Bottom up estimation VS Parametric estimation

 

In project management, one of the onerous tasks faced by the project managers and organizations is how to estimate the project’s resources i.e. time and schedule. Different types of estimation techniques are in practice. Two of them are explained below:

  • Bottom up estimation

Bottom up estimation, as the name implies entails judging the cost and schedule of an entire project by aggregating the cost and time required by discrete deliverables as specified in the work break down structure. Work break down structure decomposes the project into tractable tasks, therefore bottom up estimation works by calculating the resources required by each task and finally summing them in the end to get and estimate of the overall project.   Usually, in this type of estimation process, the people who are going to work on the project estimate the resources.

Bottom up estimation instills team bonding and commitment among the project team members because if they are involved from the very basic level, they in turn get more committed and dedicated in achieving the project’s overall objectives. In order to correctly estimate the resources, each team member who has been assigned a particular task from a work break down structure should be given a authority to estimate the project’s resources. Bottom up estimation displays a more detailed overview of time and cost. It also aids in realizing the specific resources needed during different phases of the project’s lifecycle. The following steps are followed in a bottom up estimation:

  • Prepare a work break down structure of the project i.e. divide the entire project into smaller and tractable tasks including the work package which is the smallest task in the project.
  • Next step is to identify the dependencies between the tasks and allocate resources to each task carefully.
  • Aggregate your individual estimates of each task in order to determine the resources needed by the entire project.

Project team members usually employ the three point estimation technique to determine the cost and time of each task. In three point estimating process, team members provide their pessimistic, optimistic and best guess estimates. The Three point estimation technique is regarded as the most accurate estimation process and is commonly used in bottom up estimation.

Example

Consider a simple web design project which is categorized into following three deliverables.

  1. Designing of the website which will include selecting a layout, designing graphics and approving design
  2. Project content which will include selecting the content writers, writing the content and inserting the content on web pages.
  • Development which will include setting up the website in test environment, performing test, approving website and setting it up in a live environment.

Now that the project tasks are divided, the next step would be to estimate the cost and time required by these tasks. The project team is composed of graphic designer, content writer and web developer. Graphic designer will charge at $30 per hour and will require 18 hours to complete the project. Similarly, content writers are hired for writing the web content at the rate of $18 per hour to complete in 10 hours. Web developer was also hired for the development and has charged $25 per hour for 40 hours of work. Now, the following table describes that how the whole project cost would be estimated. All the three contributors of the website project will work for average 8 hours per day excluding the weekend.

Task Cost                                               Duration
Designing $540 3 days
Writing $180 2 days
Development $1000 5 days
Total cost $1720 10 days/2 weeks

 

This mean that this web development project will be completed in 10 days approximately which will be equal to 2 weeks as one week has 5 working days. Similarly, the total project will cost $1720.

  • Parametric estimation

In parametric estimation, the project is divided into small deliverables or units. Then, on the basis of research and historical data the cost and schedule of each deliverable is determined and is finally aggregated to determine estimate the whole project’s cost and schedule. In parametric estimation, the measurement is usually scalable. Consider a simple example that if it took three hours to fix a single machine by an electrician last week, so now he had to fix two machines which will require six hours.

Parametric estimation requires less time as compared to bottom up estimation. In large projects, like construction of a building or a bridge, parametric estimation is used to calculate the cost and time of the project by using the historical data which is available from reliable sources i.e. the time and cost of the previous and similar projects are considered and scaled accordingly.

Example

  1. ABC Company aims at constructing a six floor building in a specific area. The company wants to estimate the time and cost required by this project using parametric estimation. The company has divided the project into these deliverables
  • Foundation which will include tasks like formation, pouring concrete and blocks.
  • Rough construction which includes framing, draining and supply pipes.
  • Finish construction which will include wiring, fixtures, trimming and cleaning up.

After a thorough research, the company has found that a similar project a three floor building was constructed in the past by another company at the same place and the cost and time incurred were given on the website of that company which is as follows:

Deliverables Cost Schedule
Foundation $400,000 1 month
Rough construction $ 425,000 5 months
Finish construction $75000 2 months

 

On the basis of above historical data of a three floor building ABC has determined the cost and schedule of its six floor building like this:

Deliverables Cost Schedule
Foundation $800,000 2 months
Rough construction $850,000 10 months
Finish construction $150,000 4 months

 

  1. ii) Consider another project where students have to arrange a singing competition in their school. This project is divided into three tasks i.e. registration of the participants, marketing and finally the coordination.

