Match the methods of top-down and bottom-up estimates.

Lesson Transcript

Instructor: Olga Bugajenko Show bio

Olga is a registered PRINCE2 Practitioner and has a master's degree in project management.

Successfully managed projects require realistic, well-organized budgets. Learn about estimating, and explore top-down and bottom-up estimating techniques used in project management to develop budgets. Updated: 01/20/2022

Cost Estimating: Bottom-Up vs. Top-Down

| Mar 25, 2015

Generating revenue is the light at the end of the project's tunnel, but one of the first steps toward profit is accurate estimating.

Creating a proper estimate involves detailing every expenditure you expect to make throughout the duration of a project. Compiling this information will help you charge the client enough to make a profit on the job, and will also guide you in keeping the project within budget.

Generally, there are two styles of estimating used in home technology installations: bottom-up and top-down. Each entails accounting for each item and labor cost, but there are particular projects and instances where one may be better than the other. It's important to know which method of estimating is best applied depending on the situation.

BOTTOM-UP ESTIMATING

In this style, project managers tally their costs upward, starting at the bottom and accounting for each expected cost. In sum, the total costs should equal the finished project. It's a basic method of estimating, but the benefit is that it's the most accurate means of estimating a project's total cost. Accuracy is achieved just through the process of starting at the very foundation of a project and working your way up through each cost on the project work breakdown structure.

However, because of the effort needed to detail each and every possible expense – labor, equipment, indirect, direct – using the bottom-up approach is time-consuming. Thus, streamlined and efficient processes are critical in bottom-up estimating, like using standardized work packages and formalized structures.

Bottom-up cost estimating – because of its accuracy – is best applied in large, multifaceted projects. Reining in costs and keeping to a budget is usually critically important in such projects, and bottom-up estimating allows you to work in just that manner.

TOP-DOWN ESTIMATING

The top-down approach starts with identifying every major aspect to the project. In home technology installations, you will typically start with the components and features of the job. Then, you will create different labor categories that apply to each task. The cost of the project is measured by estimating how much labor will go into each piece of the job. The set cost of the labor category is multiplied by each relevant task.

The top-down approach requires a history and knowledge of project pricing to accurately estimate. Smaller-scale installations are commonly the best environment for top-down estimating.

While there is no inherent differentiator or drawback, each method of estimating has its own benefits in certain elements and situations. It's up to you, as the project manager, to know the best method for the best outcome.

What Is Bottom-Up Estimating?

Bottom-up estimating is a technique in project management for estimating the costs or duration of projects and parts of a project (PMBOK®, 6thedition, ch. 6.4.2.5, ch. 7.2.2.4). The term bottom-up estimating gives a hint about the underlying concept: costs, durations or resource requirements are estimated at a very granular level. This means that the estimation is done for work packages (some might suggest activities though) which are the lowest and most detailed level of a work breakdown structure (WBS).

While the estimation is performed at the level of activities or work packages, the estimate for the whole project is the sum of all granular estimates.

The bottom-up estimation technique is also referred to as deterministic or detailed estimating (source:PMI Practice Standard for Project Estimating, 2ndedition, ch. 4.2.3). It is often used as the so-called “definitive estimate” – a type of cost estimate that comes with an accuracy between -5% and +10% according to the Project Management Institute (PMI).

Estimating Cost of a Project: Techniques and Examples

Overview: What is bottom-up estimating?

Bottom-up estimating is a management technique for determining the overall cost or timeline for a project by examining the work at the most granular level of detail, compiling all this information, and then coming up with an overall budget and timeline for a project that can be delegated to team members.

This contrasts with a top-down approach, where management estimates a project based on the performance of a previous, similar project. Bottom-up analysis is one of the key project management methodologies to obtain accurate estimations for a project. It considers all factors, as compared to a top-down analysis that may leave key elements out and doesn’t empower employees to take ownership of a project.

Benefits of utilizing bottom-up estimating

Bottom-up estimating is a popular method for estimating projects for four fundamental reasons.

1. Accuracy

Laying out the project scope is often the most difficult part of the project. It's difficult to accurately determine what kind of expenditures, timeline, personnel, and other factors will be needed to accomplish the project.

Bottom-up estimating presents a clearer picture of project components, allowing team members to take ownership of segments and ensuring you've considered all factors in your project. And you're more likely to end up with an accurate estimate.

Bottom-up estimating helps a manager understand the work package more comprehensively and anticipate potential roadblocks along the way. Contrast this with a top-down approach where management may miss key elements of a project not present in previous projects, or encounter obstacles that prior managers did not have to deal with.

2. Error mitigation

If the manager makes errors in the estimates, a bottom-up estimate provides the manager with mitigation options. They can conduct a cost-benefit analysis and come up with alternate solutions, giving them more flexibility to address errors over the life of the project.

There’s also greater balance through the components of the project. In other words, underestimation of one component can be offset with adjustments to another. Ultimately, this means errors don’t significantly impact delivery, reducing impact on the budget.

3. Versatility

A bottom-up analysis allows managers to be more versatile, implementing strategies such as project crashing or empowering team members to assume control if need be.

Bottom-up estimating can be integrated with other estimation approaches, such as three-point estimating, to further enhance the manager’s effectiveness. This technique is more egalitarian than a hierarchical command structure, making it an efficient strategy for teams that work well together.

4. Reduction in overall risk

With a thorough bottom-up analysis, a manager reduces overall risk to each of the project phases. The manager anticipates challenges from the ground up and leverages the specialized expertise of team members, enabling them to be flexible enough to adjust mid-stream during a project if needed.

Power and control are dispersed through the team rather than to one person, resulting in more responsiveness, greater efficiency, and, therefore, increased value to the client.