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Earned Value Management is a comprehensive project management technique that combines scope, schedule and resource management into one set of measures.  With these measures a project forecast can be generated.

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Earned Value 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.  Earned Value Management is a comprehensive project management technique that combines scope, schedule and resource management into one set of measures.  With these measures a project forecast can be generated.

When to use

On the one had 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 of project spending from the original plan.  I recommend that this be done at the beginning of each project phase.  It may also be done following a major high risk milestone.  Many organizations’ methodology requires a forecast be conducted as part of the monthly earned value 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

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 remained 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 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.  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 project 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)

  • In the second method, 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 or affect other tasks. When using earned value this is calculated as the BAC (original estimate of all work) minus the EV (original estimate of the work that has completed).  .  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.  I will often calculate a CPI for each function on the team and use that CPI when forecasting their tasks.  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 it 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 requires 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 account for 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).

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  • 00:03 Hi, I'm Ray Sheen.
  • 00:04 I'd now like to show you how to use the earned value system when doing project
  • 00:09 budget forecasts.
  • 00:11 Before we get started, it would be helpful if I defined some of the terms that
  • 00:15 we'll be using in the forecasting formulas.
  • 00:18 A project budget forecast is an estimate or prediction of what the project manager
  • 00:22 thinks will be the final spending to complete the project based upon
  • 00:25 the informational knowledge that the project manager now has available.
  • 00:30 The budget at completion, or
  • 00:31 BAC, is the final value of the planned value on the project.
  • 00:36 It is the sum of the planned value for
  • 00:37 all the project tasks that comprise the project scope.
  • 00:41 If the project went exactly according to plan, that is how much the project
  • 00:45 would cost, but the project never goes exactly according to plan, so
  • 00:49 we have the estimate at completion, or EAC.
  • 00:52 This is what the project manager now thinks the project will cost
  • 00:55 based upon the latest information and knowledge.
  • 00:58 To get to that answer there's another important definition, and
  • 01:01 that is Estimate to Complete, or ETC.
  • 01:03 This is the estimate of how much money the project still needs to spend
  • 01:07 to finish everything.
  • 01:09 The past is past, this is just looking at what work is left and
  • 01:13 estimating the cost of the remaining work.
  • 01:16 So, let's see how the earned value approach the forecasting works.
  • 01:20 The question we're trying to answer is, how much will this project REALLY cost?
  • 01:24 Based upon everything that has happened, what will be the total price tag for
  • 01:28 the project?
  • 01:29 Now on the first day of the project, the BAC and the EAC should be the same.
  • 01:35 You should have confidence in your plan, but as time goes on,
  • 01:37 there will likely be some variance.
  • 01:39 Some of those variances may be one-time effects, and some may become trends.
  • 01:44 Some of the variances may be underruns, and some overruns.
  • 01:47 Based upon what has happened on the project,
  • 01:49 you can revise some of the assumptions, and this will then.
  • 01:52 Lead to revisions in some of the estimates.
  • 01:54 The result is an estimate at completion an EAC that is different from the BAC.
  • 02:00 If we think about what goes into the EAC we have two components.
  • 02:04 All the costs that have occurred on the project which is the cumulative actual
  • 02:09 cost or AC and an estimate of all the costs required to do the remaining work,
  • 02:13 which is called the estimate to complete, or ETC.
  • 02:16 The formula is EAC = AC + ETC.
  • 02:20 Well, we know the AC, so the key is to calculate the ETC.
  • 02:25 In order to calculate the ETC, there are two performance
