Spm 4th Unit Numericals

8/12/2019 Spm 4th Unit Numericals

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How to calculate Planned Value (PV)

(TipPlanned Value is also known as Budgeted Cost of Work ScheduledBCWS)

So what is Planned Value? PV is the estimated value of the work to be completed by yourproject within a specific time period.

Planned Value is also used to calculate Schedule Variance (well be covering that in a laterpost).

How is PV calculated? Heres the formula.

Planned Value (PV) = Planned % Complete X BAC

Lets see an example.

Jenny is the project manager on a project to build a new smart-phone browser. The project is

expected to last 10 months. The estimated total cost is $2,300,000.

What is the PV after 5 months?Answer: $1,150,000

How did we calculate this?

Planned % Complete is the percentage of the project that is planned to be complete.

In this case 5 months / 10 months = 0.5 (or 50% in other words).

So in this case, BAC = $2,300,000.With these figures we can calculate the PV.

PV = 0.5 x $2,300,000 = $1,150,000


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How to calculate Budget At Completion

(BAC)

So what is the BAC? As the name suggests, its how much you estimate the project will costat its completion.

The important thing to note is that the BAC is an estimate and is determined at the start

of the project.

This is not a calculation that you perform at the end of the project to figure out how much

you spent. If you want that figure, youd calculate Actual Cost (AC) at the end of the project.

How is BAC calculated? Usually for the PMP exam you wont need to calculate it. You willnormally be given the BAC in the question as part of figuring out another value.

For example, the question may want you to calculate the Variance At Completion. To do that,the BAC could be included in the question text.

However, if you do need to calculate the BAC heres how to do it.

Simply put, BAC is estimated by calculating how much money you believe you will needto complete the project.


Dave is the project manager on a project to install a new privacy fence around a five-starhotel.

The materials for the fence are estimated to cost $230,000. The labour is estimated at

$95,000. Miscellaneous costs are estimated at $15,000. And training is estimated at $3,000.Ongoing maintenance is estimated at $20,000.

In most cases a project manager would estimate the BAC at $343,000.

Which was calculated by adding $230,000 + $95,000 + $15,000 + $3,000.

The $20,000 of ongoing maintenance was not included as this is not part of the project toinstall the fence.


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How to calculate Actual Cost (AC)

So what is Actual Cost? Actual Cost (AC) is the actualcosts incurred by the project as of acertain point in time.

TipAC is also known as Actual Cost of Work Performed (ACWP).

Most commonly, AC is used to answer the question How much have we spent on the

project as of today?

Now that we know what it is, how do we calculate it?

You add up all the costs incurred by the project as of the point in time you are measuring.Most commonly this will mean that you add up all the costs incurred by the project as oftoday.


Tom is working on a project to install a new wi-fi network on the campus of a Palo Alto

smartphone manufacturer.

The project has a budget of $2.5 million and involves numerous contractors.

The expected value of the work (eg the wi-fi network) is $3.6 million dollars.

Tom has budgeted $1.2 million for wi-fi equipment, $1.1 million for installation costs,

employee laptop updates and training. He has also budgeted $200,000 for miscellaneouscosts.

The project team has just begun installing the equipment neededstarting with the wi-fi

antennas.

The project has spent $400,000 on wi-fi equipment, $50,000 on site surveys, $3,000 on teammeetings and team building sessions. Tom will be signing a contract for an extra ten wi-fi

antennas tomorrow for $30,000.

What is the current AC of the project?

Answer: $453,000.

How did we calculate this? $400,000 + $50,000 + $3,000 = $453,000.


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Maybe you are wondering why the AC isnt $483,000?

Read the text again. The contract for the extra ten wi-fi antennas is being signed tomorrow.

Which means it isnt an actual cost today. Today its an expected cost of $30,000.

So the $30,000 is not included in the AC calculation.


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How to Calculate Earned Value (EV)

TipEV is also known as Budgeted Cost of Work Performed (BCWP).

So what is Earned Value? EV is the estimated value of the work completed by your project as

of today.

So if the project stopped today, the EV would show the value that it has produced.

