Bottom Up or Top Down? Or Both?

Bottom Up or Top Down? Or Both?

By Kim Koster, Director of Product Marketing at Unanet

During a recent webcast, 8 Steps to an Accurate Forecast, we had a very interesting discussion about Top Down and Bottom Up forecasting. There were many opinions about closing out a year and beginning planning for budgeting/forecasting cycles for the next year. This blog will discuss some of those options for forecasting.
 

Bottom Up

Bottom Up or Grass Roots planning is a technique based on the concept of asking those close to the project. They will better understand the project scope, customer, and subcontractors and they can articulate the needs from a resource perspective, what they think the risks and opportunities are, and account for any constraints, (ex. Skill sets or technical).

Pros:

  • Project teams actively work to establish a cost and schedule forecast
  • Improved communication at the project level and buy-in for the plan
  • Potentially more accurate at the project level

Cons:

  • Cycle time to complete planning will be longer due to the detailed nature of the planning
  • The scope of the contract or project must be crystal clear
  • May not tie to the overall corporate goals
  • Alternatives may not be explored to meet the corporate goals

 

How to Create a Bottom Up Forecast

  1. Understand the scope.  Scope comprehension is the key to accurate forecasting.  For example; Scope of this project is to create a super computer prototype (fixed price).
  2. Project Manager estimates the resources needed to complete the job. 
    1. Computer Genius and there is only one in your company and that is Fran.
      1. In this case use Fran’s actual rate since you know it will be her doing the work.
    2. Programmer is needed but not sure who can fill that role yet.
      1. In this case it would be best to use the average rate of that skill set for forecasting.
  3. Project Manager includes materials, services, and travel required.
  4. Apply indirect rates to direct costs. For this example, applied to direct labor only.
  5. Add the components together and you have the bottom up forecast completed by the Project Manager who is closest to the scope.

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Top Down

Total forecasts and objectives are driven from the top (typically the C-Suite). The mandated forecast is moved to lower and lower levels of the organizational hierarchy (ultimately to the people doing the work) to be developed and specified.

Pros:

  • C Suite typically develops the plan and already buys-in
  • Quicker way to forecast – short cycle time
  • Aligns with corporate strategy

Cons:

  • C Suite might not understand the issues/risks at the project level
  • Little to no buy-in from the project managers
  • Must back into the resource plan for the top down mandates

 

How to Create a Top Down Forecast

Let’s take the same project above for a super computer and walk through a top down approach. 

  • The COO gave the computer product line VP a Top Down forecast goal of $200,000 for fixed priced projects.  Corporate profit goals are ridiculous this year.
  • The product line VP passed down a Top Down forecast goal of $100,000 to the super computer project manager. 
    • The project manager will have to back into the $100,000 from the bottom up forecast of $109,500. 
      • First, he decides instead of travelling he will save $1000 by doing a web meeting. 
      • Really no impact or risk.
      • We must use Fran as she is the key to our success on the project.
      • The best option the project manager has is to name the resource for the programmer. This programmer will need to make less than the average rate.
        • Is this a good move for the project?
          • Risky because Sam is Junior
        • Is the change good for the organization?
          • Yes, the C Suite has a path to the profit target.

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Conclusion

There are pros and cons of each methodology. It is up to management to decide what is right for the business. Many factors come into play.

When is the forecast needed?  Is there an M&A activity that a forecast is required quickly?  If it is needed quickly, pick top down forecasting. 

Do you have a risky specialty project and need to hit the numbers exactly? If so, pick bottom up as you will get the most precise answer for the project. 

Are their heavy profit goals that must be met? The business is made up of a group of fixed priced projects and a risky specialty project. If so use a combination of both.

If you would like to learn more about forecasting and how Unanet can help your team, check out our webinar 8 Steps to an Accurate Forecast or a recent Unanet infographic on Forecasting, 8 Tips For Effective Project Forecasting.

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