Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

19.2.5 Project Cost

Intended learning outcomes: Produce an overview on the total cost of ownership of a project.

For the decision to be made to conduct a project, generally the benefits have to be greater than the costs. A profitability calculation is also a basis for prioritizing several possible projects. As the projects of interest here are mostly the realization of systems, the decision techniques are illustrated, taking the example of the introduction of an ERP software system.

Project costs, also called total cost of ownership of a project, encompasses both for the initial investment and for running costs incurred in accomplishing work during a given time period.

The difficulty of estimating the different project costs varies. Relatively good estimates can be made of the initial investment. In the ERP example, the initial costs generally include:

  • the required hardware, system software, and application software
  • premises and installations for machines and people
  • internal startup costs for the persons assigned to the project
  • decommissioning of the existing, old system
  • first training of users in mastering the selected business processes; that is, the organizational solution
  • first training of users in mastering computer support of the business processes
  • external startup costs; for example, for consultants

Running costs of maintaining the operation of the IT system should not be underestimated. In the case of introducing software, these include

  • service and maintenance of hardware and software
  • ongoing training of users

Estimation of expenses to avoid opportunity costs is not simple. These expenses arise through evaluation of customer requirements for the new system in the target areas of quality and delivery. They therefore concern system risks and are sometimes difficult to estimate. In the case of investment in information technology, the costs are also called “total cost of computing.” System risks include the costs of nonaccessibility for one, and faultiness of hardware and software, for another. The opportunity costs include lost profit contributions from customer business. Depending on the application, opportunity costs are very high as compared to other costs, or they are inconsequential. Examples:

  • A bank that deals in online stock trading has to equip the system for extreme loads that can unexpectedly and rapidly occur if there are new issues or the stock market crashes. System overload or even system failure at this time inevitably leads to a loss of a large part of the customers. To reduce system risks, and thus avoid opportunity costs, the information technology system can at best be duplicated; that is, mirrored, as a backup, which leads to increased investment costs.
  • Tax collection agencies do not have to deal with the problem of losing “customers.” A system failure of short duration is unproblematic and does not result in opportunity costs. In other words, no additional costs arise in order to avoid opportunity costs.

Continuation in next subsection (19.2.5b).

Course section 19.2: Subsections and their intended learning outcomes

  • 19.2 Project Management

    Intended learning outcomes: Present goals and constraints of a project. Describe project phase, project life cycle, and work breakdown structure. Explain scheduling and effort planning as well as organization of a project. Differentiate between cost, benefits, profitability, and risk of a project.

  • 19.2.1 Goals and Constraints of a Project

    Intended learning outcomes: Produce an overview on project performance and project deliverables. Differentiate between external constraints and internal constraints in project management.

  • 19.2.2 Project Phase, Project Life Cycle, Project Task, Work Package, Statement of Work

    Intended learning outcomes: Produce an overview on the project phases in a generic project life cycle. Identify project task, work package, and statement of work.

  • 19.2.2b The Work Breakdown Structure

    Intended learning outcomes: Describe the increasing degree of detail of tasks and work packages in a work breakdown structure. Present an excerpt from a work breakdown structure for the preliminary study for a building conversion.

  • 19.2.3 Project Scheduling and Project Effort Planning

    Intended learning outcomes: Present in detail the schematic display of project effort per organizational unit. Explain an excerpt of the Gantt chart for the project “preliminary study for building conversion”.

  • 19.2.4 Project Organization

    Intended learning outcomes: Differentiate between project coordination in a functional, or line, organization and project management in a project-based organization. Describe project management in a strong matrix organization.

  • 19.2.5 Project Cost

    Intended learning outcomes: Produce an overview on the total cost of ownership of a project.

  • 19.2.5b Project Benefits and Project Profitability

    Intended learning outcomes: Explain the Matrix for estimating the project benefit of an investment in a software system as well as the graphic representation in overlay of nine profitability calculations, for cumulative benefits with degrees of realization 1 to 9.