# Tracking the Budget

07 April, 2014

Project Management Professional (PMP^{®}) exam preparation courses do not spend a lot of time on budgeting. We are told to estimate the costs for each activity and aggregate these estimates together. There is some talk about reserves to cope with cost over-runs, but what we rarely see is a nice template showing the different factors that make up a budget.

For every activity, we need to calculate how much the work is going to cost, as well as how much material and what equipment are needed to carry out the activities. Also, we need to have the schedule in place, because we need to know the labour costs for this much work. Overheads are tricky. We can factor them into each estimate, or have a cumulative overhead figure for the overall project. Usually, a certain percentage value is chosen for this.

The total of the estimates is then our Budget at Completion (BAC). At the start of the project, before we have spent any money, the BAC is also the Estimate to Complete (ETC) and the Estimate at Completion (EAC). Memories of your PMP^{®} training are coming back now with these terms. It is as the project progresses that we see these values diverge.

Suppose we complete the first activity in the project and everything has gone perfectly. We discover that the activity cost exactly what we had estimated. This can happen, sometimes. Now we can record the Actual Cost of the activity as the same as its estimate. We can now calculate the Estimate to Complete using that Earned Value formula learned in your PMP^{®} exam days: ETC = EAC – AC. In other words, the estimate for the remaining work (ETC) is the original budget (BAC or EAC) less the actual cost of the first activity (AC).

However, things do not always run smoothly on projects and we usually find that the actual spending differs from the estimates. Unfortunately, it is usually the case that the difference represents an over- rather than an under-spend. As an example, we might notice a trend as the costs come in: maybe the schedule is the real problem and we find each activity is costing more in terms of labour. When this happens, we might need to revise the budget to account for this factor and Earned Value provides the way. The revised budget is the EAC. Although the term is not given in your PMP^{®} course, it might be useful to use the alternative name for EAC: Latest Revised Estimate. If we are facing a consistent divergence from the estimates, the formula: EAC = BAC / CPI is helpful. In other words, the revised budget is original budget divided by the Cost Performance Index, where the Cost Performance Index is the Earned Value divided by the Actual Cost.

When an activity completes, its estimated cost is its Earned Value. If this is less than the Actual Cost of performing the activity, then the Cost Performance Index (EV / AC) will be less than one. If this is divided into the original budget (BAC), the Latest Revised Estimate (EAC) will be greater than the original budget.

Of course, there are projects where one activity goes off the rails in a unique manner. Maybe a piece of equipment breaks and has to be replaced, blowing the budget for that activity completely. In this case, we can argue that this impact on the schedule is a one-off and remain confident in the remaining estimates. In this case, the Latest Revised Estimate (EAC) will be calculated using the formula: AC + BAC – EV. If you remember your basic Earned Value formulae, you might notice that the Cost Variance formula (EV – AC) appears here in reverse. So we could express the one-off over-spend formula as: BAC – CV. So a negative Cost Variance will increase the Latest Revised Estimate (EAC).

For PMP^{®} students and those already certified as PMPs^{®}, there is one more formula to be aware of. This is the most complex one: AC + (BAC – EV) / (SPI x CPI). This formula should be used when (1) there is a cost overrun and (2) the deadline must be met. In other words, you are considering both the schedule performance (the Schedule Performance Index (SPI) being Earned Value / Planned Value) and the Cost Performance Index (CPI) in your estimates.

While the PMP^{®} exam focuses on the Earned Value formulae, real world budgets are made up of tables of figures. However you lay out your budget, make sure you allow space for estimates and actuals. It is good project management practice to identify each over- or under-spend and decide if each is a one-off anomaly or a generic mistake that will be seen all along the project. Remember, if you report a divergence from the baseline estimate, you will need to know what has diverged and why. If you feel that the original estimates are totally wrong and want to replace them, then the budget needs to be formally re-baselined. This requires change control board approval.

For more information on budgeting, please consider one of our project management certification courses. We hold our project management courses in Dublin, Cork, Limerick and Galway. Find out more by contacting us directly.

By Velopi Seamus Collins