Types of Cost Estimates

So how do you think are cost estimates provided? Is it a single number or a range? Do you provide it just once or can you revise your estimates as the project moves further?

These are important questions! Although the answers largely depend on your industry, organization and project type, PMBOK definitely provides some guidance in the matter.

The cost estimates are provided in a range. Also, the estimates can be revised as we move further and gather more project details. So how does all this fit together?

Rough Order of Magnitude (ROM)

This is also known as a Ballpark Estimate. And as you can make out, this is a pretty rough estimate provided at an early stage in the project. The range of this estimate is -25% to +75%. For example, if you submit a cost estimate of $100K as ROM, the project cost could be anywhere between $75K to $175K.

Budget Estimate

This is where you have better knowledge of the project. Based on the project details that you now possess, the Budget Estimate can be in the range of -10% to +25%. For example, if you submit a cost estimate of $100K as Budget Estimate, the project cost could be anywhere between $90K to $125K.

Definitive Estimate

Standing true to its name, this is where the estimates get most accurate. Definitive estimate comes in fairly late in the project lifecycle and its range is -10% to +10%. For example, if you submit a cost estimate of $100K as Definitive Estimate, the project cost could be anywhere between $90K to $110K.

Note that PMBOK Guide Edition 6 mentions Definitive Estimate range of -5% to +10%

Are these ranges fixed?

Not at all. As mentioned previously, all ranges can be changed based on your industry, organization and project type. It is also possible that you don’t get to provide estimates thrice but twice. The types of estimates can definitely be tailored as per the project requirements.

When are these estimates provided?

Let’s take a good ol’ software development project for ease of understanding.

ROM is provided during the Business Case development. This could be figure you see on your Project Charter. Budget Estimate is provided once you have detailed system requirements. And finally, once your design is ready, that is when you provide the Definitive Estimate. So ideally, before you begin development, the final estimates are approved. Once again, do remember that this could be totally different for you on your real life projects.

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