Earned Value Management is an effective tool for analyzing project progress and also forecasting schedule and cost performance of the project. At some point in time project managers have to face the undermentioned questions on future performance of the project cost.
- What is the remaining work likely to cost?
- What is the entire project likely to cost?
- How much will be over or under budget at the end of the project?
EVM Formulas To Forecast Cost Performance
Earned Value Management has a set of highly effective and proven tools to forecast the cost performance of the project. It is perceived that these formulas are complex and difficult to understand. Though these formulas look complex they are not at all difficult to remember. The graph helps in remembering the formulas.
What is the remaining work likely to cost?
Estimte to complete (ETC) denoted by red dotted line in the above graph provides an answer to this question. ETC is defined as estimated cost to complete the remaining work of a work package or the project
There are two methods of arriving at the ETC the first and the most accurate is the manual bottom up estimation of the the remaining work, this is also known as the management ETC or bottoms up ETC. The second method is to derive ETC based on a mathematical formula mentioned below.
ETC = (BAC – EV)/CPI
What is the entire project likely to cost?
Estimate at completion (EAC) answers this critical question. EAC is indicated in the extreme right hand top corner of the graph and is defined as the expected total cost of the project required to complete the defined scope.
The graph clearly indicates that EAC is a sum of AC and ETC. There are three different formulas to arrive at Estimate At Completion and they are as follows
EAC = AC + Bottom up ETC
The above formula is also known as analytical or manual approach to arrive at EAC.
EAC Forecast at the budgeted rate
This method assumes that the remaining work will progress at the same CPI whether favorable or unfavorable and is expressed as
EAC = AC + (BAC – EV)
AC = Actual cost incurred on the project
(BAC – EV) is also the work remaining on the project and is indicated by point C in the graph above.
The above equation simply means that the EAC is sum of actual cost booked on the project and the work remaining as on the review date.
EAC forecast considering effects of CPI
This method takes into account the effects of current CPI experienced by the project and assumes that the remaining work will also progress at the same CPI. It is expressed mathematically as
EAC = BAC/CPI
EAC forecast considering effects of both CPI and SPI
This method incorporates effects of both CPI and SPI for the remaining work and is expressed as
EAC = AC + (BAC – EV)/(CPI X SPI)
How much will be over or under budget at the end of the project?
Variance at completion (VAC) which is expressed as difference of EAC and BAC answers this critical question. It is expressed as
VAC = EAC – BAC
VAC is indicated by point A in the above graph.
To-Complete Performance Index (TCPI)
Apart from the above other important formula to forecast the cost performance is To-Complete Performance Index (TCPI) which defined as the cost performance required to be achieved on the remaining work, with the remaining resources in order to achieve a specified management goal. TCPI is expressed as cost to finish the remaining work to the remaining budget
TCPI = (BAC – EV) /(BAC – AC) or (BAC – EV) / (EAC – AC)
Work remaining = (BAC – EV), Budget remaining = (BAC – AC) or (EAC – AC)
MR = Management Reserve and PB = Project Budget
EAC is to be used in the equation if BAC is not valid.
Hope the above helps in reducing the complexity involved in understanding the evm formulas. Earned Value Management: An integrated approach to performance measurement and Project Monitoring Using Cost, Schedule Variance & EVM Performance Indicators will also aid in understanding the various concepts of this highly effecting project schedule and cost performance monitoring tool.Follow @AtulGaurPMP