Wednesday, May 14, 2008

Using Bottom-up Cost Estimating

If you were to begin your project cost estimates at the very lowest level of your work breakdown structure and then "roll them up" through the project to finally arrive at total estimated costs, you would be performing a bottom-up estimate. You will want to use this type of cost estimating when the following conditions exist.

1. You have enough detail about the project.
The accuracy of a bottom-up estimate is driven by the level of detail it contains. This technique relies heavily on a well-decomposed work breakdown structure (WBS). Low-level activities should include a list of required resources, resource rates, and activity duration estimates.

If you do not have specific information about your project at the outset, either choose another estimating technique or be prepared to revise your estimates as the project progresses and more information becomes available.

2. You have the time necessary to use this technique.
Your project team is starting a new project. There is a lot of detail in the WBS, so the bottom-up technique is an option. Now you have to make sure that you have budgeted sufficient time to produce the estimates.

Why does bottom-up estimating take more time to perform than other cost estimating techniques? It takes time to calculate costs for every activity and every resource, especially for large and complicated projects. Unique projects may require you to research prices and dig for rates.

3. You require a high degree of accuracy.
Bottom-up estimating is perhaps the most time- and labor-intensive way to estimate project costs. The "up side," however, is the high degree of accuracy you obtain using this technique. No other estimating technique enables you to better narrow down your range of possible results than this one.

Bottom-up estimates are generally considered to be accurate within five percent to 10 percent. They can be used as "control" estimates, meaning they are used during the cost control process to measure cost performance once actual costs are known.

4. You have little historical information upon which to base cost estimates.
There is a final type of project that would call for the bottom-up cost estimating technique: one for which there is little or no historical information. There are several reasons why you would not find historical information, including cost estimates, from other projects.
  • Your project is unique. You may have a project that is unlike any that has gone before, and there are no similar projects upon which to base your cost estimates. Perhaps you are working in an emerging field or discipline for which no established history exists.
  • You are using new technology. Have you implemented new technology into your processes? It may alter actual costs to the extent that previous cost estimates will not be accurate for the new project. New technology may either increase or decrease actual costs.
  • You choose not to consult commercial databases of cost information. There are commercial databases of cost information available for many different industries. However, there are costs involved in purchasing a database plus the periodic upgrades. You may find it more worthwhile to develop your own database over time.
In summary, the bottom-up estimating technique is one that you will want to use to produce accurate cost estimates when there is little historical data about similar projects, a real need for accuracy, and adequate detail and time available.