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.)