Marketing: For marketing 150 brochures are to be printed at $1 per brochure. Last year it took 4 days for the printing of the brochures, therefore, it is estimated that it will also require 4 days this year.

Registration: Last year it took 7 days to register the participants, therefore, 7 days are estimated for registration process this year.

Coordination: Three persons were hired for coordination at $15 per hour. Last year each coordinator worked for 3 days for average 7 hours per day. Therefore, by using the parametric estimation, cost is determined $15*21= $315.

Configuration Management Plan VS Change Management Plan

I Have noticed that a lot of you have some confusion when it comes to change control and configuration management. I found a good example about configuration management that may clear this confusion.

“Say for example, your project involves providing and installing a WAN access device at each of 32 locations around the country. Some locations require more bandwidth than others, and a back-up circuit. These requirements lead to a different configuration in the WAN access device. Perhaps some other factors lead to other configuration variations within the access device.”

“The configuration management plan can document how you are going to make sure that the appropriate configuration of WAN access device is going to be provided and installed at each location. The situation calls for extra care in this area, driving you to use the configuration management plan.”

if you need to change the number of those WANs per customer requirement, that would be part of change management plan.

I hope that cleared some of the confusion some of you might have about the configuration management plan.

Budget at Completion (BAC) VS Estimate at Completion (EAC)

Budget at completion BAC

it  is simply the original project estimate (usually the estimation of BAC is done during the planning phase). It is part of the original plan cost where you estimate how much the whole project will cost. BAC is may be less, more, or equal to the Estimate at completion (EAC) since the last will be the final cost of the project when it is finished.

Example: A Tech startup Company assigned you to manage a software development project. The software is expected to cost $300,000 for the developers, $50,000 for the hosting servers, and $5,000 for testing.

BAC is the estimated value of what the project will cost.

BAC = $300,000 + $50,000 + $5,000, or $355,000.

Estimate at Completion EAC

Estimate at Completion EAC

It is a forecast for how much the final cost of the project will be. In other words, as of today what do we expect the final cost of the project to be? There are four formulas to calculate EAC, each formula is appropriate for a different scenario depending on the project type and project performance. Pay close attention to the question given to determine which formula to use. Each scenario will be explained in a separate example.

No Formula for EAC Scenario
1 AC + Bottom-Up Estimation This formula is used when the original estimate is no longer valid (flawed).
2 BAC /CPI This formula is used when the spending continues at the same rate, meaning that CPI is almost same throughout the life of the project.
3 AC + (BAC – EV) It is used when the current Cost Variance (EV -AC) is atypical of the future, meaning that the current CPI is atypical of the future.
4 This formula is used when the project has a restricted deadline and the current CPI is atypical of the future.

Example 1: Greg is an inexperienced project manager that was recently assigned to a new facility construction project. Half way through the life of the project, all estimations are different from what was originally planned due to poor management performance. Senior management asked Greg to provide estimates at completion for his project. What is the right formula to use to calculate EAC for his project?

Answer: since the original estimation for the project is no longer valid, the correct formula to use to calculate estimate at completion is EAC = AC + Bottom-Up estimate.

Example 2: You are the project manager for an installation of 4 ultrasound examining machines for a health care facility. Project timeline is 8 weeks and each installation is budgeted for $50,000. By the end of week 3, the CPI for the project was 0.9. What is the Estimate at Completion for the project?

Answer: BAC = 8 months x $50,000 = $400,000

EAC = BAC / CPI

EAC = $400,000 / 0.9, or $444,440.

Example 3: In the previous example, If there was a problem that caused the project to abnormally cost more, e.g. during the installation of the second ultrasound machine, somewhere there was a mistake that caused the installation cost to be $60,000, then the CPI is atypical of the future of the project and we should use the third formula AC + (BAC – EV).

Example 4: You are the project manager for a project that has a restricted timeline of 6 months. During the 2nd month, the project experienced a technical problem that cost the project $100,000. EV = $800,000, AC = $$900,000, and PV = $800,000. The project is budgeted for $3,000,000. What is the estimate at completion (EAC)?

