## About this lesson

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.

## Exercise files

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## Quick reference

### 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.

### When to use

On the one hand 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 from the original plan. I recommend that this be done at the beginning of each phase. It may also be done following a major high risk milestone. Some organization’s methodology requires a forecast be conducted as part of the monthly 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.

### Instructions

Forecasts are often done for both schedule and cost.

#### Schedule forecast

The schedule forecast is normally done based upon the expert judgement of the project manager, core team and SMEs. The focus of a schedule forecast is the calculation of the critical path. At a major milestone or the beginning of a phase, schedule estimates are updated and a new critical path is calculated. (See the lesson on Critical Path for how this forecast is created.) An alternative method for calculating the schedule forecast can be done with the performance indices from Earned Value Management. However, this gives a schedule forecast in units of money instead of time, and my personal experience has been that this type of schedule forecast is unacceptable to stakeholders.

#### 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 remainder 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, is known, and cannot be affected).

#### Forecasting indices

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

#### Forecasting methods

There are four methods within the Earned Value Management methodology for forecasting the ETC, and three methods available when there are no earned value indices. 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 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)

- 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 project work) minus the EV (original estimate of the proejct work that has completed). When earned value is not available, this number must be calculated by adding up the original estimates of all uncompleted tasks. 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 the completed work 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, 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).
- The final method is often used as a rough estimate since it does not require earned value indices. This is called the straight line method and just plots a straight line on a graph that shows project spending over time. A line is drawn from the project start date at zero spending through the current date at whatever the actual costs are and ends on the project end date. It assumes that project spends exactly the same amount of money each day. This is obviously a bad assumption on virtually all projects and this is not a recommended technique, yet I see many companies continue to use it because of its simplicity.

#### Definitions

- Forecast: “An estimate or prediction of conditions and events in the project’s future based on information and knowledge available at the time of the forecast.”
*PMBOK*^{®}*Guide* - 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* - 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*

These 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.

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