ROM Estimate Vs Definitive Estimate

ROM Estimate Vs Definitive Estimate

Last updated on 14th Oct 2020, Artciles, Blog

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Hitesh (Sr Project Manager )

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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 the 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 is different in 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.

What is 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.

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How Do I Prepare a ROM Estimate?

Although there is a 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 be 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.

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.

WHEN IS ROM USED?

ROM estimate is used;

At Project Initiation: to screen/prioritize for final decision making as to which project to choose among available options.

During the Project Life Cycle: to estimate the final cost to conclude the project and are reviewed and refined as more and more information is gathered during the project execution phase.

HOW TO MAKE ROM ESTIMATE?

Developing a ROM estimate takes a lot of skill and experience.

You’ll always need to involve relevant stakeholders and subject matter experts for their opinion on the required level of estimation to complete certain milestones. And as the term itself describes, it is a rough order magnitude, i.e., there will be a chance of inaccuracies, or the estimations will have limited accuracy.

It all depends on the experience and the information received from subject matter experts, ROM can have accuracy level  -50% to +50% (As per PMBOK6). Ultimately we get roughly estimated information regarding the schedule and effort required to complete a milestone.

ROM estimates can also be made from the available references of similar projects from the past. For example, the total cost to establish a new plant with 100 metric tons capacity will almost two times of the old plant with 50 metric tons capacity.

TOOLS USED IN ROM ESTIMATE

In general, the following are the main tools & techniques to get to ROM estimate.

  • Ball Park estimate
  • Top-down estimation
  • Historical data and expert opinion

It is recommended to make an estimate in terms of time and cost. It helps the subject experts to provide their expert opinions in a most efficient and precise manner. As at the early stages, there is very limited information available, so it wouldn’t be possible to provide an accurate estimate of time and cost, so what we can do here is divide the estimates into three categories. i.e., Low, Medium, and High. It could look like as below

ROM ESTIMATE CATEGORIES

ROM estimates can be categorized into these activities. This is based on the level of effort.

LOW EFFORT

  • Hours: 30 to 50 hours for completion
  • Cost: $1500 to $4500 dollars
  • Duration: 1 to 2 weeks
  • Number of Resources: 1 to 2 Resources

MEDIUM EFFORT

  • Hours: 50 to 250 hours for completion
  • Cost: $4500 to $10,000 dollars
  • Duration: 1 to 3 months
  • Number of Resources: 3 to 5 Resources
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HIGH EFFORT

  • Hours: 300 to 1000 hours for completion
  • Cost: $15,000 to $50,000 dollars
  • Duration: 4 to 6 months
  • Number of Resources: 5 to 15 Resources

This kind of category, as listed above, makes life easier for everyone by breaking down the work into every possible manner at the early stages of the project. Similarly, subject experts would be more comfortable in providing the estimates with this kind of model.

Inaccurate cost estimation and budgeting

Inaccurate cost estimation and budgeting is one of the main root causes of project cost overruns. Once the budgeted costs are lower than what is really required, the recovery is very difficult. The only way out is re-estimation, and re-budgeting, which is a long drawn out process, especially for infrastructure projects based on fixed price bids. Why is this so?.

Projects are progressively elaborated, so are budgets. The expected accuracy of estimates increases as the project progresses. When the project is in evaluation stage a Rough Order of Magnitude estimate (ROM) will serve the purpose. The expected accuracy levels of rough order of magnitude estimates are between -15 to +75 percentage. During project portfolio planning a Budgetary estimate is required. The expected accuracy level of budgetary estimates are between -15 to +15 percentage. During the planning phase of the project, one need the most accurate estimates known as Definitive estimates whose expected accuracy level is between -5 to +5 percentage. Definitive estimates are based on detailed Work Breakdown Structures (WBS). While budgetary estimates are possible with high levels of work breakdown structures, for definitive estimates one need detailed work breakdown structures meeting the 8-80 rule. Unfortunately, fixed price contracts are signed much before the preparation of the detailed work breakdown structures with the required granularity. Hence budgetary estimates gets labelled as definitive estimates.

Very often, estimation team fails to factor in appropriate overheads into the engineering and construction costs before finalizing the project budget. One has to bear in mind the following while estimating cost and budgeting. Error in judgment of any of these components will impact the budgeting process negatively.

  • Cost + Contingency costs + Management reserves = budget
  • Budget + Profit = Price (quoted)

If the quoted price itself is lower than the budget, then it is only a matter of time before the actual cost exceeds the planned cost.

Root cause#2.Inadequate cost monitoring and control systems

Recently, I was shocked to see the pathetic state of spread sheet based planning and tracking system of a very large infrastructure project where well known global giants are stakeholders. Automated real time progress monitoring based on earned value management principles is what is needed.

