Subscriber only lesson.
Sign up to this course to view this lesson.
About this lesson
Earned Value Management is a comprehensive project management technique that combines scope, schedule and resource management into one set of measures. With these measures a project forecast can be generated.
Earned Value Forecasting
Since projects seldom go exactly as planned, part way through a project the project team is typically asked to estimate how much time and money are required to complete the project. Earned Value Management is a comprehensive project management technique that combines scope, schedule and resource management into one set of measures. With these measures a project forecast can be generated.
When to use
On the one had we could say that we are always forecasting, the original baseline project plan is a forecast. However, in project management terms, forecasting is normally providing an updated estimate of project spending from the original plan. I recommend that this be done at the beginning of each project phase. It may also be done following a major high risk milestone. Many organizations’ methodology requires a forecast be conducted as part of the monthly earned value variance analysis reports. In those cases, I recommend starting the forecasting when the project is 20% complete. By that time several significant items should be completed on the project and enough work is done so that a small underrun or overrun is not magnified out of proportion. Prior to that time, the baseline plan is the forecast.
Components of a Cost Forecast
When a project is baselined, the project cost estimate is the sum of all the budgeted costs and is called the Budget at Completion (BAC). Throughout the lifecycle of the project, the project manager is often asked to provide a forecast for the final cost of the project which is referred to as the Estimate at Completion (EAC). As the project gets underway, real costs occur and now actual costs can be used instead of budget estimates for the completed tasks. The EAC is then the sum of the Actual Costs (AC) plus an estimate of what the costs will be to complete the remainder of the project. This estimate for the remained of the work is the Estimate to Completion (ETC). These can be expressed with this formula:
EAC = AC + ETC
The key then to effective forecasting is to be able to calculate a realistic ETC (since AC has already occurred and cannot be affected).
To assist the project manager and core team in their calculation of ETC, the Earned Value Management methodology creates several performance indices. These indices consider what has happened on the project since its start. There are two indices, a Cost Performance Index (CPI) and Schedule Performance Index (SPI). The CPI is a ratio of the earned value (EV) divided by the actual costs (AC). The index can be calculated for the entire project or for a subset of tasks, such as all of Phase 3, or all the tasks performed by the IT organization. The SPI is a ratio of the EV divided by the planned value (PV). Again the index can be calculated for the entire project or a subset of the project tasks.
CPI = EV / AC
SPI = EV / PV
There are four methods within the Earned Value Management methodology for forecasting the ETC. The four earned value methods are:
- The first method can be used with or without earned value indices. In this case, the project manager and project team create a new estimate for all uncompleted work. I often will use this approach when near the very end of the project because I normally have an excellent understanding of what is left to be done. The formula for the project estimate is:
EAC = AC + (new estimate for remaining work)
- In the second method, the ETC is the originally budgeted estimate for the remaining work. This is a good approach to use when any underruns or overruns that have occurred were due to unique or isolated events and are not likely to be repeated on the project or affect other tasks. When using earned value this is calculated as the BAC (original estimate of all work) minus the EV (original estimate of the work that has completed). . The formula for this method is: ETC = (BAC – EV). The formula for the total project estimate is then:
EAC = AC + (BAC – EV).
- The third estimating method requires the use of the earned value CPI performance index. It assumes that any pattern of cost overruns or underruns that has been occurring on the project will continue to occur. It can be applied to just a subset of tasks, or to the entire project. I will often calculate a CPI for each function on the team and use that CPI when forecasting their tasks. The estimate created in this method will take the originally estimated value of the remaining work (BAC – EV) and divide that by the CPI. This has the effect of increasing or decreasing that value of the remaining work by the same ratio that it has been increasing or decreasing. The formula for this is: ETC = (BAC – EV) / CPI. The formula for the total project estimate is then:
EAC = AC + (BAC – EV) / CPI.
- The fourth method requires both the CPI and SPI. This method assumes that the underrun or overrun pattern will continue and that an effort will be made to finish the project on the original date so increased costs will occur to accelerate the remaining work. I only use this approach if the project is behind schedule, I do not use it if we are ahead of schedule. To account for the acceleration effect, the estimated cost of the remaining work (BAC – EV) must be divided by the SPI. The ETC in this case then must include an effect for both cost and schedule and is calculated using this formula: ETC = (BAC – EV) / (SPI * CPI). The estimate for the total project becomes:
EAC = AC + (BAC – EV) / (SPI * CPI).Login to download
Lesson notes are only available for subscribers.
PMI, PMP, CAPM and PMBOK are registered marks of the Project Management Institute, Inc.