Earned Value Management –Forecasting
This is in continuation with the article Earned Value Management –Analysis, where all the definition and formula for planned value, actual cost and earned value concept was discussed in detail.
Forecasting involves examining the actual project performance data to date and making predictions about future project performance based on this data. According to the PMBOK® Guide, forecasting methods fall into four different categories and each category has several types of forecasting methods.
- Time series methods: This forecasting method uses historical data to predict future performance. Earned value, moving average, extrapolation, trend estimation, linear prediction, and growth curve are some of the methods fall into this category.
- Causal/econometric methods: Causal methods are based on the ability to identify variables that may cause or influence the forecast. The methods included in this category are regression analysis, autoregressive moving average (ARMA), and econometrics.
- Judgmental methods: This category of forecasting uses opinions, intuitive judgments, and probability estimates to determine possible future results. Methods within this category include composite forecasts, the Delphi method, surveys, technology forecasting, scenario building, and forecast by analogy.
- Other methods Other types of forecasting methods include simulation (like Monte Carlo analysis), probabilistic forecasting, and ensemble forecasting
Earned Value Management (EVM)
It is project management techniques which can be applied to all projects in any industry.EVM develops and monitor 3 key dimensions for each work package and control account: Planned Value, Earned Value and Actual Cost.
|BAC||Budget At Completion||Total estimated budget of the project. This Value is fixed and Constant|
|EAC||Estimate At Completion||Current Estimate of the total project cost. This value keeps on changing|
|ETC||Estimate To Complete||From this point how much more the project would cost to complete|
|VAC||Variance At Completion||How much over or under budget the project would be at the time of completion. Difference between actual Budget and Planned Budget|
Estimate at Completion (EAC)
The formula for EAC varies from scenario to scenario
The basic formula is
EAC= AC + Bottom up ETC
Bottom up ETC is summation of costs of the remaining work based on the estimates from the team working on these activities.
The base formula is
EAC= AC + (BAC-EV)/ (CPI *SPI)
Assuming future performance will behave like past i.e. Typical
Put the value of CPI=EV/AC in base formula and put SPI=1
EAC=AC + (BAC-EV) / (EV/AC)
=AC (EV+BAC-EV) / EV
= BAC / (EV/AC)
=BAC / CPI
In a project if the previous calculations are not valid (atypical), remove the denominator (as both variances are atypical) the base formula, EAC will be
EAC= AC + (BAC-EV)
When cost performance is negative and schedule date must be met
EAC= AC + (BAC-EV)/ (CPI *SPI)
Estimate to Completion (ETC)
This value indicates how much more project will cost at this point.
Assuming future cost variance will behave like past i.e. Typical
ETC= (BAC –cum EV) /cum CPI
The formula to calculate Bottom up ETC is
ETC= EAC – AC
Assuming future cost variance are expected to be atypical, remove the denominator (as cost variance is atypical)
ETC= (BAC –cum EV)
* cum means cumulative
There is no need to memorize all the formula, just memorize the base formula; rest can be derived from it.
Some Question and Answers for better understanding
- You accept project costs to date and assume future cost variances to be atypical. Find EAC if
BAC=$82500, ETC=$30000, PV=$32500, AC=$20000, EV=$25000 and Cum CPI=1.25.
|Solution 1EAC=AC + BAC-EV=20000+82500-25000=$77,500||Solution 1EAC=BAC/CPI=82500/1.25=$66,000|
Out of these 2, first answer is correct because here use the formula of atypical variances
- You know that variances that have occurred on the project to date are not expected to continue. Find ETC if
BAC=42,500, PV=40,000, AC=25,000 and Cum EV=32,500.
|Solution 1ETC=BAC- cumEV=42500-32500=10,000||Solution 2ETC=BAC – cumEV/CPICPI=325/250 = 1.3ETC =(42500-32500)/1.3=7692.3|
Out of these 2, first answer is correct because here use the formula of atypical variances.
- In a project the following data was provided by one of your team leader, BAC=$500,000, PV=$325,000, AC=$275,000 and cum EV=$250,000, you are experiencing typical variances, find ETC.
|Solution 1ETC=BAC-cumEV/CPICPI=250/275= .9ETC =(500K-250K)/.9=277.7K||Solution 2ETC=BAC-cumEV/CPICPI=250/275ETC =(500K-250K)(250/275) =275K|
* cum means cumulative
Both the answers are correct, so if you don’t find any one option then look for the second one. In case you find both go with the second option.
- Your SVP has asked you to calculate the Estimate at Completion is going to be for very small project you are working on. You were given a budget of $3000, and to date you have spent $2000 but only completed $1000 worth of work.
|Solution 1EAC=AC + BAC-EV=2000 + 3000 – 1000=4000||Solution 2EAC=BAC/CPI (CPI=1000/2000)=3000/.5=6000|
You can quote both the answers with the scenario of typical and atypical variance depending on the project progress.
Variance at Completion (VAC)
How much over or under budget the project would be at the time of completion.
The formula for calculating VAC is
VAC= BAC – EAC
Questions & Answers
- The Delphi method, technology forecasting, and forecast by analogy are examples of what category of forecasting methods?
- A. Time series
- B. Judgmental
- C. Causal
- D. Econometric
Correct Answer: B. the Delphi method, technology forecasting, scenario building, and forecast by analogy are all in the judgmental methods category of forecasting.
- If the Estimate at completion (EAC) is $6500, Budget at completion is $5500 and Estimate to complete (ETC) is $1200, what is the variance at completion?
- A. -1000
- B. 1000
- C. 100
- D. -100
Correct Answer: A. VAC=BAC – EAC =5500 – 6500.
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