What Is Top-down Estimating? (With Benefits and Examples)
Updated November 10, 2022
Budget management is an important part of project management that determines the resources a project requires and can affect whether it's eventually successful. A company's top management team often uses the top-down approach when estimating the expenses for a project by reviewing the project's overall scope and identifying its major elements. Learning about this technique can help you understand how to apply it to your next project. In this article, we define top-down estimating, explain who uses it and why, list its benefits, explore how it differs from bottom-up estimating, and share examples of top-down estimating.
What is top-down estimating?
Top-down estimating is a technique for generally analyzing the probable costs, duration, or resources of a project before simplifying them into specifics or smaller components. It often starts with a plan that roughly outlines the project's different parts. This plan then goes to other professionals in the company who have a better understanding of these specific components so they can develop the costs and details. It's common for these professionals to work alongside outside experts or consult them for assistance when detailing the plan.
Who uses the top-down approach of estimating?
Managers, investors, and other important stakeholders typically use the top-down approach at the initial stage of a project. It enables them to make strategic decisions about the departments and location of the business, as they often understand a company's long-term visions and goals. Company leaders also use the top-down approach when the required information to make detailed estimates isn't available at the project's initial stage. By consolidating the business's goals with their understanding of project processes, stakeholders can outline the broader scopes of a project while trusting other professionals with planning its specifics.
For example, if a retail chain wants to expand into a new location and construct a new store, company leaders are better placed to understand the business's mission, so they may draft plans showing the store's colours and layout to ensure a positive customer experience. They then present these ideas to a business development expert. The business development department may be more knowledgeable on the ways to implement the proposed expansion. The professionals in this department may also have a better relationship with contractors and construction professionals and may serve as project managers when the actual construction begins.
What are the benefits of using the top-down approach?
The top-down approach provides many benefits to companies, including:
It takes less time
This approach is a preferable estimation method because it typically takes less time than other methods. Business executives spend little time thinking about essential details and instead focus on drafting a plan that roughly covers all the project's aspects. They then send their estimates to experienced professionals who develop them to account for all variables and elements of the project's scope.
It requires fewer people
The top-down approach takes less time to develop than other methods because it often requires fewer people. The estimates are often quite rough and are based on tentative scenarios that presidents, vice presidents, and other executives quickly project. Once these estimates are complete, these executives distribute them to mid- and lower-level employees who insert all the details.
It requires fewer resources
Top-down estimates also require fewer resources than other methods, as they're more general and don't focus on specific details. Management usually develops these plans based on their understanding of the company's goals and strategic direction rather than by visiting the concerned departments or individuals. When they have completed a plan, they communicate it to other professionals who include all the granular details by examining all the relevant locations and determining the required resources. There's also the likelihood of fewer errors occurring in this type of estimating due to the absence of specific details.
It's more hierarchical
Top-down estimates are typically the responsibility of senior management and executives. That's because these individuals make the decisions that dictate the viability of projects and the business overall. When company leaders create plans, they may facilitate direction, order, and organization with lower-level employees or other professionals.
What is bottom-up estimating?
Bottom-up estimating, the opposite of the top-down approach, means creating a plan or a budget for a project in detail and later generalizing or categorizing it. With a bottom-up approach, the company first analyzes the project from the most specific or practical level by producing estimates for individual tasks. They then group these estimates and sum them up into a more structured outline or budget.
What are the differences between top-down and bottom-up estimating?
Top-down and bottom-up estimating are two popular estimating techniques that differ in the following ways:
Overview estimates vs. detailed estimates
The top-down approach depends on overview estimates by considering the project as a whole. This approach to estimating means that results can be quickly ready with fewer errors but less accuracy. The bottom-up approach can facilitate the efficient handling of tasks because it uses detailed estimates. Project managers and team members know its concrete details, which means they can expect and manage challenges better and can reduce risks and potential issues.
Not clearly defined tasks vs. clearly defined tasks
There's little to no definition of tasks in the top-down approach to estimating. Business executives initially use it to understand the project's budget and scope and send it to the project manager. This professional simplifies it with a work breakdown structure, extrapolates the tasks necessary to achieve the goal, and assigns them to team members. Bottom-up estimates typically contain clearly defined tasks from the beginning. Team members understand their duties and expectations, which helps prevent task duplication.
Volatile environment vs. stable environment
Companies often create top-down estimates when the required information to make detailed estimates isn't available or when the business environment is volatile. Volatility refers to the tendency of a business environment to change rapidly and unexpectedly, affecting the viability of developing well-defined schedules and budgets. Bottom-up estimates are common in a stable business environment. Project managers can properly predict the future prices of resources, which can add to estimate accuracy and reliability.
Experienced professionals vs. inexperienced professionals
Top-down and bottom-up estimating may also require professionals to have different levels of experience. Company leaders often base their top-down estimates on previous similar projects that the company has completed. Project departments and managers can also benefit from this by altering a new project's budget to accommodate its variations from the previous one. If a department has no experience with a particular project, its members may carefully use the bottom-up approach to account for all its details. Their extra planning may reduce unexpected costs or challenges when they start the project.
Examples of top-down estimating
Below are two examples involving the top-down approach to estimating:
New staff recruitment
Here's an example of a company that can use the top-down approach to transform its recruitment process to improve customer service:
An accounting company conducts a root cause analysis of its decreasing customer attrition rate and discovers that the change is because of poor customer service delivery. The company's president decides to alter the employee recruitment process. They use the top-down approach to outline the general ways of improving recruitment, such as by using multiple rounds of interviews.
The president also creates a tentative budget containing each change's projected overall cost. They then present their plan to the recruitment manager, as the hiring department is more knowledgeable about implementing the desired changes. The manager develops the plans using a work breakdown structure and shares the tasks to achieve the project among the department members.
Here's an example of how a company can benefit from the top-down approach when looking for a way to develop its cyber security or network capabilities:
The president of a technological company replaces the IT infrastructure to meet modern standards and enhance the company's customer service delivery. This individual consults with the company's top executives, who also deeply understand the business directions. They create a tentative plan containing the overall budget of the upgrade and its resources.
Due to their limited understanding of IT infrastructure, the president sends the plan to the IT department, where the IT manager performs a comprehensive assessment and creates a detailed budget of all related tasks. The manager then assigns these tasks to the team members and acts as the project manager for the duration of the project.
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