Earned Value Management is an effective tool to analyze project progress and also to forecast project cost and schedule performance. 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 Project Cost
Earned Value Management has a set of highly effective and proven tools to forecast project cost. The EVM graph displays various earned value management components. Many perceive that EVM formulas are complex and difficult to understand. However, this is not true. Though EVM formulas look complex but they are not at all difficult to remember. The graph also helps to understand the evm formulas to forecast project cost.
What is the remaining work likely to cost?
The first EVM formula to forecast project cost is Estimate to complete (ETC). Estimate to complete provide answer to the question of what the remaining work is likely to cost. Red line in the graph above denotes estimate to complete. ETC is defined as estimated cost to complete the remaining work of a work package or the project.
There are two methods to calculate ETC. The first and the most accurate method is manual bottom up estimation of the the remaining work. This method is also known as 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?
The second EVM formula to forecast project cost is Estimate at completion (EAC). Estimate at completion answers the critical question of what the entire project is likely to cost. EAC is indicated in the extreme right hand top corner of the graph above. It is defined as the expected total cost of the project required to complete the defined scope.
The graph above clearly indicates that EAC is sum of AC and ETC. Following are the three different formulas to arrive at Estimate At Completion.
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) is the third formula to forecast project cost. Variance at completion (VAC) is expressed as difference of EAC and BAC . It indicates how much we will be over or under budget at the end of the project. VAC is also part of project variance analysis and is expressed as:
VAC = EAC – BAC
Variance at Completion (VAC) is indicated by point A in the above graph.
Forecast Project Cost Using To-Complete Performance Index (TCPI)
Apart from the above, the other important formula to forecast project cost performance is, To-Complete Performance Index (TCPI). It is 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 therefore expressed as ratio of cost to finish the remaining work to budget remaining.
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
If BAC is not valid use EAC in the above equation.
Further Reading on Earned Value Management
To summarize, the above formulas of earned value management technique can forecast project cost. The graph above is also a ready reckoner for evm formulas to forecast project cost.
Following post will also aid in understanding the various earned value management concepts.
For basic concepts of EVM, please refer to the following post.
To understand application of variances and performance indicators, please refer to to the following post.
For solved problems of earned value management refer to the following post.
To understand important earned value management issues refer to the following post.
To understand variance analysis in project management refer to to the following post.
You may also read the following post for a comprehensive list for project management formulas for pmp examination
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