Understanding Earned Value is vital as its used in many of the other calculations that youwill need to know to master the PMP exam.

Its used to calculate:

Cost Variance (CV) Schedule Variance (SV) Cost Performance Index (CPI) Schedule Performance Index (SPI) To Complete Performance Index (TCPI)

How is EV calculated? Heres the formula.

Earned Value (EV) = Percent Complete * Budget At Completion



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Rohit is the project manager on a project to build a new cricket stadium in Mumbai,

India.After six months of work, the project is 27% complete. The estimated total cost of theproject is expected to be $50,000.000.

What is the EV?

Answer: $13,500,000


The Percent Complete = 27%.

So in this case, BAC = $50,000,000.

With these figures we can calculate the EV.

EV = 27% * $50,000,000 = $13,500,000


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How to Calculate Cost Variance (CV)

As the name suggests the CV calculation shows if there are any variations in the costs of theproject.

In other words, CV shows if your project is under or over budget .

CV is calculated using this formula:

Cost Variance (CV) = Earned ValueActual Cost

TipEarned Value is also known as Budgeted Cost of Work Performed (BCWP). AndActual Cost is also known as Actual Cost of Work Performed (ACWP).

So you may see the formula written as:

CV = BCWPACCV = BCWP - ACWPCV = EVACWP

So what does the CV that youve calculated mean?

A negative number is over budget. And a positive number is under budget.

An important point to remember is that on a perfect project, the CV is 0. This because a CVof 0 is neither over budget or under budget.

Most people understand instinctively why being over budget is bad. But why is being underbudget bad?
http://testeagle.com/blog/2012/02/how-to-calculate-cost-variance-cv-for-the-pmp-exam/http://testeagle.com/blog/2012/02/how-to-calculate-cost-variance-cv-for-the-pmp-exam/


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It could be a sign that the team has missed a required piece of work.

Basically, anytime the CV isnt 0 you need to investigate.

Example

Chris is the project manager on a project to build a new photo sharing app for the iPhone

and Android smart phones.The value earned by the project is $2,300,000. The costs incurred by the project are

$2,560,000.

What is the CV? And what does it tell us about the project?

AnswerThe CV is -$260,000. And this tells us that the project is over budget.


Well we know that CV = Earned ValueActual Cost.

The Earned Value is $2,300,000 (value earned by the project is another way of sayingEarned Value).

The Actual Costs are $2,560,000 (The projects costs are the costs incurred by the project).

Knowing this we can calculate:

CV = $2,300,000$2,560,000 = -$260,000


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How to Calculate Schedule Variance (SV)

Schedule Variance shows if there are any variations in the schedule of the project.

In other words, Schedule Variance shows if your project is ahead or behind schedule.

Schedule Variance Formula

Schedule Variance is calculated as follows:

Schedule Variance = Earned ValuePlanned Value

TipEarned Value is also known as Budgeted Cost of Work Performed (BCWP). AndPlanned Value is also known as Budgeted Cost of Work Scheduled (BCWS).


Schedule Variance = BCWP - BCWS

What does Schedule Variance mean?

The result of the Schedule Variance formula is a number. So what does this number mean?

A value of less than zero means the project is behind schedule.And a value greater than zero means the project is ahead of schedule.

(A value of zero means the project is exactly on schedule but this is very rare).
http://testeagle.com/blog/2012/02/calculate-schedule-variance/http://testeagle.com/blog/2012/02/calculate-schedule-variance/


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Tipmost people understand that being behind schedule is bad.

But did you know that being ahead of schedule can be bad as well?

For example, if a team works overtime and gets a task finished early this may mean thatthey sit around idle waiting for the next task to start.

Basically if aproject has a Schedule Variance that isnt zero you need to investigate whyand mitigate the risks.

Example of Calculating Schedule Variance


Doug is the project manager for a software company based in San Francisco. He is working

on a project to build a new inventory management system. The project has been underway forsix months. Doug has estimated that the project should have a planned value of $825,000 at

this point. The value earned by the project is $815,000.

What is the Schedule Variance? And what does this tell us about Dougs project?


