Types of Cost Estimates | Rough Order of Magnitude (ROM) | Budget Estimate | Definitive Estimate

hello and welcome to p.m. Z lounge con today we are looking into the different types of cost estimates and as you can see three different beautiful looking fruits on your screen that means there are three types of cost estimates that we are going to look into now before we begin let me remind you if you would rather read an article about the different types of cost estimates then watch a video if you are into reading then first link in the description is going to take you to the related article on this topic on our website PM z lounge comm and you can check that out second link is actually even more important because that is a playlist of all the videos that we have done on the cost management knowledge area this topic of course is a part of the cost management knowledge area all right if that been clear that being said let's get started now there are some questions that you should ponder upon before we introduce this topic and these questions are you can try to answer them from your real life perspective as well your real life project management experience as well so how do you provide cost estimate if somebody was to come to your cabin and ask you you have a new project that you're working on what will be the cost of that project what is your estimate are you going to give them a single number let's say 100,000 US dollars or are you going to say well it could be somewhere around ninety thousand US dollars to maybe 110 thousand US dollars are you going to give and range or a single number now when you're working on the project would you like to provide the cost estimate just once maybe during the beginning of the project or would you like to revise those estimates as you go further in the project as you get to know more details about the project what would you prefer to do let's look into the answers to these questions now one thing is that you should definitely note is that the answers to the questions we just talked about largely depend on what industry you're working in what organization you're working in and what is the type of project you're working in but PMBOK guide f initely has some guidance for you in this matter so from the perspective of the PMP exam this video is going to be important because whatever we tell you is what you should be keeping in mind when you answer BMP questions but from your real life project perspective follow whatever that your organization says now cost estimates they are always provided in a range the question that we asked in the previous slide right do you give a single number or a range you always give a range and the other thing is the estimates can be revised they can be revised as we move further and gather more project details and you would want to do that right as you move further as you gather more details of the project you will be in a better position to estimate the cost that it is going to take to deliver the project right so there are three types of cost estimates as indicated in the beginning of this video with those three beautiful fruits that we saw first as rough order of magnitude second is budget estimate and third is definitive estimate what is the range that these estimates operate in and what is these estimates all about let's look into that one by one starting off with a rough order of magnitude beyond salon.com /resources is where we have listed our favorite PMP books if you are looking to start your preparation all the resources that you can buy are available on this link now let's talk about a rough order of magnitude our om which is also known as a ballpark estimate now this should be clear right that the name itself is a rough order of magnitude it is also known as ballpark estimate and this should fairly give you an idea that this is a tariff estimate and this is provided at an early stage of the project so you may not have a lot of details about the project when you provide the rough order of magnitude estimate the range of this estimate is - 25 % - + 75 % this is the range you are dealing with when you talk about our OEM or the ballpark estimate or the rough order of magnitude estimate so what this means is if you submit a cost estimate of 100,000 US dollars what it means is if this is your rough order of magnitude if this is your AR om the actual project cost could be anywhere between 75 thousand US dollars to 175 thousand US dollars - 25 % - + 75 percent so this is taken and again this is something that you are submitting at the very beginning of the project and thus this long range is allowed in the rough order of magnitude it is a ballpark estimate so the next is budget estimate and this is where you have better knowledge of the project some time have passed since you submitted your AR om the rough order of magnitude estimate some time have passed you have done some project activities now you understand the project better and you can submit one more estimate which is known as budget estimate and the range that you have for this is - 10 % - + 25 % let's look at the same example so if you submit a hundred thousand US dollars cost estimate as your budget estimate this is your budget estimate then it is understood that the project the actual project cost could be somewhere around ninety thousand two hundred and twenty five thousand US dollars because that is the range of a budget estimate moving on the final estimate that you can submit as part of your project is definitive estimate and standing through to its name this is where estimates get most accurate now you have gone even further some more project activities have taken place have completed and you have the best knowledge about the project that you have ever had since the beginning of the project so today you have the most amount of project knowledge since the beginning of the project and this is the point where you can submit a definitive estimate and the range is minus 10% to plus 10% a minus here which actually is showing up here so a minus 10 to +10 % estimate is what you can submit as your definitive estimate continuing our same example so if hundred thousand US dollars is your definitive estimate that means the actual project cost should be around ninety thousand two hundred and ten thousand US dollars this is expected out of you considering you are an experienced project manager and you have submitted a definitive estimate of a hundred thousand US dollars so it is expected that you are going to finish off the project in minus plus minus ten percent range right now I'd like to repeat here these ranges that we talked about these estimates that we talked about can differ in terms of the company that you work for the organization that you work for in terms of the the industry that you're in and in terms of the project type as well so all of this can change based on the variables that I just talked about so a lot of people have this question that is why I thought about picking this up all these ranges fixed and like I just mentioned these ranges are not fixed these ranges are definitely not fixed and based on your industry your project type your organization these ranges can definitely change so it is quite possible that in your organization instead of the plus/minus 10% range that you have for a definitive estimate you get a plus minus 5% range right it is also possible that you don't get to provide the estimates thrice but twice or maybe even once that is also possible so everything that we have just read is from the perspective of PMP exam those ranges those names you should learn for your PMP exam but in on your real life projects you should follow whatever your organizational guidelines are like I said it is very possible that in your industry you provide estimates only once and the range could be plus minus 15% that is also possible all things are possible so like I said whatever we just discussed is based on the best practices proposed by the PMBOK it is possible that your project your organization and your industry follows something very very different when are these estimates provided that is a really really good question and that is why I thought about covering it let's take an example of a good old software delivery project you are the project manager on a software project so this is where you are going to provide the estimates when the business case is being made right when you are just right maybe you're developing the project charter that is where you are going to submit a rough order of magnitude estimate that is where you submit ro m when you have the least knowledge about the project because you are just getting started that's where you submit a very rough figure which has a range of - 25 % - + 75 % that's where you submit the AR om when you have written those requirements down and you are down to system requirements the SR documents some people call it the SRS document when you are in that stage of the project where your system requirements document is finished it is baseline it is a proof that is when you can provide the budget estimate right which has lesser range now when you finish off with your design the high level design the low level design when the design is a proof when you have the best possible knowledge that you can have for the project is where you submit the definitive estimate and this is where decision gate can be made since you have submitted your best estimate possible the estimate with the most knowledge of the project and only design is done yet this is where the sponsor of the project the customer can take a call can take a decision whether to proceed with the project to complete the development testing deployment or to cancel the project here right here at the design phase itself so this again is a very generic representation on where in what stage of the project lifecycle are these estimates submitted it is possible that for your project they may ask for you to submit a Defen estimate right at the system requirement stage as well like I said this is very generate but this should give you an idea of why we have three different types of cost estimate and where is the project manager required to submit these estimates that's all that we had in this video hope you found it useful if you did do hit the like button and subscribe to the channel and hit the bell icon if you have not done so already don't forget to check out the website BMC lounge comm your number one free PMP resource and also follow us on our social media facebook.com slash BMC lounge and twitter.com slash BMC lounge for the latest updates thank you

Channel: PMC Lounge

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Keywords: project management tutorial, project management fundamentals, project management professional pmp video training, project management lecture, project management basics, project management body of knowledge, pmp exam, pmbok, pmp certificate, pmi pmp, pmp project management, cost estimate, rough order of magnitude estimate, rough order of magnitude estimate pmp, budget estimation, budget estimate in project management, budget estimates and revised estimates, definitive estimate

Id: XaSdQ1fHOmk

Length: 12min 24sec (744 seconds)

Published: Fri Feb 15 2019