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Software development has seen a lot of changes over the years. One of the most radical changes in the industry is the switch from waterfall development methodology to agile software development. It has completely changed how new software projects are managed and completed. It has also altered how estimation, budgeting, and resource distribution in development work.

There are multiple methodologies under the umbrella of agile software development, but the most commonly used one is SCRUM. This is important to understand for clients and businesses because it’s very closely associated with burn rates in software development.

Burn Rates in Development

The word "Burn rate" means the rate at which software developers burn through available resources (cash) when developing a project. The term is more frequently used for startups. Investors and venture capitalists use it to calculate how fast the startup will burn through its capital before developing a positive cash flow. It’s probably inspired by rockets, where there is a correlation between how quickly the fuel will burn and how far it will propel the projectile.

One of the easiest ways to understand burn rates is by comparing it against the fixed-rate pricing models. But understand that different software development teams might have different perspectives on what burn rates are and how they are calculated for a software development project.

Let’s say you want a software developed for your business, and you are asking multiple vendors to bid on the project. You are also not sure what would be the best way to manage the project: Agile or waterfall, which, despite becoming obsolete in many areas, is still a viable option for some projects.

This is where you may see the different modes of bidding and come across many terms you might have never heard before (in association with software development) like "sprint," "iterations," and "dedication," etc. But we are quite sure dedication is the most casually thrown around the word when bidding for projects.

Fixed-Rate vs. Burn Rates

Many of the vendors may quote you a fixed price for the project, which can be both a good and bad thing. Even if you have provided virtually every detail about what you want your software or application to look and feel like, it can be difficult for a vendor to estimate the development cost correctly. They will come up with a number that would "most-likely" cover the whole cost, but that's until you find bugs in the finalized product or want some features removed, replaced, or modified. If the subsequent jobs are covered in the vendor's warranty, they may have to spend too many hours fixing the original version, which can eat into their profits.

This is just one example of how a fixed rate pricing model and completing the project using the waterfall methodology might not work out in your and the vendor’s favour.

This is where the agile approach to software development and calculating the project's price using burn rates can save the day.

In agile methodologies, especially in SCRUM, you can break the whole project in multiple “sprints.” Sprints are time-boxes or a fixed-duration period where one goal (or a few goals) must be completed. The entire development cycle is broken down into several sprints (usually one-month long or shorter). Not every sprint might need the same number of team members or the same amount of time and dedication from each team member, and it’s allocated based on the scope of the sprint.

This may seem a bit more complicated than the fixed-price waterfall model, where you ask a vendor to create software, and they do it for a price. But it's actually much more practical. Unlike using guesswork for the whole project and coming up with an estimation, the developers will first have to plan for just one part of the project i.e., one sprint. It's a much narrower window, with significantly fewer chances of error and under or overestimation. Once the first sprint is over, both you and the vendor will have a much clearer idea about the scope of the project, how many sprints it would take to cover the full scope, and how many team members (each with their respective "dedication") will be needed for each sprint.

This takes the guesswork out of the equation, and you'll know precisely what you are paying for.

How is Burn Rate Calculated?

If you are still a bit uncertain about what burn rates in development are, some calculations may help.

Sr. No.

Human Resource/Developer

Hours

Task “Dedication”

Resource Hours

1

A

5

50% (0.5)

2.5

2

B

6

70% (0.7)

4.2

3

C

8

100% (1)

8

4

D

8

100$ (1)

8

 

Let's say that the vendor assigns four team members for completing the first sprint of your project. Resource A can be a SCRUM leader who will spend five hours a day, but their "dedication" to your project is partial. Meaning they would be doing other things along with working on your project. Similarly, a consultant developer (B) might work six hours a day, giving 70% of their attention to your project. And two dedicated developers assigned solely to your project.

The burn rate will be calculated based on the number of resource hours your “sprint” requires. So if they are spending ten working days on this project, your total resource hours will be 227.

Your burn rate will be calculated based on how many resource hours you burn to get a part/sprint of your project done. The calculation above is an oversimplification, and different vendors may take different approaches. For example, instead of lowering the task dedication of a more valuable resource (say a scrum master), they can simply assign them fewer days on the project or charge higher for their services.

If your project was originally supposed to be completed in ten sprints, after completing the first one, you and the vendor realized that if you keep using the same resource hours every month, they will need at least fifteen sprints to get the project done. You can either change the scope of each project or make room in your budget for the additional sprints. Either way, it allows accurate calculation of the complete cost of the project.

Also, even if you are burning a lot of cash in the initial phases of development, you may not need to utilize the same number of resource hours once the software is in beta testing mode and need to be tweaked. So the last few sprints may be a mere fraction of the cost of the first ones.

Conclusion

Agile software development and calculating the cost of your project using burn rates instead of a fixed price is not just more cost-effective, but it can also save you a lot of time and get you a superior product. In traditional methods, clients usually wanted modifications and changes after the whole product was completed and tested. And even if developers can accommodate, it usually takes time to tweak and modify the completed software, which is also a bit difficult. The time needed and difficulty increases with software complexity. However, in the agile method, vendors get to see the final product being built piece by piece. Modification and even drastic changes are more comfortable to accommodate in agile methodology.

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