Estimates provide the basis for your business to secure work that clients wouldn't award without a sense of the costs their projects can engender. How you estimate affects how much you estimate and how accurately you can document prospective costs. Two of the most common estimation methods, bottom-up and top-down estimating, offer differing processes, advantages and disadvantages that can help you decide which to use when. The nature of an individual project and its specifications also factor into that decision.
Top-down estimating begins with a result or deliverable and applies it to a new set of tasks. Bottom-up does the opposite, aggregating all the individual costs of a project to build up to the total for the job.
Top-down estimating begins with some form of overall result and applies it to a new set of tasks. If a project resembles prior work, the estimator uses relevant components of completed efforts to fill in cost blanks for parts of the current prospect. Projects that consist of a large number of iterations of a much smaller job or a large version of a small project, lend themselves to top-down techniques that repeat the cost of a small module to derive an overall figure or magnify the cost of a small job to forecast a larger one.
Bottom-up estimates rely on aggregating all the individual costs of a project to build up to the total for the job.
Because estimates don't demand the level of accuracy that binding quotations require, top-down processes that draw on well-documented, relevant examples from your company's past can provide a relatively quick basis for developing reliable estimates of potential future work. Your numbers already exist, typically in ready-to-analyze spreadsheet form, so you can pull together your figures in short order.
At the estimating stage, when projects remain in potential flux and many parameters exist only in best-guess form, producing a bottom-up estimate can become a time-consuming exercise because of the need to nail down details to tie them to numbers. The bottom-up approach may look, and often is, more accurate because it relies on real numbers for actual parts of the project, but it may contain too many holes and gaps to be complete in a timely manner. It also may fail to take into consideration some of the reworking and reconfiguring that records of actual projects document concisely.
Part of the cost of any project lies in the time required to figure out what it costs to pursue and produce. Given accurate documentation of relevant past work or access to suitable substitutes, you can pull together top-down estimates quickly enough to make them less costly to create than their bottom-up equivalents.
By contrast, bottom-up procedures can rely on all-out efforts to nail down myriad details, mounting up the oft-uncaptured cost of estimation in short order. These exhaustive efforts can lead to overly high estimates based on the assumption that some costs remain hidden by the lack of a finite project specification.
In some instances, the best estimating approach combines top-down and bottom-up methods, using each as appropriate to leverage its strengths and minimize its weaknesses. A project that closely resembles some aspects of past work might derive the parts of its estimate that concern labor hours from those previous efforts and pick up the cost of materials from a bottom-up assessment. A top-down estimate produced from a preliminary specification may lend itself to bottom-up refinement as your customer's needs become clear.