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Since projects seldom go exactly as planned, part way through a project the project team is typically asked to estimate how much time and money are required to complete the project.

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Quick reference

Forecasting

Since projects seldom go exactly as planned, part way through a project the project team is typically asked to estimate how much time and money are required to complete the project.

When to use

On the one hand we could say that we are always forecasting, the original baseline project plan is a forecast.  However, in project management terms, forecasting is normally providing an updated estimate from the original plan.  I recommend that this be done at the beginning of each phase.  It may also be done following a major high risk milestone.  Some organization’s methodology requires a forecast be conducted as part of the monthly variance analysis reports.  In those cases, I recommend starting the forecasting when the project is 20% complete.  By that time several significant items should be completed on the project and enough work is done so that a small underrun or overrun is not magnified out of proportion.  Prior to that time, the baseline plan is the forecast.

Instructions

Forecasts are often done for both schedule and cost.

Schedule forecast

The schedule forecast is normally done based upon the expert judgement of the project manager, core team and SMEs.  The focus of a schedule forecast is the calculation of the critical path.  At a major milestone or the beginning of a phase, schedule estimates are updated and a new critical path is calculated.  (See the lesson on Critical Path for how this forecast is created.)  An alternative method for calculating the schedule forecast can be done with the performance indices from Earned Value Management.  However, this gives a schedule forecast in units of money instead of time, and my personal experience has been that this type of schedule forecast is unacceptable to stakeholders.

Components of a cost forecast

When a project is baselined, the project cost estimate is the sum of all the budgeted costs and is called the Budget at Completion (BAC).  Throughout the lifecycle of the project, the project manager is often asked to provide a forecast for the final cost of the project which is referred to as the Estimate at Completion (EAC).   As the project gets underway, real costs occur and now actual costs can be used instead of budget estimates for the completed tasks.  The EAC is then the sum of the Actual Costs (AC) plus an estimate of what the costs will be to complete the remainder of the project.  This estimate for the remainder of the work is the Estimate to Completion (ETC).  These can be expressed with this formula:

                        EAC = AC + ETC 

The key then to effective forecasting is to be able to calculate a realistic ETC (since AC has already occurred, is known, and cannot be affected).

Forecasting indices

To assist the project manager and core team in their calculation of ETC, the Earned Value Management methodology creates several performance indices.  These indices consider what has happened on the project since its start.  There are two indices, a Cost Performance Index (CPI) and Schedule Performance Index (SPI).  The CPI is a ratio of the earned value (EV) divided by the actual costs (AC).  The index can be calculated for the entire project or for a subset of tasks, such as all of Phase 3, or all the tasks performed by the IT organization.  The SPI is a ratio of the EV divided by the planned value (PV).  Again the index can be calculated for the entire project or a subset of the project tasks.

CPI = EV / AC

SPI = EV / PV

Forecasting methods

There are four methods within the Earned Value Management methodology for forecasting the ETC, and three methods available when there are no earned value indices.  The four earned value methods are:

  • The first method can be used with or without earned value indices.  In this case, the project manager and core team create a new estimate for all uncompleted work.  I often will use this approach when near the very end of the project because I normally have an excellent understanding of what is left to be done.  The formula for the project estimate is:

EAC = AC + (new estimate for remaining work)

  • The second method can also be used with or without earned value indices.  In this case the ETC is the originally budgeted estimate for the remaining work.  This is a good approach to use when any underruns or overruns that have occurred were due to unique or isolated events and are not likely to be repeated on the project. When using earned value this is calculated as the BAC (original estimate of all project work) minus the EV (original estimate of the proejct work that has completed).  When earned value is not available, this number must be calculated by adding up the original estimates of all uncompleted tasks.  The formula for this method is:  ETC = (BAC – EV).  The formula for the total project estimate is then:  EAC = AC + (BAC – EV).
  • The third estimating method requires the use of the earned value CPI performance index.  It assumes that any pattern of cost overruns or underruns that has been occurring on the project will continue to occur.  It can be applied to just a subset of tasks, or to the entire project.  The estimate created in this method will take the originally estimated value of the remaining work (BAC – EV) and divide that by the CPI.  This has the effect of increasing or decreasing that value of the remaining work by the same ratio that the completed work has been increasing or decreasing.  The formula for this is:  ETC = (BAC – EV) / CPI.  The formula for the total project estimate is then EAC = AC + (BAC – EV) / CPI.
  • The fourth method also requires the earned value performance indices, but in this case we need both the CPI and SPI.  This method assumes that the underrun or overrun pattern will continue and that an effort will be made to finish the project on the original date so increased costs will occur to accelerate the remaining work.  I only use this approach if the project is behind schedule, I do not use it if we are ahead of schedule.  To create the acceleration effect, the estimated cost of the remaining work (BAC – EV) must be divided by the SPI.  The ETC in this case then must include an effect for both cost and schedule and is calculated using this formula: ETC = (BAC – EV) / (SPI * CPI).  The estimate for the total project becomes: EAC = AC + (BAC – EV) / (SPI * CPI).
  • The final method is often used as a rough estimate since it does not require earned value indices.  This is called the straight line method and just plots a straight line on a graph that shows project spending over time.  A line is drawn from the project start date at zero spending through the current date at whatever the actual costs are and ends on the project end date.  It assumes that project spends exactly the same amount of money each day.  This is obviously a bad assumption on virtually all projects and this is not a recommended technique, yet I see many companies continue to use it because of its simplicity.

