When a company imposes a cost and/or duration on a project without a detailed cost analysis, we call that top-down estimating. Learn what it's all about and when to use it.
As a project manager, it's your responsibility to create a project budget and a project timeline that are both realistic and attainable. There are different techniques that a project manager can apply when planning for their projects, such as bottom-up, analogous, and parametric. However, these techniques do not necessarily work on all kinds of projects. Another estimating technique that is worth learning is the top-down estimating technique.
Top-down estimating happens when the project managers need to produce a cost estimate or timeline of a project without any detailed information. It is a form of analogous estimating, where existing knowledge of similar projects is used in the estimation process to produce a ballpark figure for the total cost.
In top-down estimating, the initial project budget or time estimates come from the opinions of experienced managers and sometimes outside experts. Management can also predict actual costs and duration using similar past projects. These numbers can be tweaked to account for particular characteristics or aspects of the current project.
The cost accuracy depends on how closely the new project mirrors the previous similar project that the estimate is based on, or the previous experience of senior managers involved in the project estimates. When using top-down estimating for project planning, you will expect detailed bottom-up estimates, based on the costs of each work package, to replace the initial top-down estimates as time passes.
➡️ Related: How to Create a Project Budget Without Opening Excel
Aside from top-down estimating, another method frequently used by project managers is the bottom-up approach. You can use these methods interchangeably, depending on the complexity and size of the project. But, which is better: the top-down or bottom-up approach?
Bottom-up estimation in project cost management is when the project team identifies all the project components and determines the lowest level component to derive estimates. These estimates cover the project scope in its entirety by calculating the cost of each of the project tasks. It's easy to see why bottom-up estimating is often called detailed estimating.
Compared to top-down estimating, bottom-up approaches involve all project team members as early as the project planning stage. Then, the project team works together to determine the required and critical tasks to complete the project. By including the whole team in the planning, you can get a time estimate for each project task, which will add up to the entire timeline of the project. This is in comparison to the top-down approach, which starts from the overall time estimate and then breaks it down to the different project tasks.
The two estimating techniques both hold advantages and disadvantages. If your project has a clear direction and your team understands how the project is in line with the company goals, then top-down estimating is a suitable choice. Repeatable projects also fit well with the top-down approach because it relies on reliable historical data, which you can derive from similar previous projects.
However, a bottom-up approach will be suitable if the project is brand new or your team does not have any experience yet in doing such projects. This is because there exists a brainstorming of ideas and details in bottom-up estimating. Your project team may think of unconventional ways to get the task done in a shorter time without sacrificing the end result.
To become as efficient as possible, it is essential to first leverage the two methods before you can decide which estimating technique to use.
Top-down estimation is frequently used when the project is still at an early stage. This estimating technique uses the most likely estimate for the project when the level of details is still limited. Here are some instances where the top-down estimating technique works well.
Technology is rapidly evolving. This pushes companies to either develop their own technology infrastructure or improve it. During these situations, a top-down approach will be helpful. Management will provide top-down estimates of the project costs and the project schedule to create an initial plan, which they can pass on to the company's IT department.
Once received, the IT department will evaluate and derive the specific project costs. They can also create a more detailed plan from the initial one provided by management. This will involve details of the project schedules and resources required.
The top-down cost estimating process is also used when technology companies develop goods and services that consumers can purchase. For example, companies selling mobile devices such as phones and tablets may use a top-down approach in developing their new model devices.
When a company is experiencing steady growth, it might decide to move their headquarters to a custom-designed building. Companies often use the top-down approach to create company buildings, whether for offices, satellite locations, or even branches.
When they use the top-down approach, managers decide whether the company needs a new building and where it will be situated. Then, with the help of outside experts, other managers, and data from previous projects, the manager can lay out a tentative plan and budget for the construction of the building. The plan will not contain the specifics of the construction project, such as the material and labor costs, procedure for the construction, and accounting for the project. Instead, as the project details become more specific, such information will be adjusted.
The top-down approach paints the big picture of the project, and details are added to it once project managers become sure of the costs and time. Nevertheless, generating estimates from this technique takes less time and effort than other methods.
Like other techniques, top-down estimating has its benefits and setbacks to project managers and the team. Here are some of the advantages of using a top-down estimate for your next project.
We mentioned before that the project management body provides the initial estimated cost and duration in top-down decision-making. It forms a broad estimate of the time and cost of the final deliverable. Having this information quickly available makes pivotal decision-making easier during the early stages of the project, especially when the details are still minimal.
The top-down approach uses ballpark estimates of time and costs for the project. These estimates are derived from various sources, such as the project accounts from similar projects completed in the past or opinions from outside experts. However, as the project progresses, the estimates are adjusted as more details become available. This makes the planning more realistic and attainable.
Because the top-down estimating technique focuses more on estimating the overall costs and duration of the project rather than its components, this technique generally takes less time and effort. This is useful when making initial decisions in the project when all the project specifics are not yet defined.
The top-down approach to estimating uses data from previous projects and/or products to generate a time and cost estimate. This means that all risks, whether unforeseen or not, are taken into consideration. Other than that, top-down estimating also considers any scope creep that might happen during the project's duration.
The use of historical data in estimation relatively reduces any risk of overlooked tasks or costs in the project, making the estimates larger than those derived from other methods.
However, the top-down approach is not always applicable to every project you will have. Here are some disadvantages of top-down estimating.
Estimating project details is a huge factor in project planning. Time and cost estimates will heavily affect the quality of work your teammates will produce and the quality of the project itself. This is why project estimating techniques exist to ensure that all aspects of the project are realistic and reasonable.
Having the right software for your team can make a huge difference to the time it takes to prepare a cost estimate. Whether you are looking for a detailed bottom-up approach, or a top-down ballpark figure, being able to view the costs and resource breakdown for each of your past and ongoing projects is a valuable asset.
Interested in how Runn resource management software can help you produce more accurate cost estimates? Book a demo today!
