Today, we will discuss the bottom-up estimation technique. This is a quantitative estimation technique that helps you provide the most accurate estimation.
Let me give you an example of this technique.
The government has floated a contract to build a commercial building with a detailed scope of work. The contract must be a firm fixed type of contract.
So, how will you calculate the cost of the project and submit the bid?
You will use bottom-up estimating teaching to find project expenses and submit the budget accordingly.
The bottom-up estimation technique is most widely used since it delivers the most accurate results and allows for a detailed project scope of work available.
Let’s dig in.
Bottom-up estimation is the preferred choice when detailed project scope of work is available. In this technique, you estimate the cost of every component of the project, roll up to WBS (Work Breakdown Structure) level and then add them all to the project cost.
This technique results in a transparent and structured estimate that you can track and manage.
Prerequisites to a bottom-up estimate are a detailed WBS, an activity list, and a comprehensive directory of project resources.
Using this technique, you can get a detailed resource-by-resource approximation of the project.
This estimation sets the foundation for informed change management when the project is constrained by a shortage of resources or a client request. Using the bottom-up estimating method, the cost of each component is estimated, and the results are combined to arrive at an estimated cost of the overall project.
- In this technique, estimators list down all project activities
- Afterward, they calculate the resource for each activity
- Then the estimator assigns resources to the activity
- Finally, they calculate the cost of all activities and sum up from the bottom to the top
The estimate obtained from bottom-up estimation is the most accurate and known as a definitive estimate. However, its accuracy lies between -5 to 10%.
Examples of Bottom-up Estimation
A work package could require three programmers for five days, and their cost per day is 10 USD and seven electrical engineers for one day whose per day cost is 6 USD. You then calculate the work package cost by summing the product of intensity, duration, and unit price of the resource.
In this case it is: (3*5*10) + (7*1*6) = 192 USD.
The project has uncertainty due to the niche technology used by the programmers and less expertise.
As this is a risk, adding 15 USD to the project cost is recommended to mitigate the impact. This is called a contingency reserve. Contingency reserve is used to manage identified risks.
Some amount of management reserve (10% of project costs as a thumb rule) can be added on top of contingency reserve. This reserve is used to manage unidentified risks. A project manager needs management approval to use this reserve.
MR = 10% of (192 + 15)
= 10% of 207
= 21 USD
Now the total project budget will be 192 + 15 + 21= 227 USD.
Many projects do not use bottom-up estimation as it is a costly and time-consuming process. Instead, they go for an analogous technique for a high-level estimation.
After estimation, you use progressive elaboration as you get detailed information and refine the cost.
The risk acceptance allows the project team to move forward and react quickly and adequately to market demands.
Bottom-up estimating involves the entire project team in the estimation process; consequently, this estimating technique develops better team commitment compared to other estimating techniques.
Sometimes, team members may add padding, causing the estimate more than the actual.
Since you have all the estimation information, this technique also gives an opportunity to assess the change request against cost and time.
Top-down estimation is different from bottom-up estimation. Top-Down estimation gives senior management control over the decision-making process, whereas, in bottom-up estimation, the project team will be involved in determining the project costs.
Inputs to Bottom-Up Estimation
- Detailed scope of work
- Past completed quantitative analysis
Outputs of Bottom-Up Estimation
- Activity duration, resource, and cost
- Basis of estimates
Advantages of the Bottom-Up Estimation Technique
- Team members felt accountable because of their involvement
- This technique provides the most reliable result
Disadvantages of the Bottom-Up Estimation Technique
- This technique may overlook many system-level costs (integration, configuration management, quality assurance, etc.) since it focuses only on the WBS activity list
- Possible inaccuracy if the required information is not available
- More time and resource-consuming
Bottom-up estimating is the most accurate estimation method. You use this technique when you need accurate results, ready to invest time and cost. Besides estimating resources, time, and expenses for the planned work of a project, this technique can also be used to assess change requests.
Estimates are approximate, so you should select the one as per your requirements. For example, if you need a rough cost, analogous estimating is a good choice, but bottom-up estimating is the only option for an accurate result.
Please note that, if you are preparing for the PMP certification exam, this is an important topic and you may see a few questions in the exam from this bottom-up estimation technique.
How did the bottom-up estimation technique help you find your project cost? Please share it through the comments section.