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• 0:04 Cost of a New Product
• 1:59 Top-Down Estimating…
• 3:07 Lesson Summary
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Lesson Transcript
Instructor: Artem Cheprasov

Artem has a doctor of veterinary medicine degree.

When a cost estimate needs to be established for a new project and not much information is available, top-down estimating can be useful. This lesson will go over the advantages and disadvantages of top-down estimating.

Cost of a New Project

Lisa is a project manager at Dolphin Boat Company, a business that makes boats of all kinds. The company wants to add a new model to their speedboat line. However, before they commit to this project, they need to know if it's a worthwhile endeavor.

Lisa has been asked to provide an estimate on how much the project will likely cost, as this will help the company determine if the project is feasible or if they should just shelve it.

As usual, Lisa uses top down-estimating.

Top-Down Estimating

Top-down estimating is a technique used by upper-level management to estimate the total cost of a project by using information from a previous, similar project. In other words, she's going to estimate the cost of the current project based on the last time they introduced a new boat model. Top-down estimates may also be based on the experiences of those involved in developing the cost estimate and expert judgement.

Lisa looks at some of her and the company's previous projects. One previous project also involved building a speedboat that used the same engine and was similar in size to the new boat the company wishes to build. Jackpot! The cost of the previous project was \$100,000, so Lisa estimates cost of the current project will also be roughly \$100,000.

Top-down estimating can be very useful when cost estimates are needed in the very early phases of a project. This is typically when not much is known about the project and very little information, if any, is available.

Since this technique is based on high level information (where small details don't need to be included), the estimated cost can be calculated faster and with fewer resources and effort. Therefore, it's a less expensive, quick method for establishing the project budget than other cost estimating techniques that require more detailed information, involving more time and resources. Finally, another good advantage is that top-down estimating gets greater commitment for the project from upper-level management, while relaying to the lower management staff expectations for the budget.

However, there are several disadvantages to using the top-down technique too, the main one being a lack of accuracy due to excluding so many details. A bad estimate could result in good projects getting scraped or bad projects taken on.

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