Answer: The project experienced a technical problem that cost $100,000; that means that the Cost Variance is atypical of the future and it is a one-time incident. Since the schedule is restricted and the Cost Variance is atypical of the future, we use the formula:

EAC =

CPI = $800,000/$900,000, or 0.89

SPI = $800,000/$800,000, or 1

EAC =

EAC = $3,372,000

What is To Complete Performance Index in Project Management

TO COMPLETE PERFORMANCE INDEX

(TCPI)

To Complete Performance Index (TCPI) is simply the budget for the work

remaining to be completed divided by the actual money available to do it. In other

words, it is the CPI for the remaining work as of today.

TCPI tells you the required remaining spending rate to stay within budget.

There are two scenarios to calculate TCPI:

TCPI = (BAC – EV) / (BAC – AC). This formula is used when the project

needs to be completed with the original estimated budget (BAC).

TCPI = (BAC – EV) / (EAC – AC). This formula is used when the project

needs to be completed within the original budget and it is valid for EAC.

Example 1:

You are the project manager for a project with an Earned Value (EV) =

$30,000. The Planned Value (PV) = $25,000. The Actual Cost = $25,000.

The Project is budgeted for $100,000. What is the To-CompleteChapter

1: Earned Value Measurement 22

Performance-Index (TCPI) to finish the project within the budgeted cost

(BAC)?

TCPI = ((BAC – EV) )/((BAC – AC))

TCPI = ($100,000 – $30,000) / ($100,000 – $25,000), or 0.93.

The CPI needs to stay equal to or be more than 0.93 to finish the project

within the BAC.

Example 2:

You are the project manager for a project with Earned Value (EV) =

$30,000. The Planned Value (PV) = $40,000. The Actual Cost = $50,000.

The Project is budgeted for $100,000. What is the To-Complete-

Performance-Index (TCPI) to finish this project within the forecasted

estimate at completion?

TCPI = (BAC – EV)

(EAC – AC)

CPI = EV / AC = $30,000/$50,000, or 0.6

EAC = BAC / CPI = $100,000 / 0.6, or $166,667

TCPI = ($100,000 – $30,000) / ($166,667 – $50,000), or 0.599.

That means the CPI needs to be 0.599 or more to finish the project within

the EAC.

Earned Value Measurement

ACTUAL COST (AC)

The cost incurred for the completed work of the project up to this point. In another words, it is the money that has been spent for the completed work of the project as of this point. It can be written as ACWP which means the Actual Cost of the Work Performed. You won’t see this term (ACWP) used on the PMP Exam. Example: You are the project manager for new school construction project. The project has a total budget of $4,000,000. The Planned Value is $1,750,000. As of today, forty percent of the budget has been spent and thirty percent of the project is complete. What is the Actual Cost (AC)? Answer: Keep it simple. The Actual Cost is the money spent as of today. The project has a budget of $4,000,000, 40 percent of it has been spent. The Actual Cost is 40% x $4,000,000. AC = $1,600,000.

EARNED VALUE (EV)

Defined as the budgeted value of the work actually completed by the project as of this point. It is also written as BCWP which stands for Budgeted Cost for the Work Performed. The Earned Value report that is used to measure the performance of the project is totally dependent on the Earned Value calculations to measure both the project’s progress and performance. EV is used to calculate Cost Variance, Schedule variance, Cost Performance Index, Estimate at Completion, To-Complete Performance Index, Estimate to Complete (indirectly), and Variance at Completion (indirectly). Earned Value (EV) = Percent Complete x Budget at Completion (BAC)

