By Sathish Babu, PMP
In my previous article PMP Protein: Earned Value Management (EVM) – Basics, we have discussed about how to calculate earned value, variances and performance indices based on the past performance of a project. These values are important to identify whether you’re on, ahead of, or behind schedule and on, under, or over budget.
In this article, we will discuss about forecasting project costs and future performance of a project.
Terms to Know:
1. Estimate at Completion (EAC) is a forecast of how much the total project will cost (total cost of completing all work). It projects the total cost at completion based on project performance up to a point in time.
When calculating EAC, different formulas can be used, depending on your assumptions. The assumptions are with respect to the cumulative cost performance index (CPI) or a combination or cumulative CPI and cumulative schedule performance index (SPI) or if your estimate is no longer valid.
Given below with simple explanation to identify where to use what.
Formulas:
EAC = BAC / CPI – If the CPI is expected to be the same for the remainder of the project, the EAC can be calculated using this formula.
EAC = AC + BAC - EV – If the future work will be accomplished at the planned rate (initial one), the EAC can be calculated using this formula.
EAC = AC + Bottom Up ETC – If the initial plan is no longer valid, the EAC can be calculated using this formula.
EAC = AC + (BAC - EV) / (CPI * SPI) – If both the CPI and SPI influences the remaining work, the EAC can be calculated using this formula.
To know more on how these formulae are derived you can refer:
PMP Exam Prep: Calculating EAC and ETC for Forecasting
2. Estimate To Complete (ETC) is the expected cost to finish all the remaining work. It forecasts how much more will be spent on the project, based on past performance.
Formula for ETC = EAC - AC If the work is proceeding to plan, the cost of completing the
remaining authorized work can be calculated using this formula.
3. Variance At Completion (VAC) is the projection of the amount of budget deficit or surplus. It is expressed as a difference between budget at completion and the estimate at completion.
Formula for VAC = BAC – EAC
4. To Complete Performance Index (TCPI) describes the performance that must be achieved in order to meet the financial or schedule goals. It is expressed as a ratio of the cost to finish the outstanding work to the budget available.
Formulas:
• TCPI = BAC - EV / BAC - AC The efficiency that must be maintained in order to complete to
plan.
• TCPI = BAC - EV / EAC - AC The efficiency that must be maintained in order to complete
the current EAC.
To know more on how these formulae for TCPI are derived, you can refer:
To Complete Performance Index (TCPI) and Cost Performance Index (CPI)
Example:
Let’s take the same example given in my previous article to continue further.
A project has a budget of $1,000,000 and schedule for 10 months. It is assumed that the total budget will be spent equally each month until the 10th month is reached. After 4 months, the project manager finds that only 10% of the work is finished and a total of $200,000 spent.
We have already calculated the following values my earlier post.
If you know your CPI now, you can use it to predict what your project will actually cost when it’s complete.
Let’s derive further to find out estimates of final cost and time to complete.
In this article, we will discuss about forecasting project costs and future performance of a project.
Terms to Know:
1. Estimate at Completion (EAC) is a forecast of how much the total project will cost (total cost of completing all work). It projects the total cost at completion based on project performance up to a point in time.
When calculating EAC, different formulas can be used, depending on your assumptions. The assumptions are with respect to the cumulative cost performance index (CPI) or a combination or cumulative CPI and cumulative schedule performance index (SPI) or if your estimate is no longer valid.
Given below with simple explanation to identify where to use what.
EAC = BAC / CPI – If the CPI is expected to be the same for the remainder of the project, the EAC can be calculated using this formula.
EAC = AC + BAC - EV – If the future work will be accomplished at the planned rate (initial one), the EAC can be calculated using this formula.
EAC = AC + Bottom Up ETC – If the initial plan is no longer valid, the EAC can be calculated using this formula.
EAC = AC + (BAC - EV) / (CPI * SPI) – If both the CPI and SPI influences the remaining work, the EAC can be calculated using this formula.
