EARNED VALUE

FORECASTING FORMULAS AS PART OF EVM ANALYSIS -

PROJECT COST MANAGEMENT

MANAGEMENT
 Control Costs : Tools and Techniques

Figure 7-12. Earned Value, Planned Value, and Actual Costs 2

Other EVM Techniques
Physical Measurement — directly transform the physical measurement of
the amount of work completed into EV
◦ example: building 10 houses each has a value of US$1000 expected to be
completed in 10 weeks in proportion, earned value of 3 house built is
US$3000

Percentage Complete — directly transform the percentage of the amount of

work completed into EV
◦ example: building 10 houses each has a value of US$1000 expected to be
completed in 10 weeks in proportion, earned value of 30% complete is
US$3000
Other EVM Techniques
Weighted Milestone — a EV is assigned to the 100% completion of each
milestone of the work packages with prior agreement with stakeholders

Fixed Formula — a specific percentage of the overall PV is assigned to the

start of a work package and the remaining assigned upon completion; these
must be agreed upon in the project management plan
◦ 0/100 rule: 0% EV at the activity begins; 100% EV upon completion
◦ 20/80 rule: 20% EV at the activity begins; 80% EV upon completion.
◦ 50/50 rule: 50% EV at the activity begins; 50% EV upon completion
EAC according to PMBOK
Budget we gave at first makes no sense and we cant use it to
predict anything of future OR I goofed up and let me re-
estimate
EAC = AC + Bottom Up ETC
(Bottom-up Estimate to complete / Going back to the drawing
board!)
Exercise:
You have a project to construct a government department building for
500,000 USD. To date, you have spent 200,000 USD, and the value of
the completed work is 175,000 USD. However, you noticed your cost
estimation was flawed. Therefore, you need to calculate your budget
again for the remainder of the project. You gather your team members
and re-estimate the cost of the remaining work. Your new estimate shows
that it would take 400,000 USD to complete the remainder of the project.
Calculate the Estimate at Completion (EAC).
Solution:
Budget at Completion (BAC) = 500,000 USD

Actual Cost (AC) = 200,000 USD

Earned Value (EV) = 175,000 USD

Bottom-up Estimate to Complete = 400,000 USD

Here, you will use the formula:

EAC = AC + Bottom-up Estimate to Complete = 200,000 + 400,000 = 600,000 USD

Hence, the Estimate at Completion is 600,000 USD.

EAC according to PMBOK
Performance was bad in the past but the budget is still intact for the remaining
work

EAC = AC + (BAC – EV)

If we believe future expenditures will occur at forecasted amount (no more
delays of the same kind in future).
This method accepts the actual cost to date and predicts that all future work will
be accomplished at the budgeted rate.
Delay might be caused by some unforeseen event like flood, hurricane,
earthquake which is likely not to happen again
Exercise:
You have a project with a budget of 500,000 USD. An incident
during the execution phase that costs you a lot of money.
However, you are sure that this will not happen again, and that
you can continue with your calculated performance for the rest
of the project. To date, you have spent 200,000 USD, and the
value of the completed work is 175,000 USD. Calculate the
Estimate at Completion (EAC).
Solution:
Actual Cost (AC) = 200,000 USD

Budget at Completion (BAC) = 500,000 USD

Earned Value (EV) = 175,000 USD

EAC = 200,000 + (500,000 – 175,000) = 200,000 + 325,000 = 525,000 USD

Hence, the Estimate at Completion is 525,000 USD.

EAC according to PMBOK
Cost performance will not change

EAC = BAC / CPI

It assumes what the project has experienced to date is expected to
prevail;
> 1 could be anything
< 1 caused by reasons like selection of less skilled labour
Exercise:
You have a fixed deadline for a project with a budgeted
cost of 500,000 USD. To date, you have spent 200,000
USD, and the value of the completed work is 175,000
USD. However, according to the schedule, you should
have earned 225,000 USD by now. Calculate the
Estimate at Completion (EAC).
Solution:
Budget at Completion (BAC) = 500,000 USD

Actual Cost (AC) = 200,000 USD

Earned Value (EV) = 175,000 USD

Planned Value (PV) = 225,000 USD

To calculate the EAC, first you have to calculate the CPI and SPI:

SPI = EV / PV = 175,000 / 225,000 = 0.78

CPI = EV / AC = 175,000 / 200,000 = 0.88

Solution:
EAC = AC + (BAC – EV) / (CPI * SPI) = 200,000 + (500,000
–175,000) / (0.88 * 0.78)
= 200,000 + 325,000 / 0.69 = 200,000 + 471,000 = 671,000 USD

Hence, the Estimate at Completion is 671,000 USD.

