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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 Project Results

Since projects seldom go exactly as planned, partway 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 organizations’ methodology requires a forecast to 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 judgment 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 project work that has been 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 the 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 the 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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  • 00:00 Hi, I'm Ray Sheen.
  • 00:05 Often while controlling the project,
  • 00:07 the project leaders asked to provide a forecast.
  • 00:10 Forecast, usually involves some calculations.
  • 00:13 So first, I will define some terms that we will use in our calculation.
  • 00:17 Well, actually, I'll let the PMBOK define them.
  • 00:20 The Project Management Body of Knowledge, the PMBOK guide defines a forecast as
  • 00:24 an estimate or prediction of conditions and events in the project's future
  • 00:28 based upon information and knowledge available at the time of the forecast.
  • 00:33 To calculate a forecast for your project,
  • 00:35 there are a few more terms that we need to define.
  • 00:38 The PMBOK defines budget at completion as the sum of all the budgets established for
  • 00:43 the work to be performed.
  • 00:46 You may recall this was the total cumulative planned value when doing
  • 00:49 an earned value analysis.
  • 00:51 This represents everything in the plan.
  • 00:54 The PMBOK defines estimate to complete as the estimated costs to finish
  • 00:59 all the remaining project work.
  • 01:02 This is answering the question of how much more money will the project cost is
  • 01:06 from this point forward.
  • 01:09 The PMBOK defines estimate at completion as the expected total cost of completion,
  • 01:15 once all the work is done expressed as a sum of the actual cost to date and
  • 01:20 the estimate to complete.
  • 01:23 That means that this is the final value when all is said and done.
  • 01:27 Notice relationship between the estimate to complete and the estimate at complete.
  • 01:32 The estimate at complete is the final cost,
  • 01:34 all the money that will be spent on the project.
  • 01:37 And the estimate to complete is only the money still needed to finish the project.
  • 01:42 Finally, the PIMBOK defines variance at completion as a projection of
  • 01:46 the amount of budget deficit or surplus, expressed as the difference between
  • 01:51 the Budget at Completion and the Estimate at Completion.
  • 01:55 That means this is the expected final variance on the project.
  • 01:59 So let's look closer at forecasting.
  • 02:01 Forecasting answers the question, how much will this project cost or
  • 02:05 how long will it take?
  • 02:07 What will the end-state look like?
  • 02:10 Schedule forecasts are normally accomplished using the critical path
  • 02:13 analysis.
  • 02:14 The critical path is the longest path through the project.
  • 02:17 So schedule forecasts will analyze the remaining critical path tasks,
  • 02:21 to estimate their duration.
  • 02:24 When the project baseline plan is set, the forecast for
  • 02:27 the total cost is the Budget at Completion.
  • 02:30 That's the sum of all the project plan values.
  • 02:34 As the project progresses, the project team gets better information.
  • 02:38 Assumptions can now be checked against reality,
  • 02:40 uncertain tasks where resources become certain.
  • 02:44 Although the scope may not change, a better understanding of what it will take
  • 02:48 to complete the scope leads to a revised estimate for
  • 02:51 the final project cost known as the Estimate at Completion.
  • 02:55 As we saw in the definitions, the Estimate at Completion will be the sum of
  • 03:00 all the costs spent on the project so far the actual costs.
  • 03:04 And the estimate of the remaining costs needed to do the remaining work known
  • 03:09 as the Estimate to Complete.
  • 03:11 Our formula is EAC = AC + ETC.
  • 03:15 We know what the AC, the actual cost is,
  • 03:17 the key is to forecast the Estimate to Complete, the ETC.
  • 03:21 Earned Value analysis helps us to calculate this ETC using two indices.
  • 03:27 The PMBOK guide defines the schedule performance index as a measure of
  • 03:32 schedule efficiency expressed as a ratio of Earned Value to Planned Value.
  • 03:37 So the formula for SPI is EV over PV.
  • 03:42 Since both of these are based upon the original estimated costs for each task,
  • 03:46 the only effect in the ratio is schedule.
