Top-down Estimating: Everything That You Should Know

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đź“ťKey Takeaways:

  • Learn how to make top-down estimates and where this technique is applicable.
  • Learn the difference between bottom-up estimating and top-down estimating.

Estimation and prediction are a core part of any business, especially the contracting business. Even the smallest projects can go out of hand if you don’t estimate them correctly. So, it’s important to learn proper estimation techniques to accurately appraise projects and plan for them as well.

For example, let’s say you’re a painter, and someone approaches you with a project to paint a residential house. The first step would be to study the project details and define the scope. Once you know the total square feet you need to paint, it becomes easier to calculate the timeline, resources, and cost. It’s a breeze.

Among the several estimating formats, top-down estimating is used by several contractors and business owners when trying to predict costs with little information. In this guide, we will show you how to use the top-down estimating approach and what makes it different from the bottom-up estimation type.

What is a Top-down Estimate?

Top-down estimating is when experienced top-level project managers evaluate a project to define the project scope, the time required, and the amount of money it will cost. They estimate this overall cost based on their experience or the experience of other senior managers and the similarity of the project to previous ones.

Top-down estimation usually ends with a breakdown of the total cost into individual smaller units called work packages. Each work package is then evaluated by a team of less-experienced project managers who create a detailed cost analysis.

However, it may not be the most efficient method if you want an actual or fully-defined estimate. But, most owners and contractors prefer using this estimate because of its speed and how it helps define the quote.

You can use this method when you want to quote a ballpark amount or timeline on any project. This approach is also a great way to estimate costs for early-stage projects. However, it may not be the most efficient method if you want a reliable estimate. But, most owners and contractors prefer using this estimating technique for its speed of implementation.

Advantages of the Top-down Approach

Why should you use a top-down estimating approach for estimating your cost and timeline? Well, first, it’s fast. If you want a speedy estimation process, then the top-down technique is your best bet. However, this isn’t the only reason why you should use the top-down method. Here are some other benefits below:

  • One of the most significant advantages of using the top-down estimation technique is that you can efficiently draft a quote for projects early on. While, in most ideal cases, you’ll need to back your estimate with verifiable data, this approach can also work when there is limited to no data available. This is particularly helpful when working on first-time projects.

  • TTop-down estimate technique requires fewer resources and time than other estimating methods. You don’t spend much time when you approach cost estimating with this technique.

  • You can use holistic data from previous projects to estimate your current project. Not only do they give you a broader outlook on cost, but you can also use them to evaluate possible risks and mitigate potential challenges.
  • Top-down estimating helps break down projects into interdependent components, which makes it easier to find dependencies and prioritize the most important elements of any project.

Bottom-up Versus Top-down: How Different are They?

They both are poles apart from each other. In the bottom-up approach, you start from the bottom to make your estimation for a project. Every work heading is carefully outlined and further analyzed, so no detail is lost. This is a time-consuming technique, but it is also one of the most accurate.

Usually, the bottom-up method involves everyone on the team, and the total sum isn’t known until every aspect of the project is calculated.

  1. Top-down Estimation Example

    Imagine you’re the project manager in charge of the renovation of a two-story office building, and you’re asked to estimate the timeline and total cost for the project. This estimate is urgent and needed ASAP. Instead of diving deep and crunching numbers—which can take forever—you can get your analysts to provide you with numbers from past projects with a similar brief.

    Once you have the numbers, you can compare the two and estimate your current project’s timeline. This will give you a ballpark estimate for the cost. For example, if the previous project cost the entire company $40k, you can use the elements of this estimate if the new project is also a two-story building with similar dimensions.

    After this, you can start calculating the exact amount after submitting the ballpark quote to the client.

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  2. Bottom-up Estimation Example

    Imagine you’re still the project manager in charge of the renovation of a two-story office building, asked to estimate the timeline and total cost for the project. Of course, you know you have to plan, strategize, and estimate all you’ll need to complete the project.

    With the bottom-up estimate technique, you consider the total cost and duration of subsections of a project and use that to determine the cost estimate and duration of the entire project. With the cost and timelines for each subsection, use a Gantt chart or other project management methods to calculate the total duration and cost that will go into the project budget and task.

    So, using this data, you will give a ballpark estimate for the cost. For example, if the previous cost the entire company $44k, you will see how different this one is and estimate it around the same price.

    As mentioned earlier, the bottom-up method takes time. However, it outlines all you need for a project accurately and reliably.

Use Cases for Top-down Estimating Approach

The top-down technique is versatile and can be used for most projects that require a quick turnaround time on the estimated cost. Some of these projects include:

  1. A new construction project

    As a project manager approaching a new construction project, you need to get an estimate of the required resources and the project’s likely duration. A top-down estimating approach can help you identify past projects with a similar scope and use them to forecast the cost of the new project.

    For instance, it’d be easier to estimate the cost of a new semi-detached construction project if you’ve previously built a semi-detached. Using past projects helps you draw a tentative plan for the new project. Eventually, it will also give you a roadmap for actual estimates, quotes, and bids.

  2. Technology projects

    A top-down estimate technique is also used in technology companies where company leaders determine the need for creating or improving their products or infrastructure.

    A top-down estimating approach is preferred in estimating the project costs and developing a tentative plan. Most tech companies also use top-down estimating techniques to determine the cost and duration of releasing new prototypes and innovative solutions.

Conclusion

While top-down estimation is great for fast estimates and quick iteration of ballpark quotes, there are a few limitations to its use.

  • You cannot be creative with your project estimates. You’d be using the past data to create your new estimate.
  • The project cost may exceed the estimated value, which might affect your credibility as a project manager.

You should be clear about when and how you use the top-down estimation technique. It is equally important to note that this estimation may not be accurate for all use cases. If you’d like to create estimates at lightning speed, InvoiceOwl helps automate and simplify the entire estimating process with pre-defined contractor templates that can be tailored to your business.

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Author Bio
Jeel Patel
Jeel Patel
Founder

Jeel Patel is the Founder of InvoiceOwl and is the main curator & writer of the content found on this site. With ideals of quality, commitment, and perseverance, he believes in creating lasting business relationships with the clients.

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