The cost incurred for the completed work of the project up to this point. In another words, it is the money that has been spent for the completed work of the project as of this point. It can be written as ACWP which means the Actual Cost of the Work Performed. You won’t see this term (ACWP) used on the PMP Exam. Example: You are the project manager for new school construction project. The project has a total budget of $4,000,000. The Planned Value is $1,750,000. As of today, forty percent of the budget has been spent and thirty percent of the project is complete. What is the Actual Cost (AC)? Answer: Keep it simple. The Actual Cost is the money spent as of today. The project has a budget of $4,000,000, 40 percent of it has been spent. The Actual Cost is 40% x $4,000,000. AC = $1,600,000. 1.2 EARNED VALUE (EV) Defined as the budgeted value of the work actually completed by the project as of this point. It is also written as BCWP which stands for Budgeted Cost for the Work Performed. The Earned Value report that is used to measure the performance of the project is totally dependent on the Earned Value calculations to measure both the project’s progress and performance. EV is used to calculate Cost Variance, Schedule variance, Cost Performance Index, Estimate at Completion, To-Complete Performance Index, Estimate to Complete (indirectly), and Variance at Completion (indirectly). Earned Value (EV) = Percent Complete x Budget at Completion (BAC)

Example1: if your project is to build a fence, each side costs $2000 to build and takes around 2 days. By the end of 3rd day, the project’s Earned Value (EV) should be $6000 if you were able to build 3 sides. If you were able to finish two and a half sides, your Earned Value would have been $5000. Example 2: You are a project manager working on a project that requires 100 items to be tested, spaced evenly over four weeks. You have just begun week three, with an overall budget of $10,000. To date, you have spent $2000 with 24 items tested successfully. Earned Value is the number of units tested multiplied by the testing cost of each one. EV = $10,000 (100 item) x (24 items tested) EV = $100 x 24, or $2400 There are quite few ways to measure the Earned Value. However, in this book, I will explain the two main methods. 1. Percent Complete Method This approach depends on measuring the percent completed of the project at any given time to determine the Earned Value. Questions on the Exam will mention percent of completion and the total value of the project. Example: A new library construction project is budgeted (BAC) for $2,000,000. Earned Value report shows that it is 40% complete. Earned Value (EV) = Percent complete x BAC EV = 40% x $2,000,000, or $800,000. 2. Units Measurement Method This approach uses the amount of work units completed. This approach best suits projects with a fixed cost per unit of completion, e.g. lines of coding, miles of railroads, machines installation and etc. Questions on the exam will give you the number of units that have been done and the cost of each unit. Example: You have a project of constructing a 30 miles of railroad in 30 days with a rate of 1 mile per day and you will be compensated $500,000 for each mile. By the end of day 20, you have only finished 16 miles of the railroad. The Earned Value for your project is (the value of the work completed) 16 days multiplied by $500,000 for each day, which is equal to $8,000,000. Note: remember that EV comes first in each of the following formulas of CV, and SV; on the top in CPI, and SPI.

PLANNED VALUE (PV)

It is simply the estimated value of the work planned to be done by the project at this point. Example 1: if your project is to install 100 desktop computers for a consulting company in 10 days. Each computer cost $100 to install. You are supposed to install 10 PCs per day. By the end of the 3rd day, the planned value for the PCs installed is $3000. PV = (10 PCs/day) x $100 per PC x 3 days = $3000. Example2: George is the project manager of a highway construction project. It is scheduled to reach the 50% completion milestone today. The total cost of the project is around $25,000,000. During a status meetings George announced that he has already completed 30 miles of the railroad for $18,000,000. Planned value is the estimated value of work planned to be accomplished as of this moment, the project is planned to be 50 percent complete. PV = 25 miles x $500,000, or $12,500,000. The Earned Value (EV) is 30 miles x $500,000, or $15,000,000. The Actual Cost is just $18,000,000 as mentioned in the example.

BUDGET AT COMPLETION

It is simply the original project estimate (usually the estimation of BAC is done during the planning phase). It is part of the original plan cost where you estimate how much the whole project will cost. BAC is may be less, more, or equal to the Estimate at completion (EAC) since the last will be the final cost of the project when it is finished. Example: A Tech startup Company assigned you to manage a software development project. The software is expected to cost $300,000 for the developers, $50,000 for the hosting servers, and $5,000 for testing. BAC is the estimated value of what the project will cost. BAC = $300,000 + $50,000 + $5,000, or $355,000.

