W2.1_YN_Cost Estimate of IT System

W2.1_YN_Cost Estimate of IT System

Opportunity Statement

OPWP is currently in the process of establishing the Spot Market, which is a day-ahead market in which generators submit daily bids to sell electricity produced at their plants. In order to operate the market, an IT system needs to be procured. In this blog, different cost estimation techniques are compared, and used to present a cost estimate of the IT system.

Feasible Alternatives

The cost estimating techniques to be compared are the following:

-          Expert Judgment.

-          Analogous Estimating

-          Parametric Estimating.

-          Bottom-Up Estimating.

-          Three-Point Estimating.

-          Algorithmic Methods.

Outcomes of Feasible Alternatives

The method through which cost estimating is performed in each of the techniques is as follows:

-          Expert Judgment: experts in the relevant area utilize their experience and understanding of the proposed project, in addition to historical data collected throughout their career to provide a cost estimate.

-          Analogous Estimating: this method utilizes information, such as scope, duration, complexity, and cost, which are available on previous projects that are similar in nature to the proposed project. The cost estimate of the previous projects is scaled to fit the characteristics of the project in hand.

-          Parametric Estimating: a statistical relationship is developed between the historical data and a relevant unit of measurement such as the cost per source line of code needed in the case of IT systems. This relationship from historical data is then used to estimate the cost of the upcoming project.

-          Bottom-Up Estimating: in this technique, the detailed cost of the activities needed to complete the project is aggregated to estimate the cost of the project.

-          Three-Point Estimating: This technique takes into account the uncertainty of a single value of estimated cost by looking at a range of values between three points: the most likely, the optimistic, and the pessimistic values. Algorithmic Methods.

-          Algorithmic Methods: These methods utilize mathematical equations that in addition to historical data, they take inputs such as size, complexity, and the development environment of the software into account to calculate the estimated time and cost of building the software. These methods include COCOMO models and Function Point method which take the number of source lines of code and the number of functions delivered to the user as an input, respectively.

Acceptable Criteria

The criteria based on which we shall choose the cost estimating technique are availability of data, accuracy, and resources needed to perform the technique in terms of time and money.

Analysis and Comparison of the Alternatives

Considering that no historical data is available, this makes it difficult to use techniques that rely on such input to provide acceptable estimates. This includes the use of Analogous, Parametric, and Algorithmic methods.

Additionally, Bottom-up Estimating is time consuming and shall be reserved for the later stages of the project once the tendering of the IT system is initiated, and more personnel are available to conduct such analysis.

On the other hand, Expert Judgement is easier to perform. Moreover, experts utilize some of the other methods in making their estimate such as Analogous Estimating since they rely on their experience of similar projects to make their estimate, making them relatively reliable and accurate. Combined with Expert Judgement, the Three-Point Estimating can be performed to account for the uncertainty in the scope at this stage of the project.

Preferred Alternative

In order to assist with the procurement of the IT system a team of advisors was hired. During the bidding stage of hiring the advisors, the bidders were asked to estimate the cost of the IT system based on the data available. The bidders’ estimates ranged from USD 4 million to 7 million with USD 6 million being the most likely value*. Considering the data available, the Expert Judgement and Three-Point Estimating techniques are used as discussed in the analysis above.

Using the three values above, the PERT formula can be used to take uncertainty into account. The formula yields a mean value for the cost estimate and results in a Normal Distribution, as follows:

Additionally, the standard deviation is calculated as follows:

Confidence levels P80 and P90 values can be calculated using the z-score as shown in the following equation, the results of which is summarized in table 1 below.

Table 1: Different confidence levels values

Confidence Level	z-score	Estimated Cost
50%	0	$5,833,333
80%	0.85	$6,258,333
90%	1.29	$6,478,333

Depending on the confidence level desired, the management can use the estimated cost accordingly.

Tracking and Reporting

The estimated costs above are based on the level of information available at this stage of the project. As we progress with the procurement of the IT system vendor, more detailed and accurate cost estimation techniques can be utilized such as Bottom-up Estimating. The updated estimates shall be compared to the current values, and the discrepancy shall be analyzed for its root causes.

* The numbers are multiplied by a factor for confidentiality reasons.

References

(1)    Project management institute. (2013). A guide to the project management body of knowledge: PMBOK guide. Newtown Square, Pennsylvania: Project management Institute.

(2)    What is PERT and 3-Point Estimate? (n.d.). Retrieved from https://www.pmbypm.com/3-point-estimate-is-different-from-pert/

(3)    Tutorialspoint.com. (2017, August 15). Estimation Techniques Three Point. Retrieved from https://www.tutorialspoint.com/estimation_techniques/estimation_techniques_three_point.htm

(4)    Standard Normal Probabilities. (n.d.). Retrieved from http://www.stat.ufl.edu/~athienit/Tables/Ztable.pdf

(5)    The Comparison of the Software Cost Estimating Methods. (n.d.). Retrieved from http://www.computing.dcu.ie/~renaat/ca421/LWu1.html