You have a piece of functionality that you need to add to your system. You see two ways to do it, one is quick to do but is messy - you are sure that it will make further changes harder in the future. The other results in a cleaner design, but will take longer to put in place.

Technical Debt is a wonderful metaphor developed by Ward Cunningham to help us think about this problem. In this metaphor, doing things the quick and dirty way sets us up with a technical debt, which is similar to a financial debt. Like a financial debt, the technical debt incurs interest payments, which come in the form of the extra effort that we have to do in future development because of the quick and dirty design choice. We can choose to continue paying the interest, or we can pay down the principal by refactoring the quick and dirty design into the better design. Although it costs to pay down the principal, we gain by reduced interest payments in the future.

The metaphor also explains why it may be sensible to do the quick and dirty approach. Just as a business incurs some debt to take advantage of a market opportunity developers may incur technical debt to hit an important deadline. The all too common problem is that development organizations let their debt get out of control and spend most of their future development effort paying crippling interest payments.

The tricky thing about technical debt, of course, is that unlike money it's impossible to measure effectively. The interest payments hurt a team's productivity, but since weCannotMeasureProductivity, we can't really see the true effect of our technical debt.

One thing that is easily missed is that you only make money on your loan by delivering. The biggest cost of technical debt is the fact that it slows your ability to deliver future features, thus handing you an opportunity cost for lost revenue. Furthermore following the DesignStaminaHypothesis, you need to deliver before you reach the design payoff line to give you any chance of making a gain on your debt. Often taking on technical debt ends up slowing you down so much you end up delivering later.

Technical Debt comes from various sources, some of which can be good and some bad - I use the TechnicalDebtQuadrant to describe them.

(As far as I can tell, Ward first introduced this concept in an experience report for OOPSLA 1992. It has also been discussed on the wiki.)