IT Project Cost Management – Bottom-Up vs. Top-Down



IT Project Cost Management involves understanding the technical features your end-users crave and the technical limitations of the systems and software available or present in the current domain. Once you have a grasp of the desired features and all relevant factors, you will then need to determine if a bottom-up or top-down pricing approach will work best.  It’s important in both methods to factor in the unexpected and adjust according to the changing needs of your customer.


If using bottom-up pricing, start with estimating the cost of each required component and use the sum to get total project cost. This is often done by using parametric estimation, which uses statistical models to predict costs based on historical data. This approach is most accurate when you have similar projects to reference and there is little variation in your project requirements. This approach also introduces risk into the costing as assumptions have significant impacts on the actual execution. Capturing these assumptions and documenting with your customer can mitigate risk when both sides are fully aware and agree. While this approach may seem the most logical, it can cause added burden for the execution team to manage scope and the inclusion of new features into the final solution.


If using top-down pricing, start with an overall estimate of the project and then break it down into smaller pieces. This is often used when there is less data available or when there is more uncertainty around the project requirements. It’s also useful when you need to develop a quick estimate for budgeting purposes. Customers love to ask, “How much will this cost?” with the expectation that you can easily offer an amount and commit to it. A good approach to answer without over-committing is to identify what you can realistically deliver with projected cost. The decision then rests with the customer to decide if that solution meets their requirements or if they need to clarify and better define.

Regardless of approach, it cannot be over emphasized that documentation of assumptions must exist. Ideally, both parties will review the assumption to assure that all stakeholders recognize the factors that will potentially impact cost and schedule. Additionally, when variances occur, this documentation will serve as a useful reference to validate its accuracy and to potentially explain why variances have occurred.

Also crucial to success is to understand that costs always tend to increase as projects move forward. For this reason, any plan should contain sufficient detail which will serve as a useful “baseline” to assure both parties clearly understand the deliverables, timelines, and pricing breakdown. This “baseline” will clearly aid in identifying any scope creep that may arise when stakeholders decide to add features, requirements or alter timelines.   Be sure to add contingency to your estimates to account for potential issues and changes. Like construction projects (one can argue has some of the best cost estimation techniques around), management reserves and contingency budgets can save a project from collapse in the event assumptions end up completely inaccurate or identified risks come to fruition.

Once you have developed a rock-solid cost management plan you can then consider other factors that impact the success of your project such as schedule, quality, risks, and dependencies. By taking all of these into account, you can develop a more comprehensive picture of what it will take to deliver a successful IT project that is on-time and maybe even a little under-budget.

Greg Olivares, DTSI Account Executive
Dave Ramos, VP Corporate Affairs

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Diversified Technical Services Inc