Top-down and bottom-up are two of the most popular approaches used to estimate project costs.
While top-down uses historical data to estimate total cost, bottom-up estimating builds up cost from individual tasks. Both have pros and cons.
This article explains these two estimating methods so you can determine which fits your needs and resources. You’ll learn the key differences, steps for each, and weigh their advantages to make informed estimations.
What is Top-Down Estimating?
Top-down estimating is a technique used to quickly forecast the total cost of a project.
It works by breaking down a project into higher-level components and using historical data to estimate the cost of each component. The estimates for the individual components are then summed up to determine the overall project cost.
This top-level approach is useful when detailed project plans are not yet available. It relies on past experience with similar projects to make broad assumptions about costs. These figures can be adjusted to reflect the unique characteristics of the project.
The top-down approach works best early in a project when only minimal information is available. Bottom-up estimating can follow as the project scope becomes clearer.
How to Do Top-Down Estimating?
Performing top-down estimating involves breaking a project into major components and using historical data to estimate costs for each piece. Follow these key steps:
- Define the overall scope and high-level requirements for the project. Don’t dig into task details yet.
- Break the project into larger phases or categories based on the work involved.
- Use past project experience to define the typical cost for each component. You can start with industry average costs initially.
- Sum the costs for all top-level components to derive the total estimated project cost.
As you move through project planning, you can refine the cost buckets.
Advantages and Disadvantages of Top-Down Estimating?
Top-down estimating has some useful advantages but also limitations to consider.
On the plus side, it provides a quick overall budget estimate when project details are unknown. It can help establish initial budgets and determine if a project is financially feasible early on.
Top-down is easy to communicate to stakeholders and takes limited time compared to detailed estimating.
However, since it lacks task specifics, the accuracy of top-down estimates can be off.
Without bottom-up task validation, cost projections can overlook new aspects of a project.
It also provides little visibility into where costs originate. With only high-level estimates, it is harder to explain variances later on.
What is Bottom-Up Estimating?
Bottom-up estimating takes a granular approach to cost projection by building up estimates from individual work items and tasks. Rather than applying broad estimates, bottom-up looks at the nitty-gritty details of each activity needed to complete the project.
The process starts by breaking down the project scope into specific deliverables and work packages. Each task or deliverable is then estimated individually for its resource needs, duration, and cost. Those activity costs are rolled up to determine the overall project budget.
How to Do Bottom-Up Estimating?
Performing bottom-up estimating takes time and detail but in return provides increased accuracy:
- Break down the project deliverables into small, discrete work packages and tasks. Capture all steps needed to complete each deliverable.
- Estimate the level of effort, resources, and duration required to perform each task.
- Assign rates and costs to the resources for each task. Derive task costs by multiplying resource estimates and rates.
- Sum up the individual task costs to determine a total cost for each work package.
- Roll up the work package costs to arrive at an overall bottom-up project budget.
- Revisit and refine estimates as the project progresses and you gain clarity. The goal is to capture all granular work items that ladder up to the full budget.
Bottom-up estimating relies on diligent upfront planning and costing. While meticulous, it provides visibility into detailed project costs. The work leads to accurate budgets and informed decision making.
Advantages and Disadvantages of Bottom-Up Estimating
The bottom-up approach to estimating has distinct advantages as well as drawbacks to consider.
On the plus side, granular estimates improve overall accuracy since every task is valued. Nothing gets missed or misrepresented. It provides clear visibility into where and why costs originate.
Bottom-up also allows for performance tracking during project execution by comparing actuals to estimates.
However, developing detailed bottom-up estimates requires significant upfront planning. Subject matter experts must analyze and estimate a number of different tasks, which takes time.
As we have also highlighted here, there is also a risk that task estimates may be inflated beyond what is truly needed due to a fear that the initial estimates are too low – this is the so called “padding”.
While both estimating techniques have merits, bottom-up provides superior precision by valuing single tasks. Its granular view surfaces where costs originate and improves accuracy since no components get overlooked.
Despite higher upfront effort, bottom-up’s detail enables performance tracking and informed decisions.
However, when project specifics remain unclear, top-down’s estimates can be used to assume an initial budget and convey the message to stakeholders. Once possible, shift to detailed bottom-up to validate earlier top-down approximations.
Italian cloud computing professional with a strong background in project management & several years of international experience in business consulting. His expertise lies in bridging the gap between business stakeholders & developers, ensuring seamless project delivery. During his free time, he enjoys fatherhood and immersing himself in nature.