Cost estimation is an important process for any project for an obvious reason – it involves cost. Therefore, the estimation should be accurate within its acceptable limit. Today in this blog post, we will discuss two such estimates: Rough Order of Magnitude (ROM) Vs Definitive Estimate.
These estimations are helpful in cost estimation and serve different purposes at the different stages of the project lifecycle.
If you are in project management and involved with the cost and budget, you will find these techniques very useful.
Let’s get started.
Rough Order of Magnitude (ROM) Vs Definitive Estimate
In project management, we have different estimates to find the project budget, such as rough order of magnitude (ROM), definitive estimate, budget estimate, control estimate, final estimate, and preliminary estimate. However, the PMI recognizes only two of these: Rough Order of Magnitude (ROM) and Definitive Estimate.
As this blog follows PMI guidelines, we will discuss these two cost estimation techniques recognized by the PMI, and how they differ from each other.
ROM and definitive estimates help you find the estimate of the project at different points in time. The accuracy of these estimations depends on the quality of data available and the historical information.
You use rough order of magnitude when little or no information is available, and a definitive estimate when you have a clearer picture.
Let’s dig deeper.
Rough Order of Magnitude (ROM)
This estimate is sometimes known as a ballpark estimate. This is because it helps management or the client know the rough budget of the project. ROM typically has an accuracy range between -25% to +75%.
This estimation is done before or during the initiation phase while performing a cost-benefit analysis.
This estimate is also useful for the project selection process.
This estimation provides you with a budget when you have very little information, or the management urgently wants to know the approximate project budget.
Once you get more information, such as the detailed scope of work, you can replace this estimate with a better one, i.e., a definitive estimate.
Tools used to Determine Rough Order of Magnitude (ROM)
To determine the rough order of magnitude (ROM), you can use the following techniques:
- Expert judgment
- Analogous estimating
In expert judgment, you look at the project and, based on your experience, come up with a figure.
In an analogous estimation, you compare the cost of the current project with any past similar projects that your organization has completed and then make an educated guess of the project on hand. You use this cost estimation technique when little or no project information is available, and the management is asking for the project cost estimate.
Analogous estimation provides a rough order of magnitude estimate as the accuracy is not good.
These techniques take less time, but the results are not reliable. Therefore, you use them when you require the information urgently, and accuracy is not desired.
Example of Rough Order of Magnitude (ROM)
Let us say your management wants to bid for a project that is about constructing a 20-story building, and they are interested in knowing the cost involved so they can decide if they should proceed with the bidding.
You are an experienced project manager and have handled several similar projects. You go to your organizational process assets and find a similar project. You see the estimate of the project and apply your expert judgment and come up with an estimate and provide it to your management.
The definitive estimate is sometimes known as a final estimate. The accuracy in this estimate is between -5% to +10%.
You get a definitive estimate when you have a complete scope of work. You use this technique in the planning phase. This estimate helps you determine the cost baseline, project budget, and then you can assign resources and complete your schedule.
The definitive estimate provides you with reliable data that you can trust and communicate with your project stakeholders.
Tools used to Determine Definitive Estimate
To determine a definitive estimate, you can use the following techniques:
- Bottom-up estimating
- Three points estimating
- Parametric estimating
These techniques are time-consuming, and you use them when you require an accurate budget.
The estimation obtained from the bottom-up estimation technique is the most accurate, and that is why this technique is also known as the “definitive estimation technique”.
Here, you find the cost of each activity and add them up to get the project’s cost. This technique is time-consuming but provides the best result.
In three-point estimating, you find three estimates (optimistic, pessimistic, and most likely) and take an average.
The estimations obtained from three-point estimating and bottom-up estimating are most accurate.
In parametric estimation, you use statistical data from any past projects and apply it to the current project parameter—for example, the painting cost per square meter.
The accuracy of parametric estimation is better than analogous estimation. The accuracy can be more accurate depending on the quality of data and the effort involved.
Example of Definitive Estimate
Let us consider the same example discussed in the case of ROM.
Your organization gets the project, and now they want the exact project cost to assign the project budget and start the project. So you break down the work to the activity level, assign resources, and effort, and find the cost of each activity. Once you get it, you add the cost of all activities and get the project budget.
You have used the bottom-up cost estimation technique here, and it provides the most accurate budget estimate.
Rough order of magnitude (ROM) and definitive estimate provides the same information: the project cost. However, they are differently calculated at different points of the project lifecycle and serve different purposes.
ROM is calculated during the very beginning of the project to provide the sponsor an idea about the cost of the project and help them complete the project cost-benefit analysis. The definitive estimate provides them the exact cost that you will spend to complete the project and helps project managers develop cost baseline, budget, and project schedule.
This is where this post on the rough order of magnitude (ROM) vs definitive estimate ends.
Have you been involved in cost estimation in your organization? If yes, please share your experience with using these techniques.