What is a ROM? ROM Price and Cost Estimate

In project management, ROM stands for Rough Order of Magnitude. A ROM estimate provides a ballpark range for the costs and effort required to complete a project. It is a quick, high-level estimate done early in the project lifecycle, before detailed requirements are defined.

The purpose of a ROM estimate is to assess project feasibility, secure initial funding, and kickstart further planning. While not precise, it gives stakeholders a general idea of the project‘s scope and cost so they can decide whether to proceed. ROMs are commonly used on projects where there are many unknowns and limited information available.

When to Use a ROM Estimate

ROM estimates are typically created in the initiation or concept phase of a project. At this early stage, project managers have only a general understanding of what needs to be built. Detailed specifications, task breakdowns, and resource assignments have not yet been determined.

A ROM price range helps justify a project‘s business case and gain tentative budget approval. With estimated costs in hand, decision makers can compare the anticipated expense to the forecasted benefits. If the return on investment looks promising, the project is greenlighted to proceed to more detailed planning. The ROM then acts as a cost constraint the team must work within as they define requirements and create schedules.

Some situations where ROM estimates are useful include:

• Evaluating project proposals and deciding which to pursue
• Comparing costs of different solution options
• Setting an initial project budget to work within
• Providing a quick quote to a client
• Determining if a project is affordable

How to Calculate a ROM Estimate

Calculating a ROM is a straightforward process. The first step is to determine a single point estimate based on the project manager‘s knowledge and experience with similar past projects. This might be derived from:

• Historical costs of related projects
• Consultation with subject matter experts
• Industry benchmarks and standards
• Parametric models based on key cost drivers

Once a base estimate is defined, it is turned into a range by applying a plus/minus variance. A commonly used ROM formula is:

• Low end = base estimate x 0.75
• High end = base estimate x 1.75

For example, if the ROM point estimate for a web application project is $100,000, the resulting range would be:

• Low: $100,000 x 0.75 = $75,000
• High: $100,000 x 1.75 = $175,000

This approach follows the "75/75 rule": the estimate has a 75% chance of being within 75% of the actual cost. In other words, the project manager is 75% confident the end cost will fall between $75,000 and $175,000.

The size of the ROM range depends on the level of project unknowns and risk. An unprecedented, highly complex project may use a larger variance, perhaps as much as 0.25 to 4x, to reflect the great uncertainty. Meanwhile, a familiar, straightforward project can apply a narrower range.

Some organizations use more advanced probabilistic techniques like three-point estimating. With this method, the project manager provides best case, most likely, and worst case estimates. These are then combined using a weighted average or statistical distribution to determine the low and high ROM range.

Factors That Impact ROM Estimates

Many factors influence the accuracy and variability of a ROM estimate. Understanding these cost drivers is critical to produce a reliable ROM. Some key considerations include:

Project Size and Complexity
The scope and intricacy of the project is a significant determinant of cost. Large, complex initiatives with many moving parts, integrations, and dependencies will have higher and more variable costs than a straightforward project.

According to the Project Management Institute, "large IT projects, defined as those with initial price tags exceeding $15 million, run 45 percent over budget and 7 percent over time, while delivering 56 percent less value than predicted." Mega-projects fared even worse, running 400% over budget on average.

Technology Stack
The languages, frameworks, and platforms used in the software architecture impact development time and costs. Bleeding edge technologies often come with a premium price tag, while mature, widely-adopted stacks may offer savings. For instance, a 2018 Gartner survey found that "IT organizations that have made a high investment in digital innovation are 2.6 times more likely to be a top performer than a trailing performer."

Team Composition and Location
Labor is often the most significant cost in a software project. A ROM must consider the mix of roles, skills, experience levels, and locations required. Onshore versus offshore resourcing affects average hourly rates.

The 2019 Stack Overflow Developer Survey found the global average developer salary was $55,750. But this varies widely by region, with developers in the U.S. averaging $115,000, while those in India averaged just $16,000. Highly experienced architects and specialized roles like data scientists also command higher premiums.

Development Methodology
The approach used to develop the software impacts the cost profile. Waterfall projects tend to be more front-loaded, with high upfront planning and design costs. Meanwhile, Agile projects spread costs more evenly across the project lifecycle.

According to the 2019 State of Agile report, 97% of organizations now practice Agile development methods. Agile projects are 28% more successful than traditional approaches. However, Agile also comes with added overhead in the form of ceremonies, tooling, and incremental delivery costs.

Risks and Contingencies
All projects face risks and uncertainties that can impact final costs. A ROM must factor in a contingency reserve to account for these unknowns. The amount varies based on the project risk profile but typically ranges from 5-15% of the base estimate.