COST VARIANCE (CV)

It is used to check if the project is under budget, over budget, or on budget as of this moment. Cost Variance (CV) = Earned Value (EV) – Actual Cost (AC) If CV is positive (EV > AC) then the project is under budget. If CV is negative (EV < AC) then the project is over budget. If CV = 0, (EV = AC) then the project is on budget. For a well-managed and monitored project, the CV should be zero or very close to zero. If the CV is either positive or negative, the project manager needs to investigate the reason behind that Cost Variance from what was planned. Being under budget could mean that there are some requirements that were not fulfilled such as installation costs that were not included, material invoices that have not been paid, etc. Example of Cost Variance calculation: You are the project manager of construction on a new robotic cow milking plant. The project is budgeted for $1,600,000 and scheduled to finish within 8 months. As of today, the estimated value for the work accomplished is $900,000 and the Actual Cost of the project is $1,100,000. What is the Cost Variance (CV) of your project? The Answer is $300,000 over budget. CV = EV – AC CV = $900,000 – $1,100,000 CV = – $200,000 and the project is $200,000 over budget.

SCHEDULE VARIANCE (SV)

It is used to check if the project is ahead of the schedule, behind the schedule, or on schedule. Schedule variance (SV) = Earned Value (EV) – Planned value (PV). If SV is positive (EV > PV) then the project is ahead of the schedule. If SV is negative (EV < PV) then the project is behind the schedule. If SV = 0 (EV = PV) then the project is on schedule. Just like with Cost Variance, the project needs to be investigated if the planned value is ahead of schedule or behind schedule. Being ahead of schedule is not necessarily a good sign since there could be some requirements that have not been included in the schedule. Example of schedule variance: You managing a project to increase the production of factory by adding 5 more assembly lines. The project is budgeted for $600,000, and scheduled to finish within 5 months at a rate of one assembly line per month and $120,000 for each added line. By the end of the fourth month, 70 percent of work is completed. What is the schedule variance (SV)? Answer: Schedule Variance (SV) = Earned Value (EV) – Planned value (PV). Earned Value (EV) is the estimated value of the completed work, which is percent of work completed multiplied by the budgeted value (this calculation for the Earned Value is used when the spending is consistent) The planned value is the estimated value of the work planned by the end of month 4, which is (4/5) x $600,000, or $480,000. EV = 70% x $600,000, or $420,000 PV = 0.8 x$600,000, or $480,000 SV = $420,000 – $480,000, or -$60,000. The project is over budget.

COST PERFORMANCE INDEX (CPI)

It is another indication of the project’s performance financially. It tells how much work we are getting for every dollar spent. The CPI should be close to 1.0 for the project to be doing well. Cost Performance Index (CPI) = Earned Value (EV) / Actual Cost (AC) Example: You are the project manager for website upgrade that the company initiated in order to enhance the user experience. Half way through the project, the status report shows that the Cost Performance Index (CPI) of your project is 0.9. What does that tell you about the financial status of your project? Answer: CPI = 0.9 means that you are getting 90 cents worth of work for every $1 dollar spent on the project and the project execution is not quite efficient.

SCHEDULE PERFORMANCE INDEX (SPI)

It is an indicator of the project’s progress compared to the originally planned progress rate. SPI should be 1 or very close to 1.0 for a project that is progressing according to the schedule. Schedule Performance Index (SPI) = Earned Value (EV) / Planned value (PV) Example: Sam is a project manager for establishing an e-learning website for an academic institute. The project is scheduled to finish within 4 months, and it is budgeted for $300,000. Two months after the project started, EV = $180,000. Assuming that the spending is uniform throughout the life of the project, what is the Schedule Performance Index (SPI)? Answer: Pay attention to the sentence (spending is uniform throughout the life of the project), that means for every month of the project life you spend the same amount and that helps you to calculate the planned value easily by adding the spending of each period up to the point of calculation , which is in this example two months. PV = ($300,000/4 months) x 2 months, or $150,000. SPI = ($180,000/$150,000), or 1.2. The project is doing well and ahead of schedule.