Definitions

  • Forecast: “An estimate or prediction of conditions and events in the project’s future based on information and knowledge available at the time of the forecast.” PMBOK® Guide
  • Budget at Completion (BAC): “The sum of all budgets established for the work to be performed.” PMBOK® Guide
  • Estimate to Complete (ETC): “The expected cost to finish all the remaining project work.” PMBOK® Guide
  • Estimate at Completion (EAC): “The expected total cost of completing all work expressed as the sum of the actual cost to date and the estimate to complete.” PMBOK® Guide
  • Schedule Performance Index (SPI): “A measure of schedule efficiency expressed as the ratio of Earned Value to Planned Value.” PMBOK® Guide
  • Cost Performance Index (CPI): “A measure of the cost efficiency of budgeted resources expressed as the ratio of Earned Value to Actual Cost.” PMBOK® Guide

These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Sixth Edition, Project Management Institute, Inc., 2017.

 

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  • 00:05 Hi, I'm Ray Sheen.
  • 00:06 Now often while controlling the project,
  • 00:08 the project leaders ask to provide a forecast.
  • 00:11 Forecasting usually involves some calculations, so first I'll define some of
  • 00:16 the terms we'll use in the calculations. >> Actually I'll let the PMBOK
  • 00:20 to find them.
  • 00:22 The project management body of knowledge, the PMBOK Guide, defines a forecast as
  • 00:26 an estimate or prediction of conditions and events in the project's future based
  • 00:30 upon information and knowledge available at the time of the forecast.
  • 00:34 To calculate a forecast for
  • 00:35 your project there are a few more terms that you need to define.
  • 00:38 PMBOK defines Budget at Completion as, the sum of all budgets established for
  • 00:43 the work to be performed.
  • 00:45 You may recall that this was a total cumulative planned value when
  • 00:48 we were working on the earned value analysis.
  • 00:50 This represents everything in the plan.
  • 00:53 PMBOK defines an Estimate to Complete as the expected cost to finish
  • 00:58 all the remaining work.
  • 01:00 This is just answering the question of how much more money will this project need
  • 01:05 to spend.
  • 01:05 Next, PMBOK defines Estimate at Completion.
  • 01:09 The expected total cost of completing all work expressed
  • 01:13 as a sum of the actual cost to date and the estimate to complete.
  • 01:18 You can see the relationship between the estimate to complete and
  • 01:20 the estimate at completion.
  • 01:22 The EAC is the final cost.
  • 01:24 All the money that would be spent on the project and
  • 01:27 the estimate to complete is the money needed to finish the project.
  • 01:31 Finally the PMBOK defines variant set completion.
  • 01:34 A projection of the amount of budget deficit or surplus expressed as
  • 01:38 the difference between the budget at completion and the estimate at completion.
  • 01:42 That means that this is the final expected variance on the project.
  • 01:46 So lets look closer at forecasting.
  • 01:48 Forecasting answers the question, how much will this project really cost or
  • 01:52 how long will it really take?
  • 01:53 What will the end state look like?
  • 01:55 Schedule forecast are normally accomplished using the critical path
  • 01:59 analysis.
  • 02:00 The critical path is the longest path through a project, so a schedule forecast
  • 02:04 will analysis the remaining critical path tasks to estimate their duration.
  • 02:09 When the project's baseline plan is set, the forecast for
  • 02:13 the total cost is the budget at completion.
  • 02:15 That's the sum of all the project planned values.
  • 02:18 As the project progresses, the project team gets better information.
  • 02:22 Assumptions can now be checked against reality.
  • 02:25 Uncertain tasks or resources become certain.
  • 02:28 Although the scope may not change, a better understanding of what it would take
  • 02:32 to complete the scope leads to a revised estimate for
  • 02:34 the final project cost known as the estimate at completion.
  • 02:39 As we saw in the definitions the estimate at completion will be the sum of the cost
  • 02:43 spent on a project so far, the actual costs, and the estimated remaining
  • 02:47 cost needed to do the remaining work, known as the estimate to complete.
  • 02:52 Our formula, EAC equals AC plus ETC.
  • 02:56 Well, we know what the AC is, key is to forecast the ETC.
  • 03:01 Earned value analysis is able to help us with this forecast when we create
