5th Edition PMBOK® Guide—Earned Value Management (part 3)


 

1.  Introduction

In the previous posts, I covered the basic formulas having to do with the three quantities of Planned Value (PV), Earned Value (EV), and Actual Cost (AC), and Budget at Completion (BAC).  Then I covered the variances Cost Variance (CV), Schedule Variance (SV), and Variance at Completion (VAC), as well as the performance indexes, Cost Performance Index (CPI) and Schedule Performance Index (SPI).

In this post, I discuss the estimate to completion or EAC used in the technique of Forecasting. The formulas tell “will be finish the project on time and within the budget?”   To calculate these quantities, we need to introduce some new terms.

2.  Terms dealing with the project cost at completion

Quantity Formula Definition
Budget at Completion (BAC)  (Related to PV) Authorized budget amount of the total project, i.e. what the project was supposed to cost
Estimate at Completion (EAC) (several formulas) Estimated cost of the project at completion, i.e., what the project is now expected to cost
Variance at
Completion

(VAC)

BAC – EAC The difference between what the project was supposed to cost (BAC) and what is now expected to cost (EAC).
Estimate to Complete EAC – AC How much more it is estimated it will cost to complete the project, i.e., the difference between what the total project is now expected to cost (EAC) and how much it has cost until now (AC).

3.  Relationship between PV, AC and the terms of completion (BAC, EAC, ETC, VAC)

So two of the formulas that relate to the terms of completion, namely,

 

Variance at Completion (VAC) VAC = BAC – EAC
Estimate to Complete (EAC) ETC = EAC – AC

can be memorized simply by realizing what the terms actually mean.

4.  Calculating the EAC

So how to you calculate the EAC?   As listed in the chart in paragraph 2, there are several formulas, which is always a point of confusion for test takers.  How do you know which one to use?  Here are the formulas, their characteristics, and an explanation of when they are to be used.

The purpose of each formula for EAC is to estimate how much it will take to complete the project based on the performance to date.   If the project is over budget or behind schedule, the key in figuring out the EAC is to analyze WHY it is over budget or behind schedule.  This will give you the clue as to which formula to use.   I’ll give some examples after explaining the terms in the table.

Formula No. Formula Formula Name Formula Explanation
1 EAC = AC + ETC New estimate ETC is new bottom-up estimate
2 EAC = AC + (BAC – EV) Atypical variance Reason for variance is one-time occurrence
3 EAC = AC + (BAC – EV)/CPI

Or

EAC = BAC/CPI

Typical variance (Cost)

 

Reason for cost variance will continue at same rate (CPI)
4 EAC = AC + (BAC – EV)/CPI*SPI Typical variance (Cost and schedule) Reason for variance will continue and effect both cost and schedule performance (CPI, SPI)

Formula 1.  If the original budget is considered totally flawed, then one way to estimate the amount it will now take to do the project is to take the amount spent on the project so far (AC) and then do a more accurate bottom-up estimate of the amount it will take to complete the project (ETC).  That’s one way to do it.  But if you are answering a question from the PMP exam, don’t use this formula unless it specifically states the ETC is a brand-new estimate.   In this case, they will have to give you the figure for ETC because it is not derivable from any other formula but from the project’s own WBS (work-breakdown structure).

Formulas 2-4.  The rest of the formulas are similar in that they all start with AC, the actual cost up to now, and then they add an amount called the remaining work or BAC – EV, modified by some other factor.

The assumption is made that the EV is somehow different than the PV, i.e., the project is off schedule somehow.   Now the PV is essentially useless for planning purposes because it shows you the value of the work that was supposed to be done, and the assumption is that the EV is somehow different than that.   So the logical think to do is to start figuring out how much work actually needs to be completed from now (EV) to the end of the project (EAC), and that difference BAC – EV is the remaining work.

 In formula 2, that difference is simply added to the actual costs already incurred, because the remaining work will be done on time and on schedule, the one-time variance having already occurred.  In formula 3, the remaining work is divided by the cost performance index, because this formula assumes that the remaining work will be done at the same cost performance index (i.e., cause of variance is ongoing).  In formula 4, the remaining work is divided by both the cost performance index and the schedule performance index, if BOTH of these performance indexes will persist throughout the rest of the project.

The next post will deal with the next technique, the to-complete performance index, which tells you if you are behind schedule now, how much “pedal to the metal” you have to apply to get to the end of the project on schedule.

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