Forecasting the Earned Value Way
What is the worst thing about being a Project Manager? For me it has to be the way the boss is constantly asking: “Will it be done on time?” Showing current progress is not enough: we are expected to put our necks on the block and predict the future. Heaven help us if we are wrong.
So how can we Project Management Professionals (PMPs)® or would-be PMPs® make predictions with confidence? Well we need to base them on hard evidence and, if you are already using Earned Value Management to track your project, then these metrics can be used to forecast how things will turn out at the end of the day. If you are unfamiliar with Earned Value basics, check out our previous article on the subject. Alternatively, consider taking a PMP® certification course. By the time you are ready to take the PMP® exam, you will be very proficient in all Earned Value techniques.
Remember our three metrics? Planned Value (PV) is our estimated value for an activity. Earned Value (EV) is recorded when the activity is complete. It then equals the Planned Value figure for that activity. Finally the Actual Cost (AC) is the amount of time or money it actually took to complete the task.
However, in terms of crystal ball gazing, we need to become familiar with more Earned Value terminology. The first term is called Budget at Completion (BAC). This is our baseline budget. How much we have initially estimated the project is going to cost in total. In other words, it is the sum of all the individual activities’ Planned Values.
However, the interesting (and more difficult) concept is that of Estimate at Completion (EAC). This figure is what the total cost will be, based on current progress. Because a forecast depends on certain assumptions, we have a range of calculations we can use to come up with an EAC figure.
1. The project will continue at the same rate as before
In this case, EAC = BAC / CPI. In other words, the Estimate at Completion will be the original budget, modified by the rate of progress we are making. It can clearly be seen that, if the Cost Performance Index (CPI = EV / AC) is greater than or equal to 1 (on or under budget), our new EAC figure will be less than or equal to the original budget and vice versa.
As an aside, this situation is the one that seems to crop up most in PMP® exam questions.
2. The cost variances we are experiencing are not typical and future progress will be at a different rate
In this situation, we want to subtract the Cost Variance from the original budget, so: EAC = BAC – CV = BAC – (EV – AC) = AC + BAC – EV. This makes sense because we want to adjust the original budget (BAC) to reflect the cost overrun we have experienced to date.
3. We realize that the original estimate (the BAC) is not correct and we need to use completely revised estimates
At this point we need to introduce another Earned Value term: Estimate to Completion (ETC). This is simply the estimate for what is left to do. So we cumulate the revised estimates for the remaining activities and sum them together to get the ETC. The EAC is now the Actual Cost to date plus the ETC: EAC = AC + ETC
Another term that is used for EAC is Latest Revised Estimate which is a bit more descriptive. However, this term does not appear in the Project Management Institute’s Guide to the Project Management Body of Knowledge (PMBOK® Guide). If you are planning on getting PMP® certification, it’s best to become familiar with EAC.
Essentially what we are trying to do with these forecasting methods is predict final figures based on current performance. Having an EAC value included in all your status reports should satisfy the boss’s perennial requests for predictions.
Some real world examples might help to clarify these points. In the software world, there is a tendency to jump into the development phase before all the necessary research work is done. As the project unfolds, developers often realize that certain tasks are more complex than thought, or new tasks (such as writing installation scripts) are needed. Once the Work Breakdown Structure starts changing, the schedule needs to be updated to reflect this and a revised Estimate at Completion (EAC) calculated. In this case, the original budget (BAC) can no longer apply. Our Estimate to Completion (ETC) becomes the revised EAC less whatever we have spent so far – i.e. the Actual Cost (BAC – AC).
Another situation could arise when the team is a little less experienced than we predicted and everything seems to go a bit slower than planned. In this case the EAC = BAC / CPI forecast is appropriate because we have got into a rhythm, but it is slower than we originally planned. A case could be made that, as the team’s experience improves, the pace of work should improve as well. However, the Earned Value figures suggest a constant drift from the plan. Assuming that things will improve is the sort of wishful thinking that distinguishes the amateur from the Project Management Professional!
One-off obstacles occur all the time. We should be aware of a lot of these possibilities from our risk management effort. For instance, a builder might find a granite rock in the middle of where a foundation needs to be dug and a delay ensues while the rock is blasted out of the way. In this case, it is a one-off problem. It does not mean that any of the other tasks will face similar delays. So we can calculate the Cost Variance (CV = EV – AC) and subtract it from the original budget figure (BAC) to get a revised EAC.
Of course, different formulae can be used at different stages of the project. The main thing that a PMP® needs to do is ensure that s/he knows where the project is and where it is going – even if it is going downhill!
If you are interested in learning more about Earned Value, or indeed any aspect of project management, please investigate our comprehensive range of project management courses from basic introductions to full PMP® certification classes. These project management courses are currently being run in our virtual classroom and can be taken from the comfort of your home. Please contact us for more details..