To know more on how these formulae are derived you can refer:
PMP Exam Prep: Calculating EAC and ETC for Forecasting
2. Estimate To Complete (ETC) is the expected cost to finish all the remaining work. It forecasts how much more will be spent on the project, based on past performance.
Formula for ETC = EAC - AC If the work is proceeding to plan, the cost of completing the
remaining authorized work can be calculated using this formula.
3. Variance At Completion (VAC) is the projection of the amount of budget deficit or surplus. It is expressed as a difference between budget at completion and the estimate at completion.
Formula for VAC = BAC – EAC
4. To Complete Performance Index (TCPI) describes the performance that must be achieved in order to meet the financial or schedule goals. It is expressed as a ratio of the cost to finish the outstanding work to the budget available.
Formulas:
• TCPI = BAC - EV / BAC - AC The efficiency that must be maintained in order to complete to
plan.
• TCPI = BAC - EV / EAC - AC The efficiency that must be maintained in order to complete
the current EAC.
To know more on how these formulae for TCPI are derived, you can refer:
To Complete Performance Index (TCPI) and Cost Performance Index (CPI)
Example:
Let’s take the same example given in my previous article to continue further.
A project has a budget of $1,000,000 and schedule for 10 months. It is assumed that the total budget will be spent equally each month until the 10th month is reached. After 4 months, the project manager finds that only 10% of the work is finished and a total of $200,000 spent.
We have already calculated the following values my earlier post.
If you know your CPI now, you can use it to predict what your project will actually cost when it’s complete.
- If your CPI is below 1, EAC will be larger than project budget (BAC).
- If your CPI is above 1, EAC will be smaller than project budget (BAC).
- If your CPI is under budget, TCPI calculation will be based on your BAC.
- If your CPI is over budget, TCPI calculation will be based on your EAC.
Let’s derive further to find out estimates of final cost and time to complete.
It is always a good practice to plot the values on a graph in order to help stakeholders concerned to visualize the progress and the health of the project. This is shown below.
Twist for Exam:
Sometimes you get question which provides partial information. Depending on the information you are given in a question, you can reverse the formulas.
Below are some formulas for you.
Most of the earned value questions on the exam will be pretty straightforward. You will be given the numbers that you need to plug into a formula and when you do it you will get the answer. But occasionally, you will get a question that isn’t quite so straightforward.
Below are some exercises for you.
Exercises:
- Your project has a total budget of $300,000. You can check your records and find that you have spent $175,000 so far. The team has completed 40% of the project work. However, when you check the schedule it says that 50% of the work should have been completed. What is the SPI and CPI of your project?
- BAC is $40,000 and EAC is $30,000, EV is $17,000 and AC is $15,000. What is your TCPI considering BAC as the budget?
- Your project has a BAC of $4,522 and EV of $587.66. What is the PV of your project?
Aiming for Exam:
- The earned value formulas have numbers divided into or subtracted from EV.
- Variance is always subtraction and an index is always division.
- SV and SPI use PV, while CV and CPI use AC. EV comes first in each of these formulas.
- If it is a variance, the formula is EV minus something.
- If it is an index, the formula is EV divided by something.
- If the formula relates to cost, use AC.
- If the formula relates to schedules, use PV.
- For variances interpretation: negative is bad and positive is good.
- For index interpretation: and less than one is bad and greater than one is good.
References:
- “7.4 Control Costs” from PMBOK Guide 5th Edition.
- “Chapter – 8: Project Cost Management” from Book - I Want To Be A PMP by Satya Narayan Dash.
- “Chapter - 7. Cost Management” from Head First PMP 3rd Edition.
Written by Sathish Babu:
Sathish Babu is working for Kodiak Networks as a Project Manager and having 11+ years of experience in Product, Project Management and Service Delivery in Telecom domain.
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Interesting. Link included in my post. Project Cost Management
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