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Answer: The Schedule Variance is -10,000. And this tells us that Dougs project is behindschedule.


Well we know that Schedule Variance = Earned ValuePlanned.

The Earned Value is $815,000.

Tipthe PMP exam may use slightly different descriptions to describe the input to aformula. This is to test your knowledge and make sure you understand what you are

calculating. EG value earned by the project is another way of saying Earned Value.

The Planned Value is $825,000.


Schedule Variance = $815,000$825,000 = -$10,000


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Example of Calculating Cost Performance Index


Brian is the project manager for a food manufacturing company based in Dallas, Texas. Heis working on a project to implement a new inventory management system. The estimated

value of the work completed by the project so far is $405,000. The total cost of the project is

expected to be $650,000. So far the project has cost $325,000.

What is the Cost Performance Index? And what does this tell us about Brians project?

Answer: The Cost Performance Index is 1.25. This means that for every $1 spent on theproject $1.25 of value is being produced.


Well we know that Cost Performance Index = Earned Value / Actual Cost.


Tipthe PMP exam may use slightly different descriptions to describe the inputs to aformula. This is to test your knowledge and make sure you understand what you arecalculating. EG estimated value of the work completed by the project so far is another wayof saying Earned Value.

The Actual Cost is $325,000.


Cost Performance Index= $405,000 / $325,000 = 1.25


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Example of Calculating Schedule Performance Index


Frank is the project manager for a software development company based in London. He is

managing a project to create a new mobile photo sharing app. The estimated value of thework completed by the project so far is $116,000. The planned value of the project is

$125,000.

What is the Schedule Performance Index? And what does this tell us about Franks project?

Answer: The Schedule Performance Index is 0.93. This means that Franks project is behindschedule.


Well we know that Schedule Performance Index = Earned Value / Planned Value.


Tipthe PMP exam may use slightly different descriptions to describe the input to aformula. This is to test your knowledge and make sure you understand what you arecalculating. EG estimated value of the work completed by the project so far is another wayof saying Earned Value.

The Planned Value is $125,000.


Schedule Performance Index= $116,000 / $125,000 = 0.93
http://testeagle.com/blog/wp-content/uploads/2012/03/SPI_chart.png


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How to Calculate Estimate At Completion

(EAC)

Estimate At Completion is used to predict the cost of the project at its completion.

In other words,the Estimate At Completion predicts the total cost of your project.

Estimate At Completion Formula

The Estimate At Completion formula is more complicated than most.

This is because there are actually four formulas.

Each formula tackles a different scenario that you may face on your project.

Scenario 1 Original estimate is no longer valid

You might discover that the original estimates for your project were fundamentally floored.

Or circumstances may have changed so much that the estimates you have are no longer valid.

In this case you would use the following formula:

Estimate At Completion = Actual Cost + Bottom-up Estimate To Complete

You can read our previous blog post about how to calculateActual Cost.

You might be wondering how you calculate the Bottom-up Estimate To Complete. Accordingto the PMBOK there is no formula.

Instead this is a prediction by the team of how much work is left to complete the project.

Tipyou may see the formula written as:

EAC = AC = Bottom-up ETC

Scenario 2 CPI will stay the same for the rest of the project

This scenario assumes that theCost Performance Index (CPI)experienced by the project willstay the same until the project is completed.
http://testeagle.com/blog/2012/03/how-to-calculate-estimate-at-completion-eac-for-the-pmp-exam/http://testeagle.com/blog/2012/03/how-to-calculate-estimate-at-completion-eac-for-the-pmp-exam/http://testeagle.com/blog/2012/01/how-to-calculate-actual-cost-for-pmp-exam/http://testeagle.com/blog/2012/01/how-to-calculate-actual-cost-for-pmp-exam/http://testeagle.com/blog/2012/01/how-to-calculate-actual-cost-for-pmp-exam/http://testeagle.com/blog/2012/03/how-to-calculate-cost-performance-index-for-the-pmp-exam/http://testeagle.com/blog/2012/03/how-to-calculate-cost-performance-index-for-the-pmp-exam/http://testeagle.com/blog/2012/03/how-to-calculate-cost-performance-index-for-the-pmp-exam/http://testeagle.com/blog/2012/03/how-to-calculate-cost-performance-index-for-the-pmp-exam/http://testeagle.com/blog/2012/01/how-to-calculate-actual-cost-for-pmp-exam/http://testeagle.com/blog/2012/03/how-to-calculate-estimate-at-completion-eac-for-the-pmp-exam/http://testeagle.com/blog/2012/03/how-to-calculate-estimate-at-completion-eac-for-the-pmp-exam/


