Everything You Need To Know About IIoT Project Costing
Tags: beginners, tutorial, learning
Published: 2024-04-27 21:46:01

The Industrial Internet of Things (IIoT) is a rapidly growing field that combines the power of the internet with industrial equipment and systems. This technology is changing the way businesses operate, and as a result, the way projects are costed. In this article, we will explore how IIoT project costing differs from traditional waterfall project costing.

Waterfall project costing is a linear, sequential approach where each phase of the project is completed before moving on to the next. This method is best suited for projects that have a well-defined scope, clear objectives, a fixed budget, and a clear-cut tangible deliverable (building a house, installing a kitchen sink, building a golf course). The main advantage of this method is that it allows for accurate cost estimating and budgeting early in the project because the deliverable is known and consists of manageable levels of complexity. 

A known deliverable means that its physical shape, quantity of capital required to create it, its users, how it operates, the exact dollar value it will provide at every point in its lifespan, and who will maintain it over time are all known before the deliverable ever gets built (including being prototyped). All of this to say that, after careful planning and consideration for every possible scenario, no work has actually been done. Traditional costing requires planning and theoretical estimates to all be done upfront based on the assumption that your cost is a function of time, not knowledge acquired while conducting project work. In layman’s terms, you are working off the data of yesterday.

IIoT projects, on the other hand, are far more complex and dynamic. The scope of these projects is not always well-defined, and objectives change as new technologies and capabilities are developed. Additionally, the budget for IIoT projects needs to be much more flexible, as new opportunities for cost savings and revenue generation may arise throughout the project. With IIoT Projects, the actual cost and value are a function of newfound knowledge acquired after building a technology and iteratively acquiring feedback from customers.

The key here is a traditional project assumes you know exactly what your deliverable will look like and the weighted numerical value it provides to the business upfront. Of equal importance is that once a project is completed, its value is supposed to be sustained by operations, which assumes the deliverable provides constant value over time. Planning every facet of an IIoT project upfront before ever building anything is wasted effort — it is a classic case of square peg, round hole.

IIoT projects necessitate that an organization adopt the Agile philosophy. In agile projects, progress is measured in terms of working software to the degree that end-users feel their business case needs are solved and the project is integrated into existing systems. Traditional project progress is measured on completed tasks or deliverables measured against a fixed pre-planned schedule. The primary goal of agile projects is to deliver value to the customer as quickly as possible in an iterative manner. This is achieved whereby the value you deliver is a function of newfound knowledge gained from customer feedback.

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## **Traditional Costing Techniques**


Earned value costing is a method of measuring project performance by comparing the planned value of work to the actual value of work completed. It is the gold standard when used in traditional, waterfall projects where the scope and budget are well-defined and fixed. Earned value costing is focused on measuring the cost and schedule performance of a project, rather than the value delivered to the customer.

Calculations using a basis of estimates, net present value (NPV), return on investment (ROI), return on invested capital (ROIC), estimate at completion (EAC), planned value (PV), and budgeted at completion (BAC) are used to theoretically see how much money will be spent and earned throughout the project’s schedule. 

Only when the project work is underway do factors like earned value (EV), schedule variance (SV), cost variance (CV), cost performance index (CPI), schedule performance index (SPI), estimate to completion (ETC), variance at completion (VAC), and actual cost (AC) show their real colors. Still, these calculations utilize the knowledge of yesterday and fundamentally assume that what you knew back then still holds true now.

How do we arrive at the above calculations?

Our first stop is defining what a project, program, portfolio, and strategy are. A project is a time-constrained undertaking to deliver a unique product, service, or outcome. Programs are groups of related projects, managed together to realize a common outcome. A portfolio is a collection of programs and projects intended to achieve a business result driven by an organization’s strategy.

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![visual aid showing relationship between portfolio vs program vs project](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/11pl7irtdu74ls655a8a.png)

Strategy plays a critical role in IIoT project costing because it is exclusively technology driven. Traditional projects were driven by a fixed budget and well-defined scope. One of the key differences in IIoT project costing is the focus on technology and its integration into existing systems. In traditional waterfall projects, technology is an afterthought, and costs are only allocated to it after the scope and budget have been defined. 

In IIoT projects, technology is a central focus, and costs must be allocated to it from the very beginning. This means that a significant portion of the budget will be allocated to research and development, as well as testing and deployment of new technologies.

Traditionally, projects were born when a member of the organization encountered a business need and approached senior leadership (usually President, VP, Director, CTO, CEO) to conduct an investigation. The end goal being a short, high-level business case justifying undertaking this project or part of the project. Senior leadership blesses the project’s birth with fixed constraints to the Iron Triangle (Scope, Cost, Schedule, Quality). This worked well thanks to the low-level of complexity involved and well-defined deliverable.