Exercise:
You have a project to be completed in 12 months and the cost
is 100,000 USD. 6 months have passed, and 60,000 USD has
been spent, but upon closer review, you find that only 40% of
the work has been completed. Find the Estimate at Completion
(EAC) for this project.
Solution:
Budget at Completion (BAC) = 100,000 USD

Actual Cost (AC) = 60,000 USD

Planned Value (PV) = 50% of 100,000 = 50,000 USD

The question did not say that the Planned Value was 50%. However, it
says that the duration is 12 months and 6 months have passed. In this
case, you can safely assume that the PV was 50% unless it is given in the
question.
Solution:
Earned Value (EV) = 40% of 100,000 = 40,000 USD

First, you have to calculate the Cost Performance Index to calculate the EAC:

Cost Performance Index (CPI) = EV / AC = 40,000 / 60,000 = 0.67

=>Cost Performance Index (CPI) = 0.67

Estimate at Completion (EAC) = BAC / CPI = 100,000 / 0.67 = 149,253.73

Hence, the Estimate at Completion (EAC) is 149,253.73 USD.

In other words, if the project continues with CPI = 0.67 until the end, you will have to spend
149,253.73 USD to complete it.
EAC according to PMBOK
Cost & Schedule performance are relevant to predict the future /
outcome
c c
EAC = AC+ (BAC – EV)/ CPI x SPI
If we believe both CPI and SPI will impact future cost performance.
It is assumed that CV and SV to date will continue to prevail
The performance of the project with sub-standards (that is over
budget and behind schedule)
Exercise:
Your boss is not impressed with your current estimates. He
asks you to calculate EAC based on the worst case scenario,
incorporating SPI & CPI in to the formula:
SPI = 0.8 BAC = $ 12
CPI = 0.5 AC = $ 5 EV = $ 6
The lower half of the equation will be?
Exercise:
Your boss is not impressed with your current estimates. He asks
you to calculate EAC based on the worst case scenario,
incorporating SPI & CPI in to the formula: The lower half of the
equation will be?
A: SPI x CPI D: CPI x EV
B: 0.04
C: BAC - AC
PV = $40 EV = $32 AC = $48 BAC = $150
SPI = 32/40 = 0.80 CPI = 32/48 = 0.67
Assumption Example Formula
Future cost performance will be EAC = AC + (BAC – EV)
Data Example:
performed at the budgeted rate EAC = 48 + (150 – 32) = 166

Future cost performance will be same as EAC = AC + [(BAC – EV)/CPI] = BAC / CPI
Data Example:
all post cost performance EAC = 48 + [(150 – 32) / 0.67] = 150/0.67=225
Future cost performance will be influenced EAC = AC + [(BAC – EV) / (CPI x SPI)]
additionally by past schedule performance Data Example:
EAC = 48 + [(150 – 32) / (0.67 x 0.80)] = 269.3
Future cost performance will be influenced EAC = AC + [(BAC – EV) / (0.8 CPI + 0.2 SPI)]
jointly in some proportion by both schedule and Data Example:
cost indices EAC = 48 + [(150 – 32) / (0.8 x 0.67) + (0.2 x 0.80) ] = 218.2
PV = $40 EV = $32 AC = $48 BAC = $150
SPI = 32/40 = 0.80 CPI = 32/48 = 0.67
Assumption Example Formula
Future cost performance will be EAC = AC + (BAC – EV)
Data Example:
performed at the budgeted rate EAC = 48 + (150 – 32) = 166

Future cost performance will be same as EAC = AC + [(BAC – EV)/CPI] = BAC / CPI
Data Example:
all post cost performance EAC = 48 + [(150 – 32) / 0.67] = 150/0.67=225
Future cost performance will be influenced EAC = AC + [(BAC – EV) / (CPI x SPI)]
additionally by past schedule performance Data Example:
EAC = 48 + [(150 – 32) / (0.67 x 0.80)] = 269.3
Future cost performance will be influenced EAC = AC + [(BAC – EV) / (0.8 CPI + 0.2 SPI)]
jointly in some proportion by both schedule and Data Example:
cost indices EAC = 48 + [(150 – 32) / (0.8 x 0.67) + (0.2 x 0.80) ] = 218.2
VAC (Variance at Completion)
What is BAC? (Project / Work budget or total amount of money
originally planned to be spent on work / project).
Variance is the difference between the new estimate at
completion and original planned value

VAC = BAC – EAC

VAC (Variance at Completion)

VAC = BAC – EAC

If we forecast the project will be over budget VAC will be
NEGATIVE
If we forecast the project will be under budget VAC will be
POSITIVE
 TCPI is the efficiency needed to finish the
project on budget. It is the ratio between
TCPI (To budgeted cost of work remaining and money
complete remaining. estimates how fast you have to
move to achieve the target. TCPI is the
performance calculated Cost Performance Index that is
index) achieved on the remaining work to meet the
specified management goal, such as the
BAC or the EAC
TCPI (To complete performance index)
TCPI = (BAC – EV) / (BAC – AC)
Use this formula if the project is required to finish within budget

