Cost Estimates In Project Management

THE THREE MAIN COST ESTIMATES:

ROUGH ORDER OF MAGNITUDE (ROM) ESTIMATES

 Rough order of magnitude (ROM) estimates offer a rough estimation of a project’s expected cost. Rough order of magnitude estimates are also typically referred to as ballpark estimates, a swag, or a broad gauge. Rough order estimates are typically calculated very early on in a project. This type of project cost management is essential for project managers and upper management, as it helps them make well informed decisions in future projects. Rough order estimates are well known for their margin of accuracy. These approximations can range from 250 percent to 1100 percent above the actual project costs. Rough order estimates are typically generated three to four years in advance. In the realm of IT projects, a broader margin of accuracy is more preferred, given that in the IT world many things change. Additionally, black swan events may come up and having a way to account for them before they happen can prove to be beneficial. 

BUDGETARY ESTIMATES

Budgetary estimates are used to assign funds within a company or organization in order to set achievable financial goals and adjust their strategies accordingly. Budgetary estimates are usually curated roughly two years in advance. There are many things that must be taken into consideration when dealing with budgetary costs. Things like the scope of a project, the timeline, and the expected outputs/project objectives. In regards to accuracy, budget estimates fall in the range of 10 percent to 25 percent above the estimated cost. This means that the actual cost varies between 10 percent less to 25 percent more than the budgetary estimates. One of the many advantages of using budgetary estimates is how useful they are in financial planning and decision making. Budgetary estimates play a role in financial planning and decision making because they can help businesses project future expenses and revenues with clear cut accuracy. By analyzing these estimates they can reveal areas of improvement and can help identify potential problems areas which can lead to efforts to improve such areas before they escalate. These budgetary estimates can also help the company or organization make more well informed decisions and invest in options that are more likely to succeed in order to not waste money and time. 

DEFINITIVE ESTIMATES

Definitive estimates, also known as the final estimate, provides accurate depictions of project costs by playing a role in many purchasing decisions. A definitive estimate is made when there are accurate estimates or there is a completion of scope of work. This estimate helps determine the cost baseline of your project and this approximation allows you to assign and allocate the responsibilities and resources necessary to complete the project. Accurate budget estimates can provide an outline for spending which allows companies and organizations to prioritize their spending in order to maximize their growth. These estimates can provide insights in order to boost financial performance. Some influential factors that affect the accuracy of definitive estimates include: market conditions, internal and external factors. Market conditions describe labor costs and market demands which can affect the budget for an organization or company. Internal factors include employee completion rates and technological advancements that can affect the impact of budget costs. External factors describe economic conditions and trends in the world, tax laws and regulations, and lastly, downturns or shifts in customer engagement. All of these factors can prove to affect definitive estimates. 

CONCLUSION

Project cost management is an essential topic in agile project management. There are three main types of budget project estimates that are used in order to maximize profits in a company and to ensure financial longevity in a company or organization. We went over rough order magnitude estimates, budgetary estimates, as well as, definitive estimates. These estimates have proven to be very similar in objective, but very different in accuracy as well as when to implement such estimates. Cost estimates are very crucial in project management because many projects recorded in the past have proven to overrun or exceed their budget estimate due to poor planning. With these three basic cost estimate methods/tools, this can change. 

CITATIONS

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Reporting, Cost. “What Are the Advantages and Disadvantages of Using Top-down or Bottom-up Cost Estimating Methods?” How to Measure Project Cost Efficiency: Top-Down vs Bottom-Up Estimating, www.linkedin.com, 1 Sept. 2023, www.linkedin.com/advice/3/what-advantages-disadvantages-using-top-down-bottom-up#:~:text=While%20this%20method%20is%20faster,and%20risks%20of%20the%20project.

Usmani, Fahad. “Rough Order of Magnitude (ROM) vs Definitive Estimate.” Home Page, 10 Aug. 2022, pmstudycircle.com/rough-order-of-magnitude-rom-vs-definitive-estimate/.

“What Is a Budgetary Estimate?” Bizmanualz, www.bizmanualz.com/library/budgetary-estimate#:~:text=Efficient%20budgetary%20estimates%20allow%20organizations,among%20various%20departments%20or%20projects. Accessed 9 Oct. 2023.