After helping draft and receiving ratification of the project charter from the sponsor (typically senior management), the project manager(s) utilize progressive elaboration to get a more accurate estimate of the Iron Triangle through open bids to vendors, partners, and OEMs.

Herein lies the problem — traditional costing assumes businesses are already digitally transformed. This is to say that they have real-time, accurate, reliable, and verifiable insight into all aspects of their business yesterday, today, and can confidently predict tomorrow.

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![the project management iron triangle showing the relationship between time, cost, scope, and quality](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/u16wba9teb1d6a02sjvg.PNG)

Most organizations are not digitally transformed and there are many reasons for this. Out of them all, a strong desire by vendors to maintain market dominance has trapped customers into proprietary solution-stacks through the shilling of cookie-cutter products that do not solve business needs. This “business-as-usual” culture in the automation field takes a heavily biased approach where profit and sales are prioritized over delivering value to customers.

The key to mastering digital transformation is first understanding the 4 key principles on which it is built.


1. O̶p̶e̶n̶ ̶a̶r̶c̶h̶i̶t̶e̶c̶t̶u̶r̶e̶  Open Source
2. Data is streamed on a report-by-exception basis instead of poll-response
3. Use a lightweight protocol
4. Edge-driven

It is important to note that these principles alone are not enough to digitally transform an organization. A paradigm shift in the fundamental way a business exists needs to occur. Organizations are no longer commodities providers. Instead, they need to recognize that they are in fact data companies, whereby their products and services are merely the medium in which data is aggregated and contextualized to optimize their business.

All of this to say that digital transformation is a strategy built on the 4 aforementioned principles, which enables an organization to undergo an educational journey rooted in a technology-first, vendor-neutral, solution-stack agnostic manner. Digital transformation relates to IIoT project costing through the use of real-time data. This includes data-driven insights to improve efficiency, reduce downtime, and increase revenue by connecting, collecting, storing, analyzing, and acting on this data. This real-time access to data is essential for making informed decisions about how to allocate resources and manage costs.


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## **Modern Costing Techniques**

Only after an organization has embraced the 4 principles of digital transformation can they effectively use Disciplined Agile costing techniques to measure the actual cost of an IIoT project. Another way digital transformation relates to IIoT project costing is through the use of predictive maintenance. Predictive maintenance uses data collected from sensors and other sources to predict when equipment will fail. This allows businesses to schedule maintenance and repairs in advance, reducing downtime and increasing the lifespan of equipment.

In the case of predictive maintenance, correlating project team velocity to burn rate can only be done once an organization understands that the cost in time and money of any project undertaking is a function of what their customers tell them they need, the technology they develop for their customers, customer feedback after using said technology, and newfound knowledge from this iterative technology-focused, vendor-neutral, solution-stack agnostic process.

The caveat here is that digitally transformed organizations recognize that IIoT projects are not stand-alone limited use-case scenarios. As mentioned earlier, each project must integrate into a broader ecosystem and this cost of integration is at the forefront, whereas traditionally this is an afterthought at best. Successful IIoT projects are built with interoperability and scalability in mind. In most cases, this means eradicating proprietary technology, which creates data silos, in favor of open technologies like MQTT, Sparkplug B, and Ignition.

Systems integrator consultants, end-users, and OEMs alike still believe that point-to-point, linear, deterministic architecture is what a digitally transformed organization looks like. Furthermore, they continue to sell prepackaged cookie-cutter solutions to their customers claiming it will digitally transform them.

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## **In Conclusion**

Today, customers must critically assess their partnerships to accurately gauge whether they will truly help them with their digital transformation journey or continue to sell products/services in the name of maintaining market dominance. IIoT projects are far more complex and dynamic, thereby rendering traditional costing methods useless. Such projects require an Agile approach to project management to accommodate the inevitable frequent changes in scope and objectives. As the saying goes in Agile, the only constant is change.

Traditional costing methods use earned value, which measures cost as a function of time spent based on the assumption that you know exactly what your deliverable looks like, operates, the numerical value it will provide, and how operations will sustain this value over time. This does not work for IIoT projects because actual cost and value are a function of newfound knowledge acquired after building a technology and iteratively acquiring feedback from customers. Minimum technical requirements may help illustrate what an IIoT project needs to accomplish but it is not exactly clear on what the tangible mechanisms to achieve this feat will look like, let alone explicitly details as to how operations will sustain its value over time.

IIoT projects must be undertaken only after a business has adopted a digital strategy based on the aforementioned 4 core principles. This strategy should take a technology-driven, vendor-neutral, solution-stack agnostic approach and be in service to an organization’s ongoing education in digital transformation. A truly digitally transformed organization recognizes it is no longer a commodities provider and understands that its products/services are merely the mediums that data is aggregated in service to optimizing the organization as a whole.


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DISCLAIMER: I am not sponsored or influenced in any way, shape, or form by the companies and products mentioned. This is my own original content, with image credits given as appropriate and necessary.