Mega-projects are particularly prone to going over budget and schedule. One IBM study found that "a staggering 59 percent of IT budgets for software projects are consumed by overages on average." Having sufficient management reserve funds is crucial for large scale endeavors.

Project Duration
The length of the project affects the accuracy of upfront estimates. Longer timelines introduce more risk and variability. Gartner research shows that "through 2023, 40% of development teams using Agile, DevOps or bimodal practices will suffer from 50% cost overruns due to an inability to match people skills to technology needs."

On the flip side, short-duration projects of less than 6 months tend to have more stable and predictable costs. An ESI study found that "a quarter of all organizations delivering technology projects in 6 months or less improved cost, quality, and business value outcomes by more than 20%."

ROM Estimating Pitfalls to Avoid

While ROMs are useful for early stage decision making, there are many ways they can go wrong. Some common mistakes include:

Insufficient Contingency
Failing to include enough buffer in a ROM to account for risks and unknowns is a recipe for cost overruns. In software projects especially, there is always a degree of uncertainty. The Project Management Institute recommends including 5-10% contingency for low risk projects, 10-20% for medium risk, and 20-30% for high risk.

Disregarding Organizational Knowledge
Project managers must tap into the collective wisdom of their organization when building ROMs. Leveraging historical cost data and consulting delivery experts helps validate assumptions. Ignoring past project performance data often leads to overly optimistic estimates.

Promising Precision Too Soon
Stakeholders may pressure project managers for a firm commitment based on a ROM. However, a ROM is an approximation at best. Promising a fixed cost, scope, or timeline too early introduces significant risk. A project forecast‘s uncertainty does not reach acceptable levels until requirements are at least 50-60% defined.

Overlooking Key Cost Drivers
A ROM can easily omit or overlook important cost elements. Project managers must consider all potential expenses, including labor, hardware, software, facilities, travel, and external services. Industry checklists and templates help ensure critical costs aren‘t missed.

Anchoring to the Baseline
Once an initial ROM is produced, there can be resistance to changing it as more information becomes known. This "anchoring bias" causes project teams to discount or dismiss data that challenges original assumptions. Avoid becoming overly attached to the first ROM. It will and should evolve.

Improving ROM Accuracy Through Progressive Elaboration

No matter how well constructed, a ROM is still just an initial estimate. It must be continually refined and adjusted as the project progresses. An effective ROM is not a static figure, but rather a living projection that evolves in step with the project‘s maturity.

Progressive elaboration is a technique for successively improving estimates over time. As requirements are defined and work is completed, the variability in the forecast diminishes. The goal is to narrow the ROM range at each major phase gate of the project lifecycle.

For example, consider a software project with an approved ROM of $1-2 million based on a high-level scope. As requirements are gathered and the solution architecture is defined, the range might narrow to $1.2-1.8 million. Once the detailed design is finished and development estimates are complete, the estimate may be further tightened to $1.3-1.5 million. After several sprints of actual delivery, the forecast could be finalized to $1.4-1.45 million.

This gradual reduction in uncertainty is illustrated in the "cone of uncertainty" model:

[Cone of Uncertainty Diagram]

Source: Constructed Cost Engineering, Dr. Robert Stempel, CC BY-SA 4.0

By the end of a project, the range should converge to within ±10% of the final actual cost. Getting to this level of precision requires diligent tracking of costs and constant estimate revisions. Project managers must monitor the budget burn rate and use empirical data to adjust their projections.

Earned value management (EVM) is a powerful method for keeping estimates in check. EVM compares the actual work completed to the planned schedule and budget. It helps identify variances early, so corrective actions can be taken. Leveraging EVM metrics in concert with a progressively elaborated ROM keeps projects on track.

The Takeaway

ROM estimates are a valuable tool for every project manager‘s toolbox. When created properly, they provide a reasonable approximation of a project‘s cost range from the very start. Effective ROMs facilitate informed investment decisions and keep project teams focused on delivering within budget constraints.

However, ROMs are not a panacea. They are simply a starting point that must be evolved throughout the project based on new information. PMs should use progressive elaboration techniques to narrow estimate ranges over time. Tracking actual costs and updating projections based on real data is also crucial.

With realistic expectations and active management, a ROM is a powerful device for setting a project up for success. As the software estimation expert Steve McConnell states, "the primary purpose of software estimation is not to predict a project‘s outcome; it is to determine whether a project‘s targets are realistic enough to allow the project to be controlled to meet them."

By beginning with a clear-eyed ROM and progressively refining it, project managers can keep their software initiatives on budget and on track. In the complex and ever-changing world of IT, that‘s the best we can hope for.