  • 02:28 indices that can be calculated from earned value data, which will be of assistance.
  • 02:33 The first is the schedule performance index, or SPI.
  • 02:37 This is a measure of schedule efficiency,
  • 02:39 expressed as a ratio of the earned value over the planned value.
  • 02:43 The formula is SPI = EV / PV.
  • 02:46 If more work was accomplished than planned, the EV is larger than PV and
  • 02:50 the ratio is greater than 1.
  • 02:52 If less work completed than planned, the ratio is less than 1,
  • 02:56 which indicates the project is delayed.
  • 02:58 The second ratio is the cost performance index, or CPI.
  • 03:02 This is a measure of cost efficiency and
  • 03:04 is the ratio of earned value over actual costs.
  • 03:07 The formula is CP = EV / AC.
  • 03:11 If EV, which is the planned value for the work that has been completed,
  • 03:15 is greater than AC Which what was actually spent to complete the work,
  • 03:18 then the ratio is greater than 1, and the project is in under-run position.
  • 03:23 If instead the AC was greater, the ratio is less than 1, and
  • 03:26 the project is over-run.
  • 03:28 We will use these two indices in some of our forecast calculations.
  • 03:32 There are four forecasting approaches that can be used with earned value management.
  • 03:37 As I introduce the approaches, let's quickly review that the EAC forecast
  • 03:41 is the AC, or actual cost, plus the ETC, or estimate to complete.
  • 03:46 Let's see how to calculate the ETC.
  • 03:49 Method one does not require any earned value indices.
  • 03:52 It relies on a new estimate of the remaining work.
  • 03:55 I'd normally use this approach if there is a major project-free plan or
  • 03:58 when very close to the end and I only have two or three open tasks.
  • 04:02 The formula is EAC = AC + New estimate for remaining work.
  • 04:07 Method 2 relies on earned value data, but not the indices.
  • 04:10 In method 2, the assumption is that the original estimates for
  • 04:13 remaining work are still appropriate.
  • 04:16 Therefore the ETC is the original estimated value of the remaining work.
  • 04:20 This can be calculated by subtracting the value of the work completed.
  • 04:24 The earned value,
  • 04:25 or EV, from the total value of the project work which is the BAC.
  • 04:28 This is appropriate if any variances were one time effects and not trends.
  • 04:34 The formula is EAC = AC + (BAC- EV).
  • 04:39 Method 3 is used when the cost variances are trends,
  • 04:42 it requires the use of the CPI index.
  • 04:45 This technique works equally well with an underrun or an overrun.
  • 04:49 The value of the remaining work,
  • 04:51 which we already said was BAC minus EV is divided by the CPI.
  • 04:56 If the project is underrunning this will forecast a continuing underrun.
  • 04:59 If the project is overrunning it will forecast a continuing overrun.
  • 05:03 This calculation is similar to the trend forecast mentioned in earlier model.
  • 05:08 The primary difference is that the CPI index ensures
  • 05:11 that there is no schedule effect imbedded in the forecast.
  • 05:14 This is the most common method used in earned value.
  • 05:17 The formula for this method is EAC equals AC plus BAC minus EV divided by CPI.
  • 05:25 Method 4 is used when the project is behind schedule and
  • 05:28 there is a clear need to accelerate the project back to the original schedule.
  • 05:33 This acceleration is likely to cost money for overtime, expedites, or
  • 05:36 other acceleration effort.
  • 05:38 To account for this, the value of the remaining work,
  • 05:41 which is BAC- CV, is divided by the SPI index.
  • 05:46 Normally, when this approaches, the value of the remaining work is divided by both
  • 05:49 indices to account for both cost and schedule effects in the forecast.
  • 05:54 The formula for this method is EAC = AC + BAC- EV divided both CPI and SPI.
  • 06:05 Let's look at this on our project spending plot.
  • 06:07 Note that we have real data for AC and EV up through time now.
  • 06:11 We also have the total planned value, which is BAC.
  • 06:13 Use whichever method is appropriate to calculate the ETC.
  • 06:17 This is extended onto the AC line and
  • 06:20 runs it till the end of the project, at which time the final value is EAC.
  • 06:25 The difference between the EAC is the forecasted final value of AC and
  • 06:30 the BAC which is the final value of both PV and EV.
  • 06:33 So the final cost variants will be the variants at completion or VAC, and
  • 06:38 that is the difference between EAC and BAC.
  • 06:41 Earned value forecasts will be the most accurate project forecasts,
  • 06:45 because they take into account both cost and schedule effects, and
  • 06:49 they're based on the latest project knowledge and experience.

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