Using Rough Order of Magnitude Estimates in Early Project Stages

One of the most challenging estimating problems is preparing an estimate for a client who says, “I am thinking about building an office building. How much is it going to cost me?” When you ask for details, you quickly find out they don’t have any. They want you to give them a cost so they can decide if they want to spend time and money determining these details. If there ever was a catch-22, this is it. There’s not enough information to prepare an accurate estimate. If your estimate is too high, you risk losing the work. If it is too low, you may not be able to build it for the estimated cost.

Key Takeaways

• Rough order estimates are used to forecast a project’s costs during the early stages of design.
• There are three primary methods (analogous, parametric, and three-point) that you can use to prepare early estimates.
• When dealing with early estimates, you are better off giving clients a range of costs rather than a single estimated cost.

How to Use Rough Order of Magnitude Estimates

Rough Order of Magnitude (ROM) estimates (sometimes called conceptual or preliminary estimates) are a quick and dirty way to prepare a rough cost estimate for a project in its early stages when the project scope is still being developed. The goal of a ROM estimate is not to prepare a definitive estimate or an exact cost estimate for the project but to get an estimate that is in the ballpark. If you are involved in the early phases of a project, you will often be tasked with preparing estimates with very little project information. We recommend that you quote a range of expected costs rather than a single cost because it allows you some flexibility as the design develops.

The owner’s decision-makers use ROM estimates to prepare business cases to assess the project’s feasibility and determine whether the economics justify the stakeholders moving it into the project planning phase. They also use them to prioritize the time frame when projects will be built, which is crucial when they lack sufficient funds to construct all the proposed projects. Preparing estimates for early design is very tricky. You don’t want your estimates to be too high, as your project may not be funded. Also, you don’t want it to be so low that you haven’t budgeted enough to complete the project the owner has in mind.

ROM estimates are used to establish the initial project budget estimate. As the project details are refined during the design process, more accurate estimates (such as detailed or bottom-up estimates) are prepared to control project costs and refine the budget. If you are hired to assist with the design, you will be updating the initial estimate throughout the design process.

👉 Read about the different types of estimates used in construction.

Construction project managers may use the following estimating techniques to prepare a project estimate without detailed information.

3 Techniques for ROM Estimates

1. Analogous Estimating

Analogous estimating (sometimes called top-down estimating or project comparison estimating) uses historical data from previous projects to develop cost estimates for the current project. You can use the following steps to prepare an analogous estimate:

1. Start by choosing a project similar to the proposed project. The past project’s actual costs become a starting point for the new project’s cost estimate. For example, if the comparison project’s costs were $2.4 million, $2.4 million becomes the starting point for the estimate. If this method is to prepare accurate estimates for the new project, you must use historical data from a very similar project.
2. Next, you adjust the past project’s costs to account for any difference between the projects. Because no two projects are exactly the same, every estimate will need some adjustments. Common adjustments include differences in building size and design, inflation, project location, and changes in market conditions.
3. Finally, you may want to quote a range of costs rather than a single price. A common way to do this is to add 75% to the costs to get the upper boundary and subtract 25% to get the lower boundary. Some people recommend using plus or minus 50%. You should select an accuracy range that you are confident covers the range of possible costs.

Analogous estimating has several advantages. First, the level of effort required to prepare an estimate is minimal, making it a cost-effective way for you to prepare estimates. Second, it is based on your company’s historical data, which considers how your company builds projects.

It also has several disadvantages. First, it is less accurate than many other estimation methods because it is based on very limited information. Second, you must have built similar projects and have historical cost data from these projects. Third, it is easy to miss several differences between the current and past projects, decreasing the estimate’s accuracy. Finally, it is subjective because it is based on the judgment of your project team members.

2. Parametric Estimating

Parametric estimating uses the statistical relationship between the cost data from past projects and their variables to prepare a budget estimate for the new project. For this method to be useful, you must be able to determine the variables early in the project life cycle, such as building square footage, building volume, length of perimeter, and plant capacity. Square foot estimating is a simple form of parametric estimating when the square foot pricing is statistically derived from historical data. You can use the following steps to prepare a parametric estimate:

1. Start by using the company's historical cost data to develop a statistical model or estimating template for a specific project type. This is the most difficult part.
2. Next, you run the model to get an initial estimate for the project.
3. You will want to adjust this cost for project-specific conditions, as no project will exactly match the projects used to develop the model.
4. Finally, as with analogous estimating, you want to develop a range for the project costs by adding and subtracting a percentage.

Parametric estimating has several advantages. First, it is more accurate than an analogous estimate because it considers more building parameters. Second, the project variables used by the model automatically capture some of the project differences. Third, once the model has been developed, estimates can be prepared quickly. Finally, because it is based on historical data, it requires less expert judgment and is less subjective than analogous or three-point estimating.

It also has several disadvantages. First, a lot of historical data is required for the statistical analysis to produce accurate results. Second, the models can be complicated and require special skills to develop. Third, it can be time-consuming and costly to analyze the cost data needed to create the model. Finally, it can only account for the variables included in the model.

Because of these disadvantages, parametric estimating is seldom used. However, advancements in artificial intelligence (AI) may change this by making it quick and easy to develop cost models from a company’s historical data.

3. Three-Point Estimating

Three-point estimating establishes a range for the estimate using three estimates: the most likely (cM) cost, which is the best estimate of the project’s cost; an optimistic (cO) cost, which establishes a lower boundary for the costs; and a pessimistic (cP) cost, which establishes an upper boundary for the costs. You can use the following steps to prepare a three-point estimate:

1. Start by preparing an estimate for the most likely costs using historical data and the expert judgment of your project team members. This should be what you expect the project to cost under normal circumstances.
2. Prepare an estimate for the optimistic costs. This should be what you expect the project to cost if everything goes right.
3. Prepare an estimate of the pessimistic costs. This should be what you expect the project to cost when things go wrong. When preparing the pessimistic cost, you should carefully identify and consider the project risks and incorporate their expected costs into the estimate. Keep in mind that it is easier to go over budget than under budget, so the pessimistic cost is expected to be further from the most likely cost than the optimistic cost is from the most likely cost.
4. Calculate the estimated cost using a statistical distribution. Don’t panic! This is easy. The Project Management Body of Knowledge (PMBOK), published by the Project Management Institute (PMI), identifies two ways to establish the expected project costs. First, averaging the three values using the following formula:

Second is the PERT method, where the most likely value is given a weight four times that of the optimistic and pessimistic values. This is calculated using the following formula:

Three-point estimating has several advantages. First, it Incorporates uncertainty in the construction costs by preparing three estimates rather than adding and subtracting an arbitrary percentage. Second, preparing optimistic and pessimistic estimates helps you identify and quantify the cost-related risks.

It also has several disadvantages. First, it is more complex than an analogous estimate, as it requires three estimates. Finally, like an analogous estimate, it is subjective because it is based on the judgment of your project team members.

Final Thoughts

Providing preconstruction services, such as preparing estimates during the early stages of a project’s design, is a great way to strengthen your relationship with clients and get more work from them. The more the client relies on your expert judgment and advice, the more likely they will choose you over your competitors. You want your clients to feel like they can’t build a project without you.