## About this lesson

Project teams are often asked to provide a forecast for final project cost. Earned Value Management provides indices that support creating the project forecast.

## Exercise files

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## Quick reference

### Earned Value Management: Variance Analysis and Forecasting

Project teams are often asked to provide a forecast for final project cost. Earned Value Analysis provides indices that support creating the project forecast.

### When to use

Forecasts are generated whenever requested from management or required by the project management methodology. If you have Earned Value Analysis metrics, forecasts can be quickly and easily created each month.

### Instructions

Forecasts are often done for both schedule and cost. Forecasting normally starts with a variance analysis to determine if the project is performing according to plan. If variances have occurred, the project manager must consider the causes of the variance and determine if these causes will continue to effect the project and with what impact.

#### Schedule forecast

Earned Value Analysis is seldom used for schedule forecast since Earned Value does not differentiate between critical path tasks and non-critical path tasks. The critical path performance is the best predictor for overall project schedule performance. However, Earned Value schedule variance will be used for some financial forecasting when there is a focus on achieving the planned project end date. This will be discussed below in forecasting method 4.

#### 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 remainer 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 is already occurred and cannot be affected).

#### Forecasting indices

To assist the project management 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 cumulative earned value (EV) divided by the cumulative 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 cumulative EV divided by the cumulative planned value (PV) for this point in the project. Again, the index can be calculated for the entire project or a subset of the project tasks.

CPI = EV / AC

SPI = EV / PV

A final index that is sometimes calculated is the To Complete Performance Index (TCPI). This is the originally planned cost of the remaining work divided by the forecasted cost of the remaining work. If the TCPI is significantly different than the CPI, the project manager can expect a question about what he or she will be doing differently for the remainder of the project.

#### Forecasting methods

There are four methods within the Earned Value Management methodology for forecasting the ETC, based upon using the earned value metrics and indices. The method selected will depend upon the circumstances. 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 core team create a new bottom-up estimate for all uncompleted work. The formula for the project estimate is: EAC = AC + (new estimate for remaining work)
- The second method can also be used with or without earned value indices. In this case 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. 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. 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 also requires the earned value performance indices, but in this case we need 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 create the acceleration effect impact, 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).

#### Definitions of terms

- Budget at Completion (BAC): “The sum of all budgets established for the work to be performed.”
*PMBOK*^{®}Guide - Estimate to Complete (ETC): “The expected cost to finish all the remaining project work.”
*PMBOK*^{®}Guide - Estimate at Completion (EAC): “The expected total cost of completing all work expressed as the sum of the Actual Cost to date and the Estimate to Complete.”
*PMBOK*^{®}Guide - Variance at Completion (VAC): “A projection of the amount of budget deficit or surplus, expressed as the difference between the Budget at Completion and Estimate at Completion.”
*PMBOK*^{®}Guide - Schedule Performance Index (SPI): “A measure of schedule efficiency expressed as the ratio of Earned Value to Planned Value.”
*PMBOK*^{®}Guide - Cost Performance Index (CPI): “A measure of the cost efficiency of budgeted resources expressed as the ratio of Earned Value to Actual Cost.”
*PMBOK*^{®}Guide - Trend Analysis: “An analytical technique that uses mathematical models to forecast future outcomes based upon historical results."
*PMBOK*^{®}Guide - To-Complete Performance Index (TCPI): “A measure of the cost performance that is required to be achieved with the remaining resources in order to meet a specified management goal, expressed as the ratio of the cost to finish the outstanding work to the remaining budget.”
*PMBOK*^{®}Guide

Definitions are taken from the Glossary of the Project Management Institute, *A Guide to the Project Management Body of Knowledge*, (*PMBOK*^{® }*Guide*) – Sixth Edition, Project Management Institute, Inc., 2017, Pages 700, 703, 706, 722. 724, and 725. PMBOK is a registered mark of the Project Management Institute, Inc.

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PMI, PMP, CAPM and PMBOK are registered marks of the Project Management Institute, Inc.