Top-down and bottom-up budgets are two distinct ways of estimating the costs for a project. Firstly, the characteristics of the top-down cost estimations imply that the top management of the company assesses the projections and judges the estimated costs. Here, the experience of the top management and their advanced skills are used for the estimations. The first advantage of this approach is, as mentioned, the experience of the top management.
They are likely to have had comparable projects in the past, have worked in the industry and the company for extended periods and can use these experiences to accurately assess possible constraints that will require additional costs and areas that should be reviewed with particular attention. However, in the case when the top management had no such experience, which is possible, and the project manager has worked on similar projects, it is evidently more sensible to use the expertise of the latter since the top-down approach will be ineffective when estimating the costs.
As the “top-down” statement implies, the top management passes these estimations down to other managers where they provide their input into the estimations. Due to the fact that this approach implies passing the estimations within different hierarchies, from the top management to other departments and to people that will perform the activities, more and more detail is added along the way, and as a result, the estimations get more detailed.
Hence, in this approach, the rough estimates transform into a detailed plan suggesting that all possible constraints are considered. However, the successive estimations should fit their costs into the initial plan. As a result, when compared to the bottom-up approach, it is possible that the upper management fails to consider some aspects of work that will be more costly, and thus the team manager will have difficulty addressing this particular activity.
Here, since different departments have to divide the costs based on the budget estimated by the management, the issue of some departments receiving more and others less, or some having enough money to complete the activities and others having to look for ways to fit into the budget arise, the positive aspect of the top-down cost estimations is that according to Batcheler and Weiskirchner-Merten, the estimations are typically highly accurate and therefore, the problem of some departments not having the financing to complete some activities should not arise. After all, the top management is interested in the successful and timely completion of the project.
In comparison, the bottom-up approach uses a reverse strategy where the estimations are made by the departments that will perform the tasks. The direct and indirect costs for each activity are considered first. Next, at each level, such as the work package or deliverable lever, the total costs are summed, which results in the final budget for the project. Here, project managers work with functional managers to collect information and create estimations. After that, the top management assesses the budget and eliminates any overlap that could arise in the process. The overlap is the main issue with this approach in comparison to the top-up budgeting because managers can be unaware of certain activities overlapping between departments.
As a result, the top management is responsible for removing these additional costs. Otherwise, the project’s budget is inaccurate, whereas, with the top-down approach, such a problem never arises. Another issue that does not occur with top-down budgeting is the need to readjust the calculations until the acceptable budget that the top management agrees to spend is presented. Hence, this can be time-consuming and will require more work. The bottom-up approach is, however, more effective because it implies creating a detailed plan for each project, making it easier for managers to prioritise projects and allocate resources for them.