stress, overwork, and eventually burnout, as they struggle to deliver within unrealistic constraints.

5. Eroded Trust

Lastly, when clients and stakeholders find that projects are not meeting the expectations set by what they believed were budgetary commitments, trust erodes. This can negatively impact long-term relationships.

Everything should be in its right place.

Understanding the distinctions between estimates and budgets allows us to use them appropriately. It ensures all parties have a realistic and shared understanding of what they can achieve. This also ensures everyone understands how resources are allocated and under what constraints the project operates. It helps us maintain the value of our estimates and budgets over time, maintains trust, ensures financial sustainability, and delivers successful outcomes.


Join the conversation

Your email address will not be published. Required fields are marked *