In the previous seven blog posts, I tried to cover several hard concepts in the project cost management (e.g. Earned Value Management, Forecasting, and TCPI) that many PMP aspirants find difficult to understand. These seven blogs are in a particular sequence, and I request you to follow them in same sequence to get the full benefit of it.
Here, I will give you short brief of each post to summarize once again. Please note that, I tried to cover each concept with a detailed description; however, I intentionally avoided two formulas used in the project forecasting.
Including those two formulas may confuse many aspirants and consequently they may decide to stay away from this topic, which I don’t want to happen. In the future, I’ll try to cover those two cases as well.
Okay, let’s us get started.
Earned Value Management (EVM)
The Earned Value Management (EVM) is a technique which helps the project management team to assess and measure the project performance and progress.
The Earned Value Management has three basic elements: Earned Value (EV), Planned Value (PV), and Actual Cost (AC).
Earned Value (EV), Planned Value (PV) and Actual Cost (AC)
These are the three basic elements of Earned Value Management.
- Earned Value (EV): It is the value of work completed till date.
- Planned Value (PV): It is the authorized value of work that has to be completed in a given time period, as per the schedule.
- Actual Cost (AC): It is the amount of money that you have spent till date.
Schedule Variance (SV) and Cost Variance (SV)
Schedule Variance (SV): It is the difference between the Earned Value and the Planned Value.
SV = EV – PV
- If SV is negative, you’re behind schedule.
- If SV is positive, you’re ahead of schedule.
Cost Variance (CV): It is the difference between the Earned Value, and the Actual Cost.
CV = EV – AC
- If CV is negative, you’re over budget.
- If CV is positive, you’re under budget.
Schedule Performance Index (SPI) and Cost Performance Index (CPI)
Schedule Performance Index (SPI): It is the ratio between the Earned Value and the Planned Value.
SPI = EV/PV
- If SPI is greater than one; you’ve completed more work than the planned work.
- If SPI is less than one; you’ve completed less work than the planned work.
Cost Performance Index (CPI): It is the ratio between the Earned Value and the Actual Cost.
CPI = EV/AC
- If CPI is less than one; you’re earning less than you’re spending.
- If CPI is greater than one; you’re earning more than you’re spending.
Estimate At Completion (EAC)
Estimate At Completion is the total amount of money that the project will cost you in the end.
EAC = BAC/CPI
Estimate To Complete (ETC)
Estimate To Complete is the expected amount of money that you will have to spend to complete the remaining work.
ETC = EAC – AC
To-Complete Performance Index (TCPI)
To-Complete Performance Index is the estimate of cost performance for the project to meet the project’s budget goal.
There are two formulas to calculate TCPI:
- If you’re under budget: TCPI = (BAC–EV)/(BAC–AC)
- If you’re over Budget : TCPI = (BAC–EV)/(EAC–AC)
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