In cost management, one of the most important decisions is choosing the right estimating method: analogous (top-down) or bottom-up. Each has trade-offs between speed, accuracy, and level of detail.
Analogous estimating uses data from previous projects to estimate costs quickly. This approach can be helpful in the early phases of planning when limited detail is available. However, it’s also risky - projects that appear similar may differ significantly in technical complexity or resource needs. Teams that rely on top-down estimates to secure funding, may run into major cost overruns during execution.
By contrast, bottom-up estimating is more granular. It involves estimating costs for each individual task in the WBS, then aggregating them to form the total budget. While time-consuming, this method offers a clearer picture of resource needs and helps avoid surprises. It also fosters team engagement, as subject-matter experts provide input based on their experience. One challenge is the temptation to pad estimates to account for unknowns, which can inflate budgets unnecessarily.
Earned Value Analysis (EVA), which is crucial for tracking Cost Variance (CV)and Schedule Variance (SV) allows for proactive cost control throughout the project. For medical device projects where budget accuracy is critical but uncertainty is high, a hybrid approach initial top-down followed by progressive bottom-up refinement might work well.
How should project teams decide between speed and accuracy when selecting a cost estimating method, especially in projects with high uncertainty?
When deciding between speed and accuracy in cost estimating, project teams should consider the project's phase, and the level of uncertainty involved. In the early stages, analogous estimating can provide quick, broad estimates to secure initial funding and set expectations. However, as the project progresses and more details become available, transitioning to bottom-up estimating can enhance accuracy and resource allocation. This hybrid approach leverages the strengths of both methods, ensuring initial speed without sacrificing the detailed accuracy needed for effective cost control. Additionally, incorporating Earned Value Analysis (EVA) throughout the project can help monitor and adjust estimates, balancing the need for precision with the realities of project execution. How might teams effectively manage the transition between these estimating methods to maintain both speed and accuracy?
I definitely agree with the last post that using a hybrid method using both analogous and bottom-up estimation methods is an effective approach. I think to confront the uncertainty aspect in a project, integrating the risk management team with their risk analysis tools would be incredibly beneficial. That way contingency plans are also included in the initial analogous estimation to show stakeholders. Again this will only be 100% accurate if there is an adequate amount of contingency plans in place that cover all of the potential problems that may arise in the project.
This integration of risk management and risk analysis would also increase the accuracy of Earned Value Analysis (EVA) as mentioned in the original post. That way the projects Planned Value is correctly acknowledged so there is no incorrect calculations for cost variance and schedule variance. If the project does not utilize risk management and the risk analysis tools, project members could be tricked into thinking their project is well under budget at a certain time. That is until they hit a problem that causes delays and costs which could have been avoided or mitigated.