Root cause#3.Improper vendor selection

Very often price is the primary determinant while choosing vendors / sub-contractors. In the process the quality aspects takes a back seat. Previous track record and the processes followed must carry equal weightage on par with price. Another aspect is the transparency of the selection process.

Root cause#4.Improper contract types

If the scope is absolutely clear, then fixed price contracts will work perfectly. For this we need definitive estimates based on work breakdown structures of high level of detail. If the scope is not very clear, then cost reimbursable contracts are a better choice.

Root cause#5.Lack of professional ethics

Lack of professional ethics is a milder way of addressing ‘CORRUPTION’ which shadows every aspect of many projects which are lagging behind both schedule wise and cost wise.

Having said that, let us focus on how to improve the accuracy of project cost estimation and budgeting.

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ROM Estimate vs Definitive Estimate

  1. 1. Rough Order of Magnitude (ROM) Estimate: the differences between estimates and actual figures may be as large as 75% more or 25% less
    • used in early stage of the project when things are not very solid/clear and/or for projects that span a lengthy period
  • 2. Definitive Estimate: the differences between estimates and actual figures may be within the range of -5% to + 10% (more or less)
    • used in latter stage of the project and/or the project is simple to estimate
  • In addition to the ROM Estimate and Definitive Estimate, there are some more estimation ranges:

    • Preliminary estimate: within the range of -15% to +50%
    • Budget estimate: within the range of -10% to +25%
    • Final estimate: 100% accurate

    The degree of accuracy of the estimations will become more accurate as the project proceed as many unknowns at the beginning of the project will become known later on.

    ROM Estimate vs Definitive Estimate Illustrated

    Let’s take the project of PMP® Exam study and preparation again for the illustration of the degree of accuracy of estimation.

    At the very beginning of the exam preparation, the Aspirants may have little or no previous knowledge about the exam syllabus and the PMBOK® Guide. The actual period of time required for the studies may not be known accurately. The only way to estimate the study period is through the lessons learned of other exam takers.

    And as a rule of thumb, the estimated preparation period for the exam is roughly 3 months of part-time study, which is considered a Rough Order of Magnitude (ROM) Estimate.

    But after going through the exam prep course, the PMP® Aspirant will then be able to understand the topics for the exam and their knowledge gaps. Hence a more accurate estimate can be made (e.g. 100 days — more like a Definitive Estimate). And at that time, it is often advisable to book the exact date of the exam, which can also act as a driving force for the PMP® study.

    Mock Exam Question

    The project is working into 3/4 of project duration and the final component is to be built to improve the accuracy of the system. The project manager is updating the cost of the whole system. What is the degree of accuracy of the estimate?

    1. 1. Preliminary Estimate
    2. 2. Rough Order of Magnitude Estimate
    3. 3. Budget Estimate
    4. 4. Definitive Estimate

    Rough Order of Magnitude

    When it is very early in the project or you have little information available for a project, and management has asked you to provide them with a budget estimate quickly, you will provide the ROM of the budget estimate.

    The accuracy of this estimate is low. It varies between -25% to +75%.

    You find this value by looking any past similar types of projects or just have an overlook of the broad scope of work and then decide on it.

    Here, the time required to calculate the cost estimate is the least.

    Rough-Order-Magnitude

    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 the 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.

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    Tools for Definitive Estimates

    Many companies offer templates and calculators to assist with definitive estimates. Smartsheet offers a template in addition 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.

    Definitive Estimate

    You use this metric when management needs a more accurate cost or time estimate and you have enough project information.

    This estimate requires more time than the ROM technique; however, its accuracy is between -5% to +10%.

    With definitive estimate the management can be sure about the project or any bid they are going to participate in.

    You will get the definitive estimate when you have a detailed scope of work or if the project is already running.

    Now we will study estimation techniques and their accuracy.

    Estimation Techniques

    There are four techniques for estimation:

    1. 1. Analogous Estimation
    2. 2. Parametric Estimation
    3. 3. Three Point Estimation
    4. 4. Bottom Up Estimation

    In an analogous estimation, you compare the cost of the project with any past similar projects and come up with an estimation of the project. You use this technique when you have little information about the project.

    The cost estimate of this technique can be considered a rough order of magnitude as the accuracy of the estimate is not good. This estimation is also known as a ballpark estimate.

    In parametric estimation, you take statistical data from any past projects and apply it to the current project. For example, the cost of painting per square foot.

    The accuracy of this estimation is better than analogous. The estimation of this technique can be definitive or ROM depending on the quality of data and effort involved.

    In three point estimating, you find three estimates and take an average to remove the bias. The accuracy of this estimate is better than the two discussed above.

    The bottom up estimation technique gives the most accurate result and is also known as the “definitive estimation technique”.

    In this technique you find the cost of each activity and add them up to get the cost of the project. Though this technique is time consuming, it provides the best results.

    The estimation values obtained from three point estimating and bottom up estimating are the most accurate, and you can say that these estimates are definitive.

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