Melbourne was one of 17 cities chosen to take part in the challenge this year and is the largest Australian city to be chosen since it began in 2010.
The Victorian capital is also one of only three cities worldwide to be given access to raw data from Twitter as part of the project.
Under the deal, IBM experts will be able analyse data generated by millions of tweets sent in Melbourne.
Smart rubbish bins among data sources
IBM's Michael Dixon said the Smarter Cities Challenge gathered much of its data from traditionally inanimate objects that now provide data, such as Melbourne's recently installed smart litter bins.
"We're seeing things that we never thought were smart — roads, buildings, garbage bins, water, air — all providing information for the first time," he told 774 ABC Melbourne's Red Symons.
He said analysing such data gave researchers "incredible insights" that could improve the way cities work.
"It enables us to change transport patterns, change the way people move around cities, change the way we monitor the environment, manage our buildings," he said.
Mr Dixon said the project represented a major shift in the way computers were being used by researchers and decision makers.
"Traditionally computing has been very focused on structured data," he said.
"We're now seeing the advent of huge amounts of unstructured data that ... really give us a chance to make some decisions about how we want to arrange our priorities and live our lives."
He said while society generated more and more of this data, most of it remained beyond the reach of researchers.
"About 80 per cent of it just goes exactly nowhere," he said.
"Getting access to vast amounts of unstructured data ... gives us a chance to have machines do all sorts of things on a scale that humans just couldn't manage."
The Smarter Cities Challenge is IBM's largest philanthropic project and has given an estimated $66 million worth of advice to 132 cities.
Editor's note: An earlier version of this story incorrectly stated that Swanston Street would be closed during the construction of Metro Rail.
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PHOTO: IBM says modern cities such as Melbourne generate vast amounts of data. (774 ABC Melbourne: Simon Leo Brown)
PHOTO: Michael Dixon says Melbourne's smart litter bins are an example of previously inanimate objects that now provide data. (774 ABC Melbourne: Simon Leo Brown)
