Invest in Realistic and Comprehensive Project Costing

Do the math now so that you can defend the spend later.

Analyst perspective

A project's costs are a key determinant of its success – or its failure.

All too often, IT leaders are asked why IT OpEx is so high and then struggle to answer the question. However, the answer is simple – we're spending what we're spending today because a decision was made in the past by our leadership to invest in technologies that bring operational efficiencies to the organization and support its growth. Almost all of today's OpEx is the direct result of yesterday's strategic and capital projects.

Yet evidential business cases and project planning documents that describe how and why the decision to invest was made in the first place are often inaccurate, incomplete, or missing entirely. The original "why" has simply vanished.

But it doesn't have to be this way. The first step in rationalizing today's spend is to develop full and realistic project cost estimates combined with total cost of ownership projections that demonstrate how much it will cost to manage and maintain the outcomes of that project. Only when this math has been done should an organization commit to any technology investment.

And with this math in hand, IT can prove why it's spending what it's spending today as well as prove the value it's delivering to the organization.

Jennifer Perrier
Principal Research Director, CIO Practice
Info-Tech Research Group

Executive summary

Your Challenge

Projects and finances go hand in hand, making project costing an essential skill for every IT department.

• Unfortunately, IT projects have become famous for their time and budget overruns.
• One of the major causes of these overruns is poor project estimation practices, particularly in the area of project costing.
• These poor practices are rampant, which virtually guarantees budget overruns and, too often, project failure.

Common Obstacles

Not applying financial management rigor to project intake and approval is the start of the problem, leading to:

• Overestimated benefits.
• Glossed-over risks and uncertainties.
• Underestimated costs.
• Unrevised cost forecasts in the face of change.

Many projects that should never have been approved in the first place are allowed to live on, gobbling up ever more precious funding.

Info-Tech's Approach

Practice sound project costing from the start:

1. Learn common project costing techniques and set meaningful cost categories to support planning, tracking, and reporting.
2. Estimate your project's workforce, vendor, and project management costs across best-case and worst-case scenarios to account for uncertainty.
3. Give yourself the data to both analyze every technology investment's financial performance and prove the value of IT.

Info-Tech Insight

Given uncertainties about next month, let alone next year, committing to an exact project cost number is not only foolish but also dishonest. Instead, offer a projected cost range that can be narrowed as you get closer to the spend date and the state of variables that influence those costs become better known.

EXECUTIVE BRIEF

Projects and finances go hand in hand

All projects should pass the CFO's sniff test to gain approval.

Every project plan, big or small, seeks to answer a few fundamental questions:

1. What capability do we want to build or foster in the organization?
2. What tasks do we need to complete to bring that capability to life?
3. How much do we need to spend to complete those tasks?
4. What do we need to do to mitigate risks to the proposed capability's success?
5. How much do we need to keep spending to sustain that capability over the long term?
6. How will we know if, and when, our investments are paying off?

The fact is that finances – and specifically costs – are at the heart of every sound business case.

Understanding how to confidently and comprehensively forecast project costs and their potential returns is an essential skill for anyone in an IT leadership or management role.

Project costing is an essential skill

When stacked up against benefits and risks, cost becomes the key determinant of whether a project is (or should be) done.

What is project costing?

• Project costing is the identification, estimation, tracking, and management of the financial resources required to successfully complete a project.
• The result of this is that you must determine the resources required to do the project as well as the price and quantity of each of those resources.

The scale of a project's costs is determined or influenced by the project's requirements and characteristics, namely:

• Scope – features, scale, complexity
• Time – effort, duration, schedule, milestones/deadlines
• Materials – licenses, hardware, data, documentation
• Skills – specialization, availability
• Risks – likelihood, impact, uncertainty
• Quality – standards, testing, acceptance
• Communications – coordination, check-ins, updates

Poor costing contributes to massive overruns

The story of IT project cost overruns is an old one, and the ending doesn't appear to getting any happier.

Rampant bad practices virtually guarantee overruns

If you want to ensure IT project cost overruns (and you most definitely don't), then do these things.

Take a smarter approach to IT project costing

Use Info-Tech's methodology to not only improve costing but demonstrate IT's value.

Blueprint deliverables

This blueprint is accompanied by supporting deliverables to help you accomplish your goals:

TCO Calculator

Estimate your proposed investment's total project costs plus the postproject operations and maintenance cost.

Cost-Benefit Analysis Tool

Perform this critical investment feasibility step by assessing both tangible and intangible costs and benefits.

ROI Workbook

Estimate the financial costs versus gains of your investment and forecast when you can expect payback.

Key deliverable:

Project Costing Workbook

Use this Excel workbook to document optimistic, pessimistic, most likely, and weighted cost estimates for a proposed project.

Measure the value of this blueprint

The potential positive outcomes of improved project costing include:

• More accurate and realistic numbers.
• Improved sensitivity to risk and uncertainty.
• Better assessment of project feasibility.
• Enhanced financial transparency.
• Reduced cost overruns.
• Increased confidence.
• Fact-based information to prove the project's and IT's true value.

Use some or all of the metrics and recommended targets described in this table to track and assess the effectiveness of your project costing improvement efforts.

Insight summary

Overarching insight

Given uncertainties about next month, let alone next year, committing to an exact project cost number is not only foolish but also dishonest. Instead, offer a projected cost range that can be narrowed as you get closer to the spend date and the state of variables that influence those costs become better known.

Insight 1

Today's OpEx was born in yesterday's strategic capital projects. To provide a rationale for today's spend, you need to look at the rationale behind the project that caused that spend in the first place. This means revisiting the original business case.

Insight 2

One of the major determinants of a project's value is its cost. However, you can't prove a project's value if you don't set up the metrics that capture and prove that value prior to the project being approved. Project costing is one of these foundational metrics.

Insight 3

Too often, IT project benefits are exaggerated, the costs underestimated, and the assessment of true risk glossed over. All the above mistakes lead to cost overruns and the ultimate failure of many IT projects to deliver anticipated value.

Insight 4

An overlooked component of project approval is what it will cost to maintain and support the outcomes of that project over the long term. This means calculating both the project's cost and the planned investment's total cost of ownership at the start.

Insight 5

You can't do a thorough cost-benefit analysis without costing. You also can't forecast return on investment or any other profitability metric without it either. And with many things in life, the calculations are only as good as their inputs.

Guided Implementation

What does a typical GI on this topic look like?

A Guided Implementation (GI) is a series of calls with an Info-Tech analyst to help implement our best practices in your organization.

A typical GI is 8 to 12 calls over the course of 3 to 5 months.

PHASE 1
LEARN COMMON COSTING TECHNIQUES

Learn common project costing techniques

There are many ways to cost a project, and no one way is perfect for every project.

In this phase, we'll review the most commonly used methods for costing projects and other tactics that will help better forecast and manage those costs. Specifically, this phase aims to help you:

• Understand that, given uncertainty, your project cost estimate is just that – an estimate – and not a promise.
• Learn the pros and cons of the leading cost estimation techniques – top-down, bottom-up, three-point, and parametric.
• Take a blended approach that uses several cost estimation techniques to ensure that you can leverage past lessons learned, ensure nothing is missed, and account for uncertainty.
• Consider how to scale the various costing techniques to suit not only your experience and expertise levels but also the proposed project's size, scale, and complexity.

"What happens in the planning phase often determines whether a project will succeed. At the core of this phase is cost estimation."
– Chris Hutchings, Galorath, 2024