Predicting Status:
Greater than 1.0 = Harder to complete
Exactly equal to 1 = Same to complete
Less than 1.0 = Easier to complete
TCPI (To complete performance index)
TCPI = (BAC – EV) / (EAC – AC)
Use this formula if the project is required to finish within new EAC
Predicting Status:
Greater than 1.0 = Harder to complete
Exactly equal to 1 = Same to complete
Less than 1.0 = Easier to complete
Exercise:
You are working on a project to be completed in 24 months and
the total cost of the project is 200,000 USD. Twelve months
have passed and 110,000 USD has been spent, and 60% of
the work has been completed so far. Find To Complete
Performance Index (TCPI) for this project?
Solution (Under Budget):
Budget at Completion (BAC) = 200,000 USD
Actual Cost (AC) = 110,000 USD
Planned Value (PV) = 50% of 200,000 = 100,000 USD
Earned Value (EV) = 60% of 200,000 = 120,000 USD
Cost Performance Index (CPI) = EV / AC = 120,000 /110,000 = 1.1
Solution:
Since the cost performance index is 1.1, which is greater than one, you are under
budget. Therefore, in this case you will use the TCPI formula based on the BAC.
Hence,
TCPI = (BAC – EV)/(BAC – AC)
= (200,000 – 120,000)/(200,000 – 110,000)
= 80,000/90,000
= 0.89
This means that you can continue with a Cost Performance Index of 0.89 to complete
the project.
Exercise (Over Budget):
You have a project to be completed in 12 months and the total
cost of the project is 100,000 USD. Six months have passed
and 60,000 USD has been spent, but on closer examination
you find that only 40% of the work has been completed so far.
Find the To Complete Performance Index (TCPI) for this project?
Solution (Over Budget):
Budget at Completion (BAC) = 100,000 USD
Actual Cost (AC) = 60,000 USD
Planned Value (PV) = 50% of 100,000= 50,000 USD
Earned Value (EV) = 40% of 100,000= 40,000 USD
Cost Performance Index (CPI) = EV / AC
= 40,000 /60,000= 0.67
Hence, the Cost Performance Index (CPI) = 0.67
Solution (Over Budget):
Since the cost performance index is less than one, you are over budget. Now you will calculate
the new estimate at completion and use the formula for case-II which is based on the EAC.
Estimate at Completion (EAC) = BAC/CPI = 100,000/0.67= 149,253.73 USD
Hence, Estimate at Completion (EAC) = 149,253.73 USD
Now, TCPI = (BAC – EV)/(EAC – AC) = (100,000 – 40,000)/(149,253.73 – 60,000)
=60,000/89,253.73 =0.67
TCPI = 0.67
This means that you can continue with a Cost Performance Index of 0.67 to complete the project.
ETC (Estimate to Complete)
Expected cost to finish all the remaining work OR assuring
work is proceeding on plan, the cost of completing the
remaining authorized work will be calculated using formula:

ETC = EAC - AC
Exercise:
You have a project with a BAC of 100,000 USD and a duration
of 12 months. 6 months have passed, and you have spent
60,000 USD. Upon closer view, you find that only 40% of the
work has been completed. Your project is expected to perform
with the same cost. Find the Estimate to Complete (ETC) for
this project.
Solution:
Budget at Completion (BAC) = 100,000 USD
Actual Cost (AC) = 60,000 USD
Planned Value (PV) = 50% of 100,000 USD = 50,000 USD
Earned Value (EV) = 40% of 100,000 USD = 40,000 USD
To determine the ETC, you need the EAC.
And, EAC = BAC / CPI
Hence, Cost Performance Index (CPI) = EV / AC = 40,000 / 60,000
= 0.67
Solution:
Therefore, Cost Performance Index (CPI) = 0.67
Now, Estimate at Completion (EAC) = BAC / CPI = 100,000 / 0.67 =
149,253 USD
Estimate at Completion (EAC) = 149,253 USD
Now, Estimate to Complete (ETC) = EAC – AC = 149,253 – 60,000 =
89,253 USD
Hence the Estimate to Complete (ETC) for this project is 89,253 USD.
ETC (Estimate to Complete)
Re-Estimate the remaining work from Bottom-Up will use
formula:

ETC = Re-Estimate
Exercise:
You have a project to build a government department’s building for
500,000 USD. You have spent 200,000 USD to date. However, you
realize that your cost estimation was flawed, and you need to re-
calculate your budget for the remaining part of the project. So, you
re-estimate the cost of the remaining work. The new estimate is:
125,000 USD for construction, 75,000 USD for plumbing, 150,000
USD for painting, and 50,000 USD for other expenditures. Calculate
the Estimate to Complete (ETC).
Solution:
BAC = 500,000 USD
AC = 200,000 USD
Construction Cost =125,000 USD
Plumbing Cost = 75,000 USD
Painting Cost =150,000 USD
Other expenditures =50,000 USD
You are using Bottom-Up Cost Estimation. You will calculate the cost of
each activity/work package, and then you will add them to get the final
figure.
Solution:
Estimate to Complete = Cost of construction + Cost of
plumbing + Cost of painting + Other expenditures
= 125,000 + 75,000 +150,000 + 50,000 = 400,000 USD

Hence, the Estimate to Complete is 400,000 USD.

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