Project Management Learning Series: ROM Estimate vs Definitive Estimate
To be successful in the field of project management, the ability to estimate the cost of a project is vital. If you’re a Project Manager who’s been thrown in at the deep end and are struggling to come up with accurate, realistic estimates, here’s an article that covers two of the most important estimate metrics that you could start applying to your projects right away: ROM and Definitive!
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Why Is Accurate Estimation So Important?
Depending on the organization, sometimes there is little room for being incorrect on an estimate. There are many large scale projects that are really just a high number of smaller scale projects rolled into one. There are essentially two ways to estimate the cost of a project. One of the most commonly used parameters is an ROM estimate, which stands for rough order of magnitude.
Another way to estimate the cost of a project is by using a definitive estimate. The way in which the costs are estimated are different with both methods, and it is important for any project management professional to understand how these estimations work. Depending on the method used, a company will have more or less tolerance for variation from the estimate.
So What’s A ROM Estimate?
A ROM estimate is generally completed in one of the first phases of a project. In general, when a company or business wants a ROM estimate completed they are looking more for a ballpark number than anything.
The variation between estimated and actual costs with a ROM estimate can easily be plus or minus fifty percent. Anyone preparing a ROM estimate for a client or company should indicate that the accuracy of the estimate can vary greatly, especially if it is in the early stages of a project.
How Do I Prepare A ROM Estimate?
Although there is more accepted variation with an ROM estimate, it is still vital that a project management professional complete work to make the estimate as accurate as possible. There are limits to what is acceptable in regards to the price variation. For example, if someone estimated the construction of a new house to be $200,000 and the final cost was $1,000,000, the level of variation would not be acceptable. When preparing cost estimates using this method, the most important aspect is to get the known factors right.
Often, projects are completed over a period of several years. It is difficult to forecast and plot the cost of raw materials or labor over a multi-year time frame. However, there are known inputs that the project manager is sure to get correct. As a general rule, the longer the time horizon for the project, the more the possible variation in the final price.
What Is A Definitive Estimate?
A definitive estimate is very different from a ROM estimate. First, the accepted level of variation between projected cost and final cost is usually -10% to +10%. This means that the person preparing the cost estimates for a project using a definitive estimate must perform a large amount of research in order to get the variation down this low.
A company or client that is requesting a definitive estimate usually has much less room for error than one that is accepting of a ROM. Anyone that has worked in the field of project management long enough knows how difficult preparing a definitive estimate can be on a long or complex project.
How Do I Prepare A Definitive Estimate?
The method of preparing a definitive estimate must be more detailed than a ROM estimate. In addition, there must be more solid data when preparing a definitive estimate. A company or business cannot expect an accurate definitive estimate to be prepared if the proper data points are not provided. In general, there are contract documents and a scope of work that is provided in order to back up the estimate claims. A definitive estimate should be prepared from fully designed plans with different scenarios that can be projected out.
Any direct costs associated with the project, such as building materials and labor for a home, should be itemized. A contingency should also be incorporated into a definitive estimate which can cover a project manager in the event that the market conditions change. To use the home building example, if the price of bricks suddenly goes up by fifty percent it would not be reasonable that the estimated cost of bricks in the home will be the same as the final cost. To help reduce the impact of this situation, indirect costs should also be budgeted into a project.
How Do I Calculate Variation For These Estimates?
As a project manager, it is important to be able to accurately account for variation. If the estimated cost of a project is $200,000 and the actual cost of the project ends up being $250,000, the dollar variation is $50,000. However, what really matters is the percent variation. In this case, we would take the difference of $50,000 and divide that by the estimated cost of the project at $200,000. In this simple example, the cost variation would be 25%. This would be acceptable for a ROM estimate but not for a definitive estimate.
As a general rule, it is important to understand that an estimate is only as good as the inputs that are put in. Any wild variations in market costs or deviations from the plan can and will result in estimates being less accurate.
A ROM estimate and definitive estimate function differently in terms of both scope and detail. A client or business that is asking for a ROM estimate is going to have a completely different set of expectations than one asking for a definitive estimate. There are ways in which a project manager can help to prepare more accurate estimates. To begin with, it is vital to get all of the inputs correct when calculating cost. There are some people that just use historical data when calculating the cost of a project. Although this can work in certain situations, over the long term this will lead to higher variations in estimated and final costs.
Any definitive estimate should have a scope of work and an itemized list of costs that went into the project. Unlike an ROM estimate, a business is not going to tolerate or accept large variations from the estimated and final costs. Finally, as a project manager it is important to lay out the expectations on the accuracy of the different estimation methods. A business should understand that an ROM estimate is not going to be nearly as accurate as a definitive one.
A definitive estimate may also turn out to be incorrect, since it is based on quite some assumptions, factors beyond anyone’s control. That estimates may change is also an accepted fact of life. Only way to counter uncertainty in estimates is to keep updating your estimates! More the uncertainty in estimates, more frequently they need to be revisited. This is the only way to mitigate the risks. The PMBOK terms this ‘rolling wave planning’.
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