Project estimating is one of the most important aspects of project management. By their very nature, projects have fixed budgets and their owners want to know how much they will cost. Hence, project estimating begins prior to project initiation and estimates are usually updated at important project milestones.
A Rough Order of Magnitude estimate, often called ROM Estimate, is the first estimate in the life cycle of a project.
Usually it is used for project screening, that is, to decide which among several projects to proceed with. It is also often used to estimate projects prior to funding being approved.
According to the Project Management Body of Knowledge (PMBOK), an ROM estimate has an accuracy of +/- 50%. That means that if the estimate is $100,000, the range of acceptable outcomes would be considered $50,000 – $150,000.
How to Develop an ROM Estimate
ROM estimates are developed primarily using analogous techniques, meaning that cost information from previous projects is used to determine an estimate for the new project. Applicable adjustment factors are applied, for example if the new plant will have five assembly lines and the old plant only had four, the cost would be increased by 25%.
Alternatively, parametric estimating involves using a unit price, for example if we knew that the last 10 houses we built averaged at $120/square foot, and the new house will be 1,000 square feet, the estimate would be $120 x 1,000 = $120,000.
So how do you know that the estimate has an accuracy level of exactly 50% and not 40%, 30%, or whatever? This is a question many beginners have, and the answer is that this is a maximum range of this type of estimate, not a universally achievable objective. If the estimate cannot be produced to this accuracy, it cannot be called an ROM estimate. But if it can, well, you’re in luck.
The actual accuracy of the estimate comes from the accuracy of the underlying information. The project is broken down into a series of tasks and each task is analyzed for accuracy. If we know that when a task is performed many times it will range from -50% to +50%, it will be considered sufficient for an ROM estimate. The accuracy of the project estimate is the average of the accuracies of the tasks, weighted by task size. For example, if Task A has an accuracy of 50%, and Task B has an accuracy of 30%, and both tasks have the same number of hours, the accuracy of the project estimate is 40%.
Bottom line, you gather statistical evidence of how often each task fails to perform satisfactorily if it was performed many times. Often this data is sparse, but with experience you can estimate it quite well. When you can establish that each task has at least 50% accuracy, you can safely call the estimate an ROM estimate.
A 50% accuracy level is fairly easy to obtain, and almost all projects will have to ability to estimate at this level. The exception might be research and development projects, or software projects that continually change and evolve.
Project Definition Level
The definition level of a project for an ROM estimate is about 0 – 5%. That means that the design of the relevant products and services are at an infant stage, or have not started at all.
For example, the design of the building has not yet started when the ROM estimate is produced.
- A software development firm is hired to produce a web application. The client outlines their requirements and the firm plans out the structure of the application. They figure it needs 15 primary pages. They find a previous project which had 20 pages, and thus estimate that the project will cost 25% less.
- A manufacturer of office furniture is planning on expanding their manufacturing plant to produce 25% more products. The last time they expanded, it grew by 50%, therefore the cost of the expansion is half of what the previous expansion was.
- A government transportation department is estimating the cost of a highway construction project in order to determine which project to proceed with. The average cost per mile over the whole state is used as the basis to produce an ROM estimate.
Other Types of Estimates
ROM estimates are the first (lowest) level in a hierarchy of estimates that are produced as a project proceeds through its life cycle. The others are:
- Rough Order of Magnitude (ROM)
Used for project screening, or deciding whether to proceed with a project. Accuracy is +/- 50%.
Used after a project is initiated, to decide between several options. Accuracy is -15% to +50%.
Used to determine a project budget once the design details (for example, quantities of materials) are known. Accuracy is -10% – +25%.
Used after the costs, not just quantities of materials, are known. For example, after the project is tendered (or quotes have been received), rather than just designed. Accuracy is -5% to +10%.
This is not really an estimate as much of a summary of the final costs of the project. Accuracy is +/- 0%.