VARIANCE AT COMPLETION (VAC)

What do we currently expect the Cost Variance to be at the end of the project? If VAC is positive, the project is under budget. If VAC is negative then the project is over budget. If VAC = 0 then the project is on budget. Variance at completion (VAC) = Budget at Completion (BAC) – Estimate at completion (EAC) Example: You are the project manager for an installation of 5 MRI machines for a Healthcare facility. Project is scheduled to be finished within 5 weeks and each installation is budgeted for $50,000. By the end of week 3, CPI for the project was 0.85. What is the variance at completion (VAC) of the project assuming that the spending rate remains the same for the rest of the project? VAC = BAC – EAC BAC = 5 weeks at $50,000 per installation, or $250,000. EAC = BAC / CPI since the spending rate is the same. EAC = $250,000 / 0.85, or $294,000 VAC = $250,000 – $294,000, or -$44,000. The project is over budget because the VAC is negative.

ESTIMATE AT COMPLETION (EAC)

It is a forecast for how much the final cost of the project will be. In other words, as of today what do we expect the final cost of the project to be? There are four formulas to calculate EAC, each formula is appropriate for a different scenario depending on the project type and project performance. Pay close attention to the question given to determine which formula to use. Each scenario will be explained in a separate example.

Example 1: Greg is an inexperienced project manager that was recently assigned to a new facility construction project. Half way through the life of the project, all estimations are different from what was originally planned due to poor management performance. Senior management asked Greg to provide estimates at completion for his project. What is the right formula to use to calculate EAC for his project? Answer: Since the original estimation for the project is no longer valid, the correct formula to use to calculate estimate at completion is EAC = AC + Bottom-Up estimate.

Example 2: You are the project manager for an installation of 4 ultrasound examining machines for a health care facility. Project timeline is 8 weeks and each installation is budgeted for $50,000. By the end of week 3, the CPI for the project was 0.9. What is the Estimate at Completion for the project? Answer: BAC = 8 months x $50,000 = $400,000 EAC = BAC / CPI EAC = $400,000 / 0.9, or $444,440.

Example 3: In the previous example, If there was a problem that caused the project to abnormally cost more, e.g. during the installation of the second ultrasound machine, somewhere there was a mistake that caused the installation cost to be $60,000, then the CPI is atypical of the future of he project and we should use the third formula AC + (BAC – EV).

Example 4: You are the project manager for a project that has a restricted timeline of 6 months. During the 2nd month, the project experienced a technical problem that cost the project $100,000. EV = $800,000, AC = $$900,000, and PV = $800,000. The project is budgeted for $3,000,000. What is the estimate at completion (EAC)? Answer: The project experienced a technical problem that cost $100,000; that means that the Cost Variance is atypical of the future and it is a onetime incident. Since the schedule is restricted and the Cost Variance is atypical of the future, we use the formula: EAC = (AC+(BAC-EV))/CPIxSPI CPI = $800,000/$900,000, or 0.89 SPI = $800,000/$800,000, or 1 EAC = ($900,000+($3,000,000-$800,000))/0.89×1.0 EAC = $3,372,000.

ESTIMATE TO COMPLETE (ETC)

From this point on, what is the estimated amount of cash required to complete the project (forecast). When an organization is mitigating its losses by cutting those projects that are incomplete, ETC becomes really helpful for the management to allocate their reservoir of money toward a project that only needs a little more cash to complete and cut off money for the project that requires a lot of money to get to a state of completion. Estimate to Complete (ETC) = Estimate at Completion – Actual Cost. Example 1: You are the project manager for a workout app development project, The Actual Cost of the project is $1000, the planned value is $1,200, and the Earned Value is $900. The project was budgeted for $2,000. What is the Estimate to Complete (ETC) assuming that the spending continues at the same rate?

Answer: Since the spending rate continues in the same rate, then we use the following formulas to calculate ETC and CPI. ETC = EAC – AC In this example CPI = EV / AC since the spending rate remains constant. CPI = $900/$1000, or 0.9 EAC = BAC / CPI EAC = $2,000 / 0.9, or $2,222 ETC = $2222 – $1,100 ETC = $1,122. Example 2: For the previous example, assume that the estimation was flawed. How do you calculate the Estimate to Complete (ETC)? Answer: In this case, project manager should use bottom-up estimation to calculate ETC.

