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.