Taking on Project Management Myths, Part 2

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Written by: Michael Hatfield, PMP

In my continuing series on commonly used, but invalid project management tactics and techniques, I simply could not let my traditional targets, the accountants, off the hook. I'm also going to wade back into a matter I began to address over a decade ago, but, since many of my readers are still not convinced, I simply must re-address it.

So, without further ado, here are my myths 8 and 7:

Myth 8: Nothing an accountant can do in general ledger space can produce cost or schedule performance information, or project at-completion costs or dates. Traditional management techniques are oriented toward "maximizing shareholder wealth," and all of the management information systems designed to support that goal--including generally accepted accounting practices--are based on managing assets.

Managing a project's scope, cost or schedule is a completely different animal. Unfortunately, the idea that all of an organization's information involving money simply has to come from the general ledger is a myth that dies hard, if at all, and accountants have absolutely no motive to correct that assumption.

Myth 7: Bottoms-up estimates at completion (EACs*) are more difficult, more time-consuming more expensive and less accurate than the calculated version.

According to the Association for the Advancement of Cost Engineering International, the most detailed estimate available is named, appropriately, a detailed estimate. It is generated by a professional estimator using off-the-shelf software and is so detailed that it can be handed off to a procurement specialist to begin the buying process. However, it is only accurate to within 15 percent of the project's final cost, at best. The most commonly used formula for calculating the EAC is based on the accuracy of the cost performance index (CPI) (EAC = Budget at Completion / CPI).

Dave Christensen has definitively established that the CPI virtually never changes more than 10 percent in either direction once a project has passed the 15 percent complete point. It follows, then, that the EAC calculated using that CPI is also accurate to within 10 percent and extensive analysis has borne this out.

That being the case, the calculated EAC can be derived from three data points, whereas the bottoms-up version needs literally hundreds. That version is also more expensive, if, for no other reason than it takes more professional time to produce. Finally, since within 10 percent is more accurate than within 15 percent, the calculated version just hit the trifecta.

Looking forward to your thoughts on these two myths.

(*A bottoms-up estimate is when you have already started the project, and you re-estimate all remaining work by work breakdown structures element. You take that number, add it to the cumulative actual costs, and you have a "bottoms-up" EAC.)
Posted by Administrator on: September 09, 2009 10:25 AM | Permalink


I am little confused here. Please correct me if I am wrong, you are saying that calculated version is more accurate than bottoms-up version (10% range is better than 15% range). However it is supporting to the myth than bottoms-up estimations are less accurate than calculated estimates that you stated earlier. Thanks, Ketan

Patrick Weaver
I am afraid Michael is somewhat out of date on claiming CPI stability and the consequential certainty of predicting EAC. There is undoubtedly the equivalent of an "urban myth" in general circulation within the general project management community, arising from U.S. Defense-based research, that CPI always stabilizes at 15% to 20% completion and the final outcome will be within 10% of this value and usually worse.

This myth has been extended by some authors to all projects in all industries; and I would suggest that this is demonstrably false in at least some circumstances. If CPI stability was an incontrovertible "fact" for all projects, there would be no need for active management of the project after 20% completion!

Henderson, Zwikael and others have demonstrated significant instability in CPI in a range of projects from the commercial sector where they gathered EVM project data to utilise in their research. EVM and CPI are still in the most effective predictors of future cost performance (and much more reliable than a bottoms-up re-estimating) but claiming some form of magical stability is counterproductive because the whole EVM process becomes questioned as soon as the accountants can demonstrate CPI instability.

The debate has moved forward and I would suggest that when CPI stability is shown to be established, the CPI stability is a strong indicator of other important (but much harder to measure) factors such as stable management, stable requirements, an efficient management system, effective project culture, etc. (many of which are likely to be present in the limited range of major defense projects used in the research undertaken by Christensen).

Conversely, where CPI is unstable, significant changes in the underlying project can be reasonably assumed to be occurring, either at the management level or at the requirements/scope level. These changes may be either beneficial or detrimental but are undoubtedly a risk that warrants the attention of senior management.

This whole subject is the centre of an ongoing debate within the College of Performance Management. For those interested, go to http://www.pmi-cpm.org/pages/home/index.html and read some of the back issues of "Measurable News’" you do not need to be a member to access the resources on the College’s web site.

Judi Vincent
Myth 7: Bottoms-up estimates at completion (EACs*) are more difficult, more time-consuming more expensive and less accurate than the calculated version.

Don't you mean that the myth is that Bottom-up estimates at Completion (re-estimates) are MORE accurate than calculated version. This is the myth but that BAC/CPI is, in fact more accurate.

David Mann
I'm trying to figure if you are stating the myth or answering. Anyway, one question: If a budget from which you are calculating a CPI is based on a bottom up estimate no more accurate than +/-15%, how is the CPI calculation more accurate? Essentially, the CPI is +/-10% of the +/-15% estimate.

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