TO COMPLETE PERFORMANCE INDEX (TCPI)

To Complete Performance Index (TCPI) is simply the budget for the work remaining to be completed divided by the actual money available to do it. In other words, it is the CPI for the remaining work as of today. TCPI tells you the required remaining spending rate to stay within budget. There are two scenarios to calculate TCPI: TCPI = (BAC – EV) / (BAC – AC). This formula is used when the project needs to be completed with the original estimated budget (BAC). TCPI = (BAC – EV) / (EAC – AC). This formula is used when the project needs to be completed within the original budget and it is valid for EAC. Example 1: You are the project manager for a project with an Earned Value (EV) = $30,000. The Planned Value (PV) = $25,000. The Actual Cost = $25,000. The Project is budgeted for $100,000. What is the To-Complete-Performance-Index (TCPI) to finish the project within the budgeted cost (BAC)? TCPI = ((BAC – EV) )/((BAC – AC)) TCPI = ($100,000 – $30,000) / ($100,000 – $25,000), or 0.93. The CPI needs to stay equal to or be more than 0.93 to finish the project within the BAC. Example 2: You are the project manager for a project with Earned Value (EV) = $30,000. The Planned Value (PV) = $40,000. The Actual Cost = $50,000. The Project is budgeted for $100,000. What is the To-CompletePerformance-Index (TCPI) to finish this project within the forecasted estimate at completion? TCPI = (BAC – EV) (EAC – AC) CPI = EV / AC = $30,000/$50,000, or 0.6 EAC = BAC / CPI = $100,000 / 0.6, or $166,667 TCPI = ($100,000 – $30,000) / ($166,667 – $50,000), or 0.599. That means the CPI needs to be 0.599 or more to finish the project within the EAC.

Stakeholders Engagement Assessment Matrix

There are different levels of stakeholders engagement. Stakeholders engagement categorized as the following:

  • Unaware: Unaware of project and potential impacts.
  • Resistant: Aware of project and potential impacts and resistant to change.
  • Neutral: Aware of project yet neither supportive nor resistant.
  • Supportive: Aware of project and potential impacts and supportive to change.
  • Leading: Aware of project and potential impacts and actively engaged in ensuring the project is a success.

The current engagement level of stakeholders are different than the planned stakeholders engagement so your goal as a project manager is to bring the current stakeholders engagement to the planned stakeholders engagement.

Stakeholders Engagement Assessment Matrix helps you document the current level of engagement of each stakeholder and the desired level of engagement of stakeholder.

desired level of engagement for a stakeholder can be achieved by communications and actions for example, if a functional manager is resistant to your project because he thinks that some of his employees will be recruited to your project and he will not be able to finish the work he has with less number of employees. get him to be supportive to your project by offering a training to those employees so they can be more efficient and productive when they go back to work for him.

C : Current Engagement

D: Desired Engagement

OPPORTUNITY COST

Opportunity cost is what a person/thing needs to give up in order to gain something. In other words, opportunity cost is the cost of forgoing the next best alternative to the one you chose. You could spend that $5 on one coffee, or you could spend it on a 3 cupcakes. The opportunity cost of one coffee is therefore 3 cupcakes (by choosing the coffee, I have given up the opportunity to buy 3 cupcakes). The opportunity cost of attending a class of 2 hours is probably giving up $30 dollars of working if you make a $15 per hour.

For the Exam purposes, opportunity cost is the opportunity given up by selecting one project over another. There is no calculation required.

Opportunity cost is an economic term that describes the relationship between scarcity and choices. Organizations need to choose one project(s) over another or others because of limited resources, organization and or the company’s needs to make decisions where to focus its resources and that is always weighted toward the investment with the best returns.

Example:

You are a part of the Project management office (PMO) for an organization. The office is in the process of selecting one project that helps the growth of the organization. There are 3 projects to choose from. They are Project A with an NPV of $18,000,000, Project B with an NPV of $19,000,000 and Project C with an NPV of $15,000,000. After a brief initial discussion, the selection board decided to exclude Project C and it will not be pursued at all. Project A was chosen to be pursued after a lengthy discussion. What is the opportunity cost of selecting Project A instead of Project B?

Answer:

Although the question may seem as a complex problem, it is very simple to answer. The opportunity cost when selecting between two projects is the value of the project that is not selected, which is $18,000,000.

