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Top-Down Estimating

Updated on April 26, 2024
Article byPrakhar Gajendrakar
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Top-Down Estimating?

Top-Down Estimating is the project evaluation technique that uses past data and similar projects with identical scenarios or circumstances to gauge the overall cost of the present or any new project. The method can be observed as a surface-level assessment of any project without defining any particulars.

What Is Top-Down Estimating

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The estimation primarily includes major expenses and general costs that the project will incur. Since it is not an in-depth assessment, it is mainly done in the initial planning aspects. This type of project estimation technique needs to be considered accurate, is performed by managers, and relies on experienced experts who have worked on similar projects in the past.

Key Takeaways

  • Top-down estimating is evaluating the overall cost of a current or future project based on past data and information mainly taken from similar projects.
  • There are mainly three methods of top-down estimating: consensus, ratio, and apportion method.
  • The estimation helps in making initial decisions regarding the project and is based on experience, past data, and information.
  • It cannot be considered accurate because it just provides an overview of the expenses with a ballpark estimate of the total project costs.

Top-Down Estimating Explained

Top-down estimating is the practice of evaluating the project cost by using basic knowledge, past information, and expertise from working on the same project in the past. Whenever a company is discussing a project, they require an initial costing of the project to understand the essential expenditure of it, and based on it, further decision-making is done.

Top-down estimating in project management helps a company understand the effort, time, and quality of work based on the cost. In a nutshell, it is equivalent to an individual asking an event organizer about the essential cost of hosting a dinner for ninety people. The event organizer who has already worked and arranged similar parties tells a ballpark figure to the individual, and based on it, the person can make further decisions. Obviously, the amount may vary depending on factors like the venue, menu, and the type of event, but still, the ballpark figure is helpful.

The top-down estimating definition indicates how it helps a manager gauge the project cost without any detailed information. However, the unavailability of proper details is the same aspect that brings forth many other issues with this technique, including possibilities of inaccuracy, assumptions, and a higher degree of risk and financial loss.

Methods

The various methods of this approach are –

  • Consensus Method – When the measuring of cost and expense estimation is not assigned to any one person or expert, but a group of people with their expertise, experience, and knowledge agree on an estimate. It is a consensus method in which everyone has given their consent.
  • Ratio Method – In this method, a particular aspect or element of a previous or past yet similar project is taken into account, and the whole estimate and project cost, including its duration, is gauged, keeping that as a center of calculation.
  • Apportion Method – It refers to breaking down the entire project cost into small components and then assigning separate costs and expenses to each of them. This technique works well if the past data is reliable.

Examples

Below are two examples of this evaluation technique to understand the concept better:

Example #1

Suppose a construction company is working initially on a new bridge development project. Earlier, they have worked on similar projects, so they have experience, skills, and knowledge of the whole project and its cost structure. In the initial meeting, when the top-level management was asked how much the whole project would cost, all the people who had worked on such projects before in their capacity go through the previous costs and other expenses and come up with a ballpark figure using their knowledge and information.

This amount more or less resembles the entire project cost. It is not accurate and open to many changes as it is completely based on an assumption. Though the project may incur many indirect costs and get affected by many other factors that are not considered, the ballpark figure will help the company in the initial meetings and discussions and allow them to make decisions about the bridge development project.

It is the consensus method of estimating because not just one person was asked, but a group of managers and executives gave the amount.

Example #2

Suppose a company is planning to launch a yet another new soft drink in the market with a new flavor and a different name.  

Now, in the initial meetings when the plan was being discussed, and the CEO asked for a ballpark figure that would be required for the launch of the new soft drink, the managers and executives retrieved past information and the elements and aspects from previous soft drinks’ launch and used it as a focal point to determine the initial overall cost required for the new soft drink.

For instance, if the packaging and branding for the first soft drink required $9000 so, the managers took this into account and calculated that this time, it may cost around $13500, given the inflation and other market aspects, and a final cost was proposed for the entire project.

In this way, every element is calculated by collating it with the first soft drink launch, which signifies the ratio method of top-down estimating.

Advantages And Disadvantages

Top-down estimating in project management comes with certain advantages and disadvantages. Some of them are mentioned below:

Advantages

  • Gives out a simple cost and expense understanding for the project.
  • It is the best for the general development and initial decision-making of the project.
  • It is not random but based on holistic data and past information, including the experience of executives and managers who have worked on such projects in the past.
  • The estimates are flexible and save time and effort from in-depth understanding.

Disadvantages 

  • Lack of detailed analysis and assumption-based estimating.
  • It can never be considered accurate and reliable for the long term.
  • The whole estimating technique is based on experience and data, which means if there is no available information or experience, the technique cannot be formulated.
  • If the past data is out of context, the strategy has no basis point.
  • The whole process is mainly limited to the top-level management, managers, and stakeholders of the company.

Top-Down Estimating vs Bottom-Up Estimating

The main differences between top-down and bottom-up estimating are as follows-

Top-Down Estimating Bottom-Up Estimating
It only occurs in the initial stage. It goes on to further stages of the project.
It only provides an overview, and there is high uncertainty.In contrast, it has minimum risk and uncertainty.
This approach has no specific scope or timeline. The aspects are well-studied and better defined.
Only managers and top management are involved in this method. While implying a bottom-up approach, internal teams collaborate.

Frequently Asked Questions (FAQs)

1. What is a good condition for top-down estimating?

The good conditions for this approach are –
– Small and internal project.
– There is plenty of information and past data available.
– When the project capital or fund is fixed, it’s easy to work inside it.

2. Which is more accurate, bottom-up or top-down estimating?

The bottom-up estimating is more accurate because it takes into account each component, starting from the bottom and gradually moving up. When dealing with a significant project, it is always advised that an organization should opt for the bottom-up project so that they can actually understand the proper costs.

3. Is parametric estimating a top-down estimating approach?

No, parametric estimating is actually a combination of both top-down and bottom-up estimating techniques. Top-down estimating uses historical data, and bottom-up estimating brings in the accuracy factor, which ultimately applies a formula to scale the data points. It can be used in an equation or an algorithm.

This article has been a guide to what is Top-Down Estimating. We explain its examples, comparison with bottom-up estimating, advantages, disadvantages, & methods. You may also take a look at the useful articles below –

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