  • 03:06 two performance indices.
  • 03:07 PMBOK Guide defines the schedule performance index as a measure of schedule
  • 03:12 efficiency expressed as a ratio of earned value to planned value.
  • 03:16 So the formula for SPI is EV over PV.
  • 03:20 Since both of these are based upon the original estimated cost for
  • 03:23 each task, the only effect in this ratio is schedule.
  • 03:26 If we're ahead of schedule, more EV is done than was planned and
  • 03:30 the SPI is greater than 1.
  • 03:31 For behind schedule, SPI is less than 1.
  • 03:34 The other index is the cost performance index.
  • 03:37 The PMBOK defines CPI as a measure of the cost efficiency of project
  • 03:42 resources expressed as a ratio of earned value to actual cost.
  • 03:47 The CPI formula is EV/AC.
  • 03:50 In this case, the constant is the work that has been done.
  • 03:53 EV is the estimate for that work and AC is the actual cost for that work.
  • 03:58 A CPI greater than 1 indicates that the project has under-run the work completed.
  • 04:03 And a CPI less than 1 indicates an over-run.
  • 04:07 Well, armed with these indices,
  • 04:09 there is a number of ways to create a forecast of the estimate to complete.
  • 04:13 First, we call our equation, EAC = AC + ETC.
  • 04:18 We know the actual cost, so we wanna forecast the ETC.
  • 04:23 As you can see in this formula, the closer we get to the end of the project,
  • 04:28 the closer the EAC is to the AC.
  • 04:30 Well, the first method is to create a completely new estimate for
  • 04:33 the remaining work.
  • 04:34 This approach is used when there is a major project re-plan and
  • 04:38 the old estimate does not apply.
  • 04:40 I also use this approach when I'm very near the end of the project and
  • 04:44 I now know exactly what work is left to be done.
  • 04:47 This forecasting method will usually take the most time.
  • 04:51 This second method is used when we can rely on the original estimate for
  • 04:54 the remaining work.
  • 04:55 If any variances on the project were due to a one time unusual event, and
  • 04:59 otherwise everything is going as expected, use this approach.
  • 05:02 The ETC is the estimated cost of the remaining work.
  • 05:07 Well, if the budget at complete is the estimated cost of all the work, and
  • 05:11 the earned value is the estimated cost of the work that we've done so far, then
  • 05:16 the budget at complete minus earned value, is the estimate for the remaining work.
  • 05:20 This third method assumes that any cost variances that have been happening on
  • 05:24 the project will continue in the same proportion.
  • 05:27 So to calculate the ETC,
  • 05:28 we take the original estimated cost of the remaining work,
  • 05:32 which is the BAC minus EV, and then we divide that by the cost performance index.
  • 05:38 This will modify that estimate for the remaining work, so
  • 05:41 that it will now take on the same under run or over run effects.
  • 05:45 This is the most commonly used cost forecasting approach.
  • 05:49 The final method is used when a project is behind schedule and overrun.
  • 05:54 If the project team must try to bring the project back on schedule,
  • 05:57 the forecast must taken to the account as schedule acceleration effect.
  • 06:01 We do this by calculating the forecast in the same as we did with Method 3.
  • 06:06 Only we also divide the estimate for
  • 06:08 the remaining work by the schedule performance index.
  • 06:12 I never use this were ahead of schedule to reduce the forecast, but
  • 06:16 only when behind schedule to increase the forecasted amount ETC.
  • 06:20 Use whatever method best fits your project condition.
  • 06:23 Now let's look at a graph for project costs.
  • 06:26 The ETC is the red dotted line.
  • 06:29 Note that it starts at the end of the AC, the actual cost.
  • 06:32 The two together, form the EAC the estimated completion.
  • 06:36 In this example, the project ends with an overrun.
  • 06:39 The amount of overrun, the variance at complete, is the difference between
  • 06:44 the initial plan total cost, the BAC, and the final estimated total cost, the EAC.
  • 06:49 Forecasting project performance is a relatively quick and
  • 06:54 easy activity when using Earned Value Data.
  • 06:57 Without it, the only method available to you is method one,
  • 07:00 which can be time-consuming on a large project.
  • 07:04 If you're planning to sit for the PMP exam, you need to be familiar with
  • 07:08 everything in this lesson and be able to quickly calculate forecasts.

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