Project Management Learning Series: ROM Estimate vs Definitive Estimate

Project Management Learning Series: ROM Estimate vs Definitive Estimate
Author

R Bhargav

Last updated June 28, 2018


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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, it helps to fully understand two of the most important estimate metrics that you could start applying to your projects right away: ROM and Definitive.

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. Some project managers 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.
There are essentially two ways to estimate the cost of a project. One of the most commonly used techniques is the ROM estimate, or Rough Order of Magnitude estimate. Another way to estimate the cost of a project is by using a definitive estimate.

The way the costs are estimated are different with both methods, and it is important for any project management professional to understand how both these estimations work. Depending on the method used, a company will have more or less tolerance for variation from the estimate.

Let’s take a deeper look into these two techniques.

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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 cost completed, they are looking for a ballpark number instead of an exact figure.

The variation between estimated and actual costs with a ROM estimate can easily be plus or minus fifty percent. Anyone preparing a ROM estimate should be sure to 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 a ROM estimate, it is still vital that a project management professional complete the work to make the estimate as accurate as possible. There are limits to what is acceptable in regard to the price variation.

 Often, projects are completed over a period of several years. It can 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.

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.

Tools for ROM Estimates

There are several handy tools on the market to help project managers provide likely ROM estimates. SEER is an interoperable suite of products that can help project managers with many steps along the way, including software solutions that help with both ROM and Definitive Estimates. 

There are also ROM templates like this one from Doctonic that will help map out all variables to take into account. 

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%. A company or client that  requests a definitive estimate usually has much less room for error than one that will accept  ROM pricing. 

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. This means that the person preparing the cost estimates for a project using a definitive estimate must perform a considerable amount of research in order to get the variation this low.

A definitive estimate may also turn out to be incorrect, since it is likely based on quite a few assumptions, including factors beyond anyone’s control. Estimates changing is an accepted fact of life, and the only way to counter uncertainty in estimates is to update them regularly—the more uncertainty, the more frequently they need to be revisited. This is the only way to mitigate the risks. The PMBOK terms this “rolling wave planning.”

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.

Tools for Definitive Estimates

Many  companies offer templates and calculators to assist with definitive estimates. Smartsheet offers a template in additional to a helpful guide on project cost estimation. 

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.

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.
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.

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Conclusion

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. Your understanding of the differences between ROM costs, ROM pricing, ROM estimate and Definitive estimate are a crucial first step when developing a project’s scope. 

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 likely 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.

If you found this article helpful, visit our resources library for more project management articles!

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About the Author

An experienced process analyst at Simplilearn, the author specializes in adapting current quality management best practices to the needs of fast-paced digital businesses. An MS in MechEng with over eight years of professional experience in various domains, Bhargav was previously associated with Paradox Interactive, The Creative Assembly, and Mott MacDonald LLC.

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