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What is a Rough Cost Estimate? | Spanglers – General Blog News

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What is a Rough Cost Estimate? | Spanglers – General Blog News

Estimator

A Rough Cost Estimate is an initial estimate that uses prior experience and other non-project data to estimate the cost of a project.

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It is also called a Rough Order of Magnitude (ROM) estimate, or a Conceptual Estimate.

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The Rough Cost Estimate is used for project screening, or deciding which among several projects to proceed with.

The project definition is around 0 – 5%, since the project is still in the conceptual phase. Usually it is not yet funded, and the primary parts of the project are not designed. There is, in fact, just enough project definition to determine whether it is a priority for the organization.

Accuracy

The accuracy of a Rough Cost Estimate is about 30 – 50%. As with most estimate types, the accuracy is dependent on what you wish to compare it to, that is, if you still can’t decide between two projects you would continue with a more accurate estimate.

Types of Estimates

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The Rough Cost Estimate is one of 5 primary estimate types:

  1. Rough Cost (Conceptual) To get an idea of the potential expenditure involved with a project.
  2. Feasibility To determine the feasibility of a project sufficiently for a go/no-go decision.
  3. Preliminary To choose between several different options or alternatives within the project.
  4. Substantive To refine the budget once all design has been completed quantities of resources are known.
  5. Definitive To ensure sufficient budget is available once costs are known (quotes obtained, etc.)

Determination of a Rough Cost Estimate

Because there is no cost information prior to a Rough Cost Estimate, it uses data from other projects, either within or outside of the organization. Project-based organizations like construction, engineering, or software development firms generally have good information to produce a rough cost estimate from in-house data. Other organizations do not, but it is often possible to glean data from industry publications and other external sources.

There are three main sources of data for a rough cost estimate:

  1. Analogous Estimating This refers to obtaining data from a previous project and applying it to the new project. Often a correction factor must be applied to make it more applicable to the new project, but it is a good start. An example of an analogous estimate would be if a house building company spent $200,000 to build a house, the new house will be $220,000 based on square footage.
  2. building a houseParametric Estimating This is when a known unit rate is applied to obtain the estimate. Most industries have industry-wide trade organizations which have good average cost data per unit of time, materials, production units, or applicable metric. These are often not free. Project based organizations tend to track average costs per unit as well. An example of a parametric estimate would be if a house building company knows that the cost of building a house is $110 per square foot, and the house is 2,000 square feet, the estimate would be $220,000.
  3. Expert Judgment I have included this one last because you probably don’t have an expert readily available if you needed to use the other two methods. But if you do, you should consult them first, not last. They are the most important source of information, and will save enormous amounts of time if you can find one. It might be worth paying a consultant to get an estimate, or they might even be willing to give you some top-of-the-head numbers for free if it might result in future work.

Examples

Here are a few examples of a rough cost estimate:

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  1. An insurance company identifies the need to develop a software product. The initial Rough Cost Estimate was based on guidelines found from various internet sources. The estimate is presented to management to determine if the project is a priority for the organization.
  2. A manufacturing company identifies the potential to upgrade some production equipment to reduce costs. The Rough Cost Estimate is produced by consulting industry publications which provide average cost data for the equipment necessary to be purchased. The estimate is presented to management to decide if the idea is worth pursuing, that is, the benefits might be worth the costs to proceed to a feasibility (go/no-go) estimate.
  3. An airline company wants to build a new hangar, but has no idea about the costs. The rough cost estimate is produced using industry data and gives the company an idea whether they can proceed with the project.
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