What Is the Difference Between Estimated Costs & a Rough Order of Magnitude?

A small-business owner has the need for both forecasting what projects cost on an estimated cost basis and rough order of magnitude, also called a ballpark estimate. Which method she uses depends on several factors, such as how far ahead she wants the estimate, how detailed she wants it to be and how much time she wants her staff to devote to the estimate. For example, if her business is bidding on a project, the estimated cost basis gives her a more accurate and detailed bid to present to a client.

Timing of Use

A rough order of magnitude is used to determine whether a project is generally feasible quite a bit prior to the project, while an estimated cost is used toward the beginning of the project. For example, if the company has decided to develop and market a new product, the rough order of magnitude method would be used to estimate the cost as much as a year or more prior to the projected product introduction date. The estimated costs would be completed perhaps only three or four months prior to the beginning of the project.

Level of Detail

Rough order of magnitude takes into consideration top-level general estimates, while estimated costs are more specific. A rough order of magnitude could look at what a similar project cost in the past. For example, projecting what a new computer system would cost for a multi-location business could be completed by multiplying what one location cost the last time the computers were upgraded times the number of locations. An estimated cost would list the specific equipment necessary for each location, any wiring or construction necessary and define any location that has out-of-the ordinary needs -- say the concrete flooring has to be trenched for the wires. There is much less detail in estimating on a rough-order-of-magnitude basis than an estimated-cost basis.

Variance

Estimated costs are much closer to the actual project costs than a rough order of magnitude method of determining costs. Think of the estimated costs as a list of all the items necessary and with specific costs for each item. The variance between the actual costs and estimated costs are pretty much in the range of plus or minus 15 percent. A rough order of magnitude could be a variance of as much as 100 percent, because it's more of a guesstimate than relying on a list of specific costs.

Time to Complete

Depending on the project, an estimated cost basis for a project could take several weeks to complete. The estimate is based on more detail, specific equipment and cost analysis. A rough order of magnitude could take less than a day. For example, a construction company could estimate in a rough order of magnitude that a two-story home would cost $250,000 to build. An estimated cost basis for a two-story house would specify the building materials used -- wood frame or block, the level of customization, the interior flooring -- tile or carpeting, kitchen appliances -- standard or top of the line -- and so forth. That estimate is more complicated and specific, so it takes more time to complete than a rough-order-of-magnitude estimate.

About the Author

Katie Jensen's first book was published in 2000. Since then she has written additional books as well as screenplays, website content and e-books. Rosehill holds a Master of Business Administration from Arizona State University. Her articles specialize in business and personal finance. Her passion includes cooking, eating and writing about food.