Estimating Project Times and Costs

Estimating Project Times and Costs - Top-Down and Bottom-Up Estimating Techniques

The scope of each organization is to invest its resources in endeavors that will further increase its shareholder value. However, since the resources to be invested are limited, economic agents must adequately assess the features of each investment opportunity and make the best informed decisions. Useful tools is assessing the features of future projects revolve around estimating techniques that try to foresee the costs of a respective project, the time it will take for the investment to generate a satisfactory return, the type of resources to be employed (such as capitals, technologies, commodities or human resources) or the benefits of the endeavor. Two relevant examples of such means refer to the top-down and bottom-up estimating techniques.

Comparative Analysis of Top-Down and Bottom-Up Estimating Techniques

The top-down technique revolves around analyzing the value of the project from the business standpoint. It looks at data from the balance sheet and transforms it into information relevant for the project team. The information can generically be retrieved by any party involved in the project, but most commonly this task belongs to those who possess sufficient experience, marketing information, benchmarking capabilities or any other extra-project characteristics. The estimations are seldom based on concrete and verifiable facts. The bottom-up technique on the other hand analyzes the estimates of the project, retrieved from analyses of the already known facts. The most common fact estimation refers to the amount of work the team will have to put in for the completion of the project. Unlike the top-down technique, which looks at the matter from the business standpoint, the bottom-up tool analyzes the matter from the standpoint of the project at hand and converts the balance sheet data into information relevant for the project sponsor. The estimations in the case of bottom-up are generally made by the project manager or the team in charge with project management (Goodpasture, 2003).

As the previous lines have showed, the top-down estimations require the assistance of a highly skilled individual who possess extra-project knowledge. This necessity is given by the fact that top-down estimations are generally specialized and require expert judgment. The actual operations revolve around a comparative analysis of the project discussed and other similar projects undertaken by the same firm, by the same team or by other players. A relevant example to better comprehend the comparative analyses employed by the top-down technique revolves around the time it took for a previous project to complete. Say that the implementation of a new accounting computerized system required Firm a two weeks. Given that Firm B. is similar in terms of operations undertaken, number of employees and their qualifications, and that they will use the same it consultancy team, it is highly likely that the implementation of the accounting software application within Firm B. will also require two weeks.

A notable difference between the two estimating techniques refers to their analyzed timelines. The top-down methodology can be used to estimate the total time it will take for the project to complete. The bottom-up technique on the other hand can only be used to break the project down into smaller tasks and assess them individually. At the end of the analysis, the results will be combined to retrieve the final estimations for the overall project. "The technique [top-down] can also be used to estimate the duration of the entire project. Think of the top-down technique as taking one long drink as opposed to little sips (which is what bottom-up estimating is like). The opposite method, the bottom-up estimating technique, estimates each work component individually and rolls up the individual estimates into one" (Heldman, 2007).

It can be said then that the two mechanisms of estimating costs and times for a project are opposed. The top-down estimates the costs and times for the overall project and then breaks the estimations into units for each individual task. The bottom-up technique on the other hand assesses the individual components and then sums them up to reveal the estimations for the entire project (Newell and Grashina, 2003).

With top-down estimation technique, the expert will look at three primary project components - actual resources required, time to be spent on the completion of the project and the costs. The cost component could be assessed by either comparing the feature with the costs of similar past projects, or by breaking down the overall project and assessing the individual costs of each project component. These initial estimates are only used to create an incipient idea, and they will suffer various modifications and adjustments throughout the estimating process.

The primary advantage of the analogous approach (used by the top-down estimating technique) is that, if the records have been properly kept relative to past projects, the access to the data is extremely easy. The major downside however is that the past projects reveal the characteristics of past conditions. And even if the present project is indeed similar to one against which it is being benchmarked, imperceptible differences could occur and generate as such mistakes. The problem occurs even more frequently when the experts rely on memory and do not confront the reports of past projects (Cobb, 2005).

The bottom-up estimating technique does not rely on past results but breaks the project down into smaller tasks and assesses the time, resources and costs incurred in its completion. An interesting specification to be made here is that the managerial team conducting the bottom-up estimations considers the costs of starting the project from zero and finishing it to its full potential. They will calculate the costs at each stage and then roll them up for the overall project estimations. Similar to top-down estimations, these initial values will be modified throughout the process and in the end, will lead to a highly accurate result. In addition, the analysis of every stage will help the manager to ensure that the future stages are being developed in accordance with the allocated budgets and in the given time and resource restrictions. Despite its precision however, the bottom-up methodology is characterized by tedious work and increased consumption of time and resources. In addition, the process could overlook tasks that in the end will impact the overall outcome and resource consumption of the project (Cobb, 2005).

The problem of overlooking project components does not occur with top-down estimation technique - since it is based on analogies with past projects, it is highly likely that all components and tasks will be assessed (Lock, 2007). Take for instance the case of a company looking to open a new subsidiary. As they make the estimations based on the subsidiary opened the previous years, they will consider features such as location costs, marketing costs for the new locations, redesign or the costs of hiring new staff members. Given that it is the first time they consider such an endeavor, the second team using the bottom-up estimating technique might omit to include the costs of redesigning the new building.