W2_YN_Cost Estimate of IT System

W2_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 and Preferred Alternative

The cost estimating techniques to be compared are the following:

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

-          Parametric Estimating: a statistical relationship is developed between the historical data and a relevant unit of measurement such as the cost per 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.

Considering that no historical data is available, this eliminates the possibility of using Parametric Estimating. 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.
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.

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