What are the three basic types of cost estimating? Describe each type
The three basic types of cost estimating are as follows:
(1) A rough order of magnitude (ROM) estimate provides an estimate of what a project will cost. This type of estimate is done very early in a project or even before a project is officially started. Project managers and top management use this estimate to help make project selection decisions. The timeframe for this type of estimate is often three or more years prior to project completion. A ROM estimate's accuracy is typically –50 percent to +100 percent, which means that the project's actual costs could be 50 percent below the ROM estimate or 100 percent above. For information technology project estimates, this accuracy range is often much wider. ROM estimates are also known as a ballpark estimate, a guesstimate, a swag, or a broad gauge.
(2) A budgetary estimate is used to allocate money into an organization's budget. Many organizations develop budgets at least two years into the future. Budgetary estimates are made one to two years prior to project completion. The accuracy of budgetary estimates is typically –10 percent to +25 percent, meaning the actual costs could be 10 percent less or 25 percent more than the budgetary estimate.
(3) A definitive estimate provides an accurate estimate of project costs. Definitive estimates are used for making many purchasing decisions for which accurate estimates are required and for estimating final project costs. Definitive estimates are made one year or less prior to project completion. A definitive estimate should be the most accurate of the three types of estimates. The accuracy of this type of estimate is normally –5 percent to +10 percent, meaning the actual costs could be 5 percent less or 10 percent more than the definitive estimate.
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