Why Bottom-Up Estimating Beats Top-Down for Capital Projects
January 28, 2021
Working on larger, more complex capital construction projects has different considerations than small- to medium-sized ones. The way you arrive at your estimates is one such difference.
Cost, timeline and resource estimating is one of the most important tasks in managing a project, serving as one of the foundations for measuring efficiency and success. While arriving at exact figures is fairly impossible, on the other hand, you don’t have a blank check either. So, you’ve got to have some fluidity and flexibility in your initial estimate so you can adjust up or down as variables become known, unexpected glitches occur or necessary changes are made.
Though there’s no one universally accepted way to do cost estimation, bottom-up and top-down estimating are the two of the most common techniques used today. For projects that are more substantial, however, bottom-up estimating has the clear advantage. Here’s why.
Overview of bottom-up
and top-down estimating
Details serve as the building blocks for this approach. You start by determining the most fundamental tasks possible. The more fully realized the project, the easier it is to determine the smaller tasks involved and assign costs as well as the resources necessary to complete them. These tasks are then organized into work packages. Those unit and dollar values assigned to each task could be from your past projects, industry averages localized to your area or solicited quotes from subcontractors and vendors. These fine-tuned estimates from all the work packages are then combined for an overall total. However, it may not take into account risk mitigation of the unexpected or the tendency for scope creep that many projects experience. Regardless, even though it’s more time-consuming to arrive at this type of estimate, the payoff is a higher level of accuracy and reliability based on known details.
By contrast, this approach is more akin to a ballpark or big picture estimation. You would consider using this early in the process when details aren’t yet known, or the project scope isn’t fully developed. Naturally, this is a faster method than bottom-up. Major tasks, rather than smaller ones, are determined in the beginning to arrive at an estimate. Where do you get the numbers? Historical data from prior similar builds can be used, even factoring in the unexpected risks those projects experienced for a broader, more inclusive estimate. But a key drawback is that using only a top-down method will not incorporate the level of specificity often required for capital projects or any others of similar size or complexity.
Advantages of bottom-up estimating for capital projects
- You create better project cost certainty upfront. Clients want and expect this. It’s not surprising, given the degree to which large-scale projects exceed their budgets. While nothing is ever 100% certain, by demonstrating you’ve realistically prepared for all costs as well as forecasted challenges, you can reduce the financial and business risks resulting from details that might have gone unaccounted for. For your company, the bottom-up approach could help you discern which projects will yield a higher return on investment, and recognize which are lower-margin so you don’t wind up committing valuable time and resources to them.
- It accounts for the huge number of tasks and factors involved. These may include labor, equipment and materials. Involving the team at large — craftspeople, subcontractors, project managers, etc. — in your cost-estimation process means everyone has an equal chance to input rate and resource information for their unique tasks. More current, realistic numbers; no guesstimates. All team members become more vested in, and accountable for, their respective roles in completing the project. Providing clients with visibility into the type and cost of all components lends transparency to your process and the integrity of your numbers. Your transparency equals more client confidence.
- Your project accounting will improve. Massive-sized or capital projects often require an accounting of every dollar outlay, particularly when public funding is involved. Because the level of initial detail relies so heavily on well-developed plans, the estimate can show how it aligns with job requirements.
- You can course correct faster. A bottom-up estimate can serve as an alert system to deviations from the original figures so you can analyze the cause, and then course correct as necessary. And by exposing subtle mathematical errors early in the process, it can help avoid amplified cost deviations for large builds. That’s a big consideration in an overrun-averse industry.
What if you don’t know all the details at the beginning and you can only do top-down? No problem. It’s not unusual for construction companies to follow up their top-down estimates with bottom-up as more information becomes known or clarified. Whether you adopt this hybrid approach or only bottom-up, you might understandably have concerns about the time commitment involved. Fortunately, there is software that streamlines this process. And that’s precisely what InEight Estimate does.
Created especially for the construction industry, InEight Estimate features databases, rate libraries and templates to standardize cost estimation, so you can perform bottom-up estimating in a fraction of the time, and with lower risk of miscalculations and overlooked details. It not only gives you confidence in your estimate but can also reassure the client that you can deliver. This can make all the difference when seeking to win bids in a highly competitive environment with aggressive submission deadlines — and boost your reputation as a contractor of choice.