  • 03:49 If we are ahead of schedule, more Earned Value has been done than was planned and
  • 03:53 the SPI is greater than 1.
  • 03:55 If we're behind schedule, the SPI is less than 1.
  • 03:59 The other index is the Cost Performance Index.
  • 04:02 The PMBOK defines CPI as a measure of the cost efficiency of budgeted
  • 04:07 resources expressed as the ratio of Earned Value to Actual Cost.
  • 04:12 So the CPI formula is EV over AC.
  • 04:16 In this case, the constant is the work that has been done.
  • 04:20 EV is the estimate for the work that has been done, and
  • 04:23 AC is the Actual Cost spent doing that work.
  • 04:26 A CPI greater than 1 indicates that the project is under running the work
  • 04:30 completed, and a CPI less than 1 indicates an overrun.
  • 04:34 And with these indices,
  • 04:36 there's a number of ways to create a forecast of Estimate to Complete.
  • 04:40 First recall our equation of Estimate at Complete = AC + ETC.
  • 04:45 We have the Actual Cost, the AC, we take that right from the financial system.
  • 04:51 So we're going to forecast the ETC, the Estimate to Complete.
  • 04:55 The first method is to create a completely new estimate of the remaining work.
  • 05:00 This approach is used when there is a major project replan and
  • 05:03 the old estimates no longer apply.
  • 05:05 I will also use this approach when very near the end of the project.
  • 05:10 I know exactly what is left to be done.
  • 05:13 This forecasting method will usually take the most time.
  • 05:16 Second method is used when we can rely on the original estimates for
  • 05:20 the remaining work.
  • 05:21 If any variance has occurred, it was due to a one time unusual event, otherwise,
  • 05:26 everything is still going smoothly, so we'll use this approach.
  • 05:30 The ETC is the estimated cost of the remaining work.
  • 05:34 So if the BAC is the estimated cost of all the work and
  • 05:37 the Earned Value is the estimated cost of the work that is done,
  • 05:41 then BAC- EV will be the estimated cost of the remaining work.
  • 05:45 The third method assumes that the variances that have been occurring on
  • 05:50 the project will continue to occur in roughly the same proportion.
  • 05:54 So to calculate the estimate to complete, we take the original estimated
  • 05:59 cost of the remaining work which we just calculated a moment ago as BAC- EV,
  • 06:04 and then we divide that by the Cost Performance Index.
  • 06:08 This will modify the estimates for waiting work, so
  • 06:11 that it will now take on the same underrun or overrun effect.
  • 06:15 This is the most commonly used cost forecasting approach.
  • 06:19 The final method is used when a project is behind schedule and overrun,
  • 06:23 but the project team has been told they need to get back on schedule.
  • 06:27 The forecast must take into account a schedule acceleration effect.
  • 06:32 We do this by calculating the forecast in the same manner as we did with method 3.
  • 06:38 Only we also divide the estimate for
  • 06:40 the remaining work by the Schedule Performance Index.
  • 06:44 Now, I never use this one in our head is scheduled to reduce the forecast, but
  • 06:48 only when behind schedule to increase the forecast and account for
  • 06:52 the schedule acceleration work.
  • 06:54 You should use whichever of these four methods best fits your project condition.
  • 07:00 Now, let's look at our graph of project costs.
  • 07:03 The ETC is the red dotted line.
  • 07:06 Note that it starts at the end of the AC, Actual Cost.
  • 07:09 The two together form the EAC, the Estimate at Completion.
  • 07:14 In this example, the project ends with a significant overrun.
  • 07:19 The amount of overrun, the variance at complete is a difference between
  • 07:23 the initial planned total cost, the BAC, and the final estimated cost, the EAC.
  • 07:29 Forecasting project performance is a relatively quick and
  • 07:32 easy activity when using Earned Value data.
  • 07:35 Without it, the only method available to you is method 1,
  • 07:39 which can be time consuming on a large project.
  • 07:42 If you're planning to sit for the PMP exam, you need to be familiar with
  • 07:46 everything in this lesson and be able to quickly calculate forecasts.

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