When Is it Appropriate to Use a
Top-Down Estimating Approach?
March 18, 2021
Cost estimating is not an exact science. There’s no single formula that will help you arrive at that one, precise estimate for every type of construction project. But there are estimating methods that can give you an idea of what a project will cost to construct. Two of the most common ones — bottom-up and top-down — approach this process differently.
Bottom-up estimating relies heavily on the nitty-gritty details of how you’re going to build the project. Costs are assigned to specific tasks that are combined into work packages, which tend to yield a more accurate number. Top-down estimating is more generalized, focusing on what you’re going to build and is determined by adding up costs for higher-level tasks, rather than smaller dependent ones within them.
How do you know which one to use? While we’ve covered some of the reasons that bottom-up estimating generally works best, there are other situations when using a top-down estimating approach may be more appropriate. These include:
- When time is of the essence. Top-down estimating can be used in lieu of bottom-up because it doesn’t depend on project details, therefore it’s much quicker to assemble. This is where historical data from prior similar projects can prove very helpful. Not only will you have actual comprehensive project costs on which to base your estimate, but you can figure in any factors that impacted those final tallies, such as scope creep from design changes, unexpected weather events or supply chain delays. Using a straight 1:1 value from a prior project can work in some cases, but there will likely be some customization depending on factors like inflation, geographic pricing differences, and advances in construction equipment and technologies that could introduce variations and skew your estimate. Adjusting for these things on your current project can give you a more refined estimate.
If you don’t have or prefer not to use previous data or industry benchmarks, there’s another approach to arrive at an estimate when you have limited time: the consensus method. Reach out to the construction professionals you work with who have experience in the type of project you’re estimating, in particular those who may be part of the current project team. With their firsthand knowledge of relevant costs and risk factors, these experts can collectively discuss and agree on reliable numbers for an estimate, while also establishing a baseline for collaboration for the project.
- When you need a ballpark figure to determine feasibility and secure a commitment to the project. Consider this more of an exploratory exercise. Let’s say you have an idea for a construction project that is taking form; the particulars are unknown, so it doesn’t have a fully realized scope. But you still want to find out if it’s worth pursuing. The intent of top-down estimating here is to figure out whether the project is practical from a funding perspective. Plus, you want to get a general idea of what resources — people, timeline, location, materials, etc. — would be necessary. Detailed project costs and schedules are inconsequential at this point.
- When your project concept is in the early stages. There may be details that are not yet known and the design has not been completely finalized though it is likely to be considered more certain rather than exploratory. Details and a well-developed plan are required, but they’re still evolving. How do you create an estimate for this? By adopting a hybrid approach. That means leading off with a preliminary top-down estimate with the limited information that is actually available. Then, as more details come to light and work packages are determined, you can shift to bottom-up, making it easier to define schedules and budgets.
- When you need to lay preliminary groundwork for planning and funding. This concept applies to large capital projects quite often. Typically, top-down estimating is used for smaller scale builds and those that don’t require accounting for every detail and dollar upfront. But it can also be used in the estimating process for larger projects. While bottom-up is understood to be the favored estimating approach for these types of complex projects, top-down can be used in the beginning to start charting out planning and to line up funding. The expectation is that the details will come later, before construction begins, and then a more refined project estimate can be developed using the bottom-up method.
Top-down estimating is a practical way to help with pre-planning, strategy and decision-making in the early project stages.
As a solid industry-specific solution, InEight Control allows you to leverage your past and existing data to enhance top-down estimate accuracy and revise benchmarks to inform estimates for future projects. All of this can provide a solid jumping-off point if and when you transition to bottom-up estimating. Schedule a call or demo to learn how Control can help your construction company better assess and manage your projects, now and in the future.