How to estimate the cost of an enterprise automation project

FAQ: We are planning to implement 1C:ERP. We asked three contractors for a project quote. One quoted RUB 12 million (≈ $120,000), the second RUB 25 million (≈ $250,000), and the third RUB 30 million (≈ $300,000). Why such a wide price range?

Answered by Adel Kagarmanova, 1C:ERP/1C:ERP.UH implementation project manager at Tsifrovizatsiya Proizvodstva (CIFP)

An initial estimate is always based on the client’s input data. The more detailed and reliable the data, the more accurate the estimate.

Every contractor approaches estimation in its own way. There are several methods.

We use 2 estimation methods:

The first method we use is the resource-based method. Under this method, project effort is calculated from the expected size of the required project team, FTE (full-time equivalent: the hours equal to a specialist’s full-time workload), and the expected duration of the project stages. The forecast is based on experience from past projects and anticipated risks. This method is less transparent and more superficial, because it is unclear how labor-intensive the project tasks will actually turn out to be. We use it only when the client requires strict confidentiality and is not open to sharing information, when we cannot obtain more detailed information from the client, or when we need to quickly calculate a rough project budget.

The second method we use is the task-based method. It is also based on experience from past projects, but effort in hours is added up for each task, and only then are the team size and the timeline for each stage determined. The project is estimated based on the time required for specific tasks. This method requires the contractor to dig deeper into the tasks and the client’s business processes.

We prefer the second method, because it is closer to reality and covers most of the common risks. That is why we conduct a pre-project assessment before the project starts.

For the pre-project assessment, we offer our own list of standardized functional blocks, each with a list of business processes down to the second level. We also have questionnaires that we use to conduct interviews or send to clients to fill out on their own.

On site, we dive into the processes, clarify the issues in each existing business process, and record all the information in our list. We also get to know the key users. We then process this register and, drawing on experience from past projects in the industry, can provide a more realistic estimate for all project stages.

When choosing a contractor, the approach to estimation matters. Sometimes a price is set, but what the project will include is not described in detail. Only a handful of exclusions are listed, and the project cost is understated. Clients usually like such a commercial proposal. However, this is exactly where the biggest risks lie. It may turn out that the budget does not include some of the necessary work or a particular result. In such cases, the project cost can rise significantly at the worst possible moment.

This happens again and again on many projects. You can look at the statistics or talk to clients who have already launched 1C:ERP projects. That is exactly why many projects are never completed or end with unsatisfactory results.

Both sides share responsibility for this outcome:

- the client, who expects a turnkey project but withholds or does not clarify certain details (for example, that there are additional systems that will need to be integrated, or that there are no IT specialists on staff to install the software and the client expects installation to be included in the project budget).

- the integrator, who did not spell out in the commercial proposal what falls within the project scope, its deliverables, and its limitations, including:

• Functional scope of the project;
• Methodological scope of the project;
• Technical scope of the project;
• Organizational scope of the project;
• Geographic scope of the project.

We once had a project where the client made its choice with a focus on reducing cost. When it received the estimated project cost, the client wanted to launch a minimal set of blocks, leaving out the various existing integrations that also had to be worked out. Accordingly, the project price without these integrations was much lower. Midway through the project, it became clear that the client needed these integrations. But developing each integration is a labor-intensive, sizable piece of work, and it also had to be done to deliver the project, which meant finding a compromise on increasing the budget. Not every project manages to reach a compromise between client and contractor on additional budget, and there is a risk that the project will be put on hold.

Now, drawing on many years of experience, we fill out a questionnaire and interview all process owners to understand where data in the system comes from. Based on this, we prepare a commercial proposal that lists all the integrations to be delivered within the project. We compile a list of exclusions: processes or work not included in the project. When presenting the commercial proposal, we always agree with the client that excluded items, if needed, will be delivered at additional cost. This helps avoid conflicts and reduce project risks.

The lowest project rates usually come from little-known companies without much experience. It is their only way to sell a project. But there is a high risk that they will not be able to take responsibility for delivering the agreed work. Large or well-established companies do not take on projects at an unrealistic price, knowing from experience that they cannot deliver the required work and quality at that price.

We recommend

- requesting project estimates from several contractors

- looking at how they approach estimation

- and most importantly, reading the commercial proposal carefully: what is within the project scope and what is outside it

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