One interest concept brought up in this week's lecture addressed the concepts of bottom-up and analogous estimations within the Project Cost Management Knowledge Area. Bottom-up estimation is a more accurate method for estimating a project's cost, but it also has the risk of the project being rejected due to the cost being higher compared to an analogous estimation. In an analogous estimation, tasks don't need to be identified and this is more of a raw estimate that is based on little detail or understanding of the project. What are some scenarios where a certain approach may be more effective?
Do you opt for an analogous estimation with the risk of asking for forgiveness later when you need a budget increase? Or, do you run the risk of a great project never even getting started at all because stakeholders think the project is too costly?
Both bottom-up estimations and analogous estimations have their benefits and limitations.
For more complex projects, a bottom-up estimation may be more effective where the tasks are well-defined and the project scope is clear. Moreover, projects with higher stakes often have a significant budget for which bottom-up estimation would be a good option. This type of estimation would provide a more thorough and reliable cost estimate.
For projects in early-stage planning, an analogous estimation may be more effective when detailed information about tasks and resources is not available yet. This type of estimation would provide a quick approximation based on past or similar projects which would allow the stakeholders to get an early sense of the project's potential cost.
When it comes to deciding which type of estimation to use, it depends on the type or stage of the project. Some factors to consider could include project complexity, stakeholder preference, available information, and risk level tolerance within the organization.
@archishak brings up very good points, but I would also add that which option is chosen for cost estimation should also depend on the state of your organization at the time of pitching the project. Companies go through fluctuations in their capacity to invest in R&D, at times having high budgets and at other times, due to external situations such as Covid or lower revenue, etc., having lower budgets. Understanding where your organization stands from an R&D budgetary perspective is key when choosing you cost projection model
Consider a situation in which a company needs to explore the feasibility of launching a new product line within a short timeframe. A detailed task identification and bottom-up estimation may not be feasible due to time constraints and the need for rapid decision-making. In this scenario, an analogous estimation allows the project team to provide stakeholders with a preliminary cost estimate based on similar projects or industry standards. It provides a quick approximation to assess the financial viability so that an informed decision can be made.
Choosing between bottom-up and analogous estimation methods can feel like navigating between a rock and a hard place, especially when trying to balance accuracy with the likelihood of project approval. Bottom-up estimation, while more detailed and accurate, might initially scare stakeholders with its higher figures, potentially shelving a great project before it even starts. On the other hand, analogous estimation offers a rougher, less detailed cost projection that can be more digestible and easier to get approved in the initial phases. This method might be particularly useful in early-stage pitches or when the project is similar to previous initiatives, enabling a smoother kickoff. However, it does carry the risk of needing to request additional funds later, which can affect project credibility and overall success. Ultimately, the choice might depend on the strategic importance of the project, the risk tolerance of the organization, and how critical budget adherence is to the project's stakeholders.
