The $12m is just for the planning. They originally though $8 million would be enough but it wasn't. The UW payroll system (really HR system) has to take care of around 60,00 employees at several campuses plus county extension branches. There are all sorts of job descriptions with different contracts, vacation, sick leave, seniority, retirement plans, insurance, etc.
The previous failure was an embarassment and some reporter figured they could stir up some trouble by making a big deal out of this. It's better that they get all the processes sorted out before they start writing custom code.