Make or Buy Analysis

During Project Planning, the company needs to make a decision whether to do the work of the project

themselves or outsource some or all the work.  The lack of the company ability to do some particular

activities or work packages within the project drives the project manager to outsource the work;

another reason for outsourcing can be the time and cost gain of outsourcing to experienced reputable

vendor that can meet the quality requirement for the that particular work of the project.  In many case,

some works need to be outsourced to seller that hold a patent for that type of work.  All cost related to

managing the procurement must be taking into consideration when making the Buy-Make Analysis since

this cost may be significant in many cases and outweigh the cost saving of outsourcing the work to a

particular seller.

Make-Buy analysis is a tool to help the project manager to make a financial decision whether to make

the product or services within the company our purchase that product or services. Successful decision

must take into consideration the direct and indirect cost related to planning and managing the

procurement of purchasing those products and services.

PMP Exam may examine your experience with a lease or buy question.  Lease-Buy analysis helps mostly

with equipment and machine that is required to do the work of the project to produce the product. For

example, the company may decide to lease bulldozer if it only going to use it for short time. In this type

of analysis the procurement department calculate how many days, weeks, months, years it takes for the

cost of leasing to be equal to cost of buying a piece of equipment. That calculation help to determine

whether to lease or buy that equipment depending on the life of the project.

Example:  Project manager trying to decide whether to lease a piece of equipment that is required to his

project and cost 15000 $ to buy and 500 $ / month to maintain, or to lease that equipment for 2500 $

down payment and 1500 $ a monthly lease until the equipment is return. How long will it take to break

even?

Answer: Let M represent the number of months. To break even you need to have the cost of buying = to

the cost of leasing.

$15000 + $ 500 M = $2500 + $1500 M

$15000 – $2500 = $1500 -$500M

$12500 = $1000 M

M = 12.5 months

No if you intend to use that piece of equipment less than 25 months, it is better to lease it than buy. If

you plan to use it more than 25 months then you may consider buying it to save money for the project.

Do understand how this technique help the project manager to optimize the cost of the project and save

money by choosing the best alternative.

  1. A Project manager of a construction project with a time line of 24 months is trying to decide the

feasible alternative of buying a machine that cost $100,000 besides $1000/ month to maintain

or leasing that machine with $5000 / month and $20000 down payment. Which alternative

should he use and how many months that machine should operate to be a feasible buying

choice?

  1. Lease, 20 months
  2. Lease, 24 months
  3. Lease, 30 months
  4. Buy it

Answer is D

Explanation: Let M equal the number of months where leasing break even with the buying

option.

$20,000 + $5000 M = $100,000 + $1000 M

$4000 M = $80,000

M = 20 months. Therefore, buying will be the cheaper option after 20 months and since the

machine is needed for 24 months, then buying decision is justified.

What Can Make you or Break you on a PMP Exam

During my first attempt to pass the PMP exam, I was not doing well and I started to get nervous. if you have not gone through the test yet, you do not know what I am talking about, but if you have, then you know how nervous and overwhelmed you can  be during the test. PMP Exam time has no cushion and it is measured so you only have 4 hours to answer  200 questions, that means each question should be answered within  1.2 minutes. When it comes to Earned value management problems, decision tree problems, critical path and float problems, I can assure you that you will need way more time than 1.2 minutes to get the correct answer.

for me, I was not serious about the math part of the PMP Exam prep materials that I was studying and unfortunately it came back and bite me at the exam. I spent more time and efforts trying to solve the math problems so it caused me to waste time that I could have used solving others non-mathematical problems and wasted valuable points. The result is fail attempt, no promotion for that year, and another three months of studying and practicing to pass the exam. All of that could have been avoided if I was more serious about the mathproblems of the PMP Exam.

Honestly, I blame Rita’s book for not emphasizing the importance of the mathematical part of the PMP Exam, other than that, her book was great.

I decided to write this post  just to bring awareness about the importance of practicing math problems for the PMP exam so you get the correct answer and  not to  waste valuable time trying to remember how to solve them. Please  focused more on the topics that more frequently included in the Exam such as Earned Value management, Risk problems, critical path and float problems, and procurement problems. Those are the problems that have always been on the exam.

In my opinion, you do not need to really focus on other math topics since those topics have always been 10%-15% of all math problems that included at the PMP Exam.

Just focus on these four topics of math problems and you will be ready to solve any math problem that the exam may throw at you.