The capacity to estimate project costs is essential for success in the field of project management. It helps to have a thorough understanding of the two most crucial estimate metrics, ROM and Definitive, if you’re a project manager who has been thrown into the deep end and is having trouble coming up with accurate, realistic estimates.
A project manager may assist in creating more precise estimates; first and foremost, it is crucial to ensure that all of the inputs are accurate when computing the cost. While using historical data to predict a project’s cost can be effective in some circumstances, doing so will ultimately result in bigger differences between estimated and actual costs.
The cost of a project can be estimated in essentially two different ways. The ROM estimate, or rough order of magnitude estimate, is one of the methods that is most frequently utilised. Using a firm estimate is another technique to calculate a project’s cost.
Each methodologies have various ways of estimating expenses, thus it is crucial for any project management expert to comprehend how both of these estimations operate. A corporation will have a greater or lesser tolerance for deviation from the estimate depending on the approach utilised.
Let’s examine these two strategies in more detail.
A Rom Estimate: What Is It?
Typically, a ROM estimate is finished during one of the project’s initial phases. Typically, when a firm or business requests a ROM cost, they are seeking for a range of numbers rather than an exact sum.
With a ROM estimate, the difference between estimated and actual costs can easily be plus or minus 50%. Anyone creating a ROM estimate should make sure to note that the estimate’s accuracy can vary substantially, especially if the project is still in its early phases.
How Should a ROM Estimate Be Prepared?
A project management expert must finish the task to ensure the estimate is as precise as possible, even when there is a more common fluctuation with a ROM estimate. There are restrictions on how much of a price difference is permitted.
Projects are frequently finished over the course of several years. Forecasting and plotting the cost of labour or raw materials over an extended period of time can be challenging. However, the project manager is certain to enter certain inputs correctly because they are known. In general, there is more potential for fluctuation in the final price the longer the project’s time horizon.
For instance, the degree of difference would not be acceptable if someone anticipated the cost of building a new house to be $200,000 but the actual cost was $1,000,000. The most crucial step in creating cost estimates using this method is to accurately account for the known variables.
Definitive Estimate: What Is It?
A ROM estimate and a definite estimate are significantly dissimilar. First, there is a generally accepted range of -10% to +10% between planned cost and final cost. A business or client that asks for a firm estimate typically has far less leeway than one who accepts ROM pricing.
Anyone who has spent enough time working in the field of project management knows how challenging it can be to create a firm estimate for a lengthy or complex project. This means that in order to obtain the variation this low, the individual creating the cost estimates for a project utilising a definitive estimate must do a lot of study.
Since a final estimate is likely to be based on a number of assumptions, including ones that are out of anyone’s control, it could potentially be proven to be inaccurate. Estimates are subject to change; the only way to deal with uncertainty in estimates is to update them frequently; the greater the level of uncertainty, the more frequently they must be reviewed. The risks can only be reduced in this way. This is known as “rolling wave planning” in the PMBOK.
How Should a Definitive Estimate Be Prepared?
A definite estimate must be prepared in a more thorough manner than a ROM estimate. When creating a firm estimate, more reliable data must also be available. If the correct data points are not provided, a corporation or business cannot expect a precise, final estimate to be created. In order to support the estimate claims, often contract documents and a scope of work are presented. A firm estimate needs to be created from properly conceptualised plans that include future-proofing possibilities.
Any project-related direct expenses, such as the cost of building supplies and labour for a house, should be listed. A contingency that can protect a project manager in case market conditions change should also be included in a final estimate. In the case of building a house, it would not be acceptable to assume that the predicted cost of the bricks will be the same as the final cost if the price of bricks suddenly increases by 50%. Indirect expenditures should also be included into a project to help lessen the effects of this circumstance.
In terms of both scope and detail, a ROM estimate and final estimate perform in distinct ways. A client or company requesting a ROM estimate will have entirely different expectations than one requesting a definite estimate. The first stage in creating a project’s scope is knowing the distinctions between ROM costs, ROM pricing, ROM estimate, and Definitive estimate.
A scope of work and an itemised summary of project costs should be included in every final quote. In contrast to a ROM estimate, a business is unlikely to accept or tolerate significant differences in the expected and actual costs. As a project manager, it’s crucial to set expectations for the accuracy of the various estimation techniques. An organisation should be aware that a ROM estimate won’t be nearly as precise as a definite one.