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In this case you would use the following formula:

Estimate At Completion = Budget At Completion / Cost Performance Index

Read our posts aboutBudget At CompletionandCost Performance Indexif you need moreinformation about them.

Scenario 3 Current CPI is abnormal

In this case you need to calculate the Estimate At Completion but discover that your currentCPI is abnormal.

Why could the current CPI be abnormal? An example might be that you have estimated$50,000 to install a new generator.During the installation the generator is accidentally damaged and $5,000 has is spent onrepairs.

You have three more generators to install but you are confident that the accident wonthappen again as you have a risk mitigation plan (and you yelled at the people who caused thedamage!).

In this case it is appropriate to believe that your original estimates for installing thegenerators are still good.

Its also appropriate that the current CPI (which reflects the accidental damage) does notreflect how the project will progress.

In this case you should use a formula that ignores the CPI. The formula is:

Estimate At Completion = Actual Cost + (Budget At CompletionEarned Value)

You can read our previous blog post about how to calculateActual Cost,Budget AtCompletionandEarned Value.

Scenario 4 Project has to meet a deadline

Weve all worked on projects where the boss or a customer demand that a project bedelivered by a certain date.To calculate the Estimate At Completion for such a project you need to take into account the

Schedule Performance IndexandCost Performance Index.
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The formula is:

Actual Cost + [(Budget At Completion - Earned Value) /

(Cost Performance Index X Schedule Performance Index)]

What does EAC mean?

After calculating the EAC youll have an amount in dollars, pounds, yen or whatevercurrency your project is using.

But what does this amount mean? The EAC predicts what you expect the total cost of theproject to be.

Example of Calculating Estimate At Completion

Lets see some examples.

Example 1

Frank is the project manager for a software development company based in London. He ismanaging a project to create a new recipe sharing social network.

The project recently hit problems when the development team discovered that the software

architecture they were going to use is not valid. After discussions the team has decided on anew approach.

The PMO has asked for a new estimate of the total cost of the project.

The project has already spent $210,000 and has a CPI of 1.1.

After talking with the teams on the project, he determined that the remaining costs aredevelopment$50,000, quality assurance$30,000 and documentation$10,000.

What is the Estimate At Completion?

Answer: The Estimate At Completion is $300,000.



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In this example, the original estimates are bad because they are based on a flawedarchitecture approach.

Therefore, we will calculate Estimate At Completion using the formula from scenario one:

Estimate At Completion = Actual Cost + Bottom-up Estimate To Complete

Knowing this we can calculate: $210,000 + ($50,000 + $30,000 + $10,000) = $300,000

Example 2

Tim is the project manager for an undersea cable company based in Cyprus. He is managinga project to lay an optical fiber cable from Naples to Palermo.

The PMO has asked for an updated estimate of the total cost of the project.

At the start of the project, the costs of the project were estimated as $1,600,000 for designand permitting, $18,750,000 for optical fiber costs, $4,500,000 for installation and

$2,300,000 for testing of the cable.

The Cost Performance Index of the project is currently 1.08.


Answer: The Estimate At Completion is $25,138,888.89


In this example, the CPI is not considered abnormal.

Therefore, a formula using CPI can be used.

So we will calculate Estimate At Completion using the formula from scenario two:

Estimate At Completion = Budget At Completion / Cost Performance Index

Knowing this we can calculate: ($1,600,000 + $18,750,000 + $4,500,000 + $2,300,000) /1.08 = $25,138,888.89


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Example 3

Gill is the project manager for a software company based in New York. She is managing aproject to create a new accounting software package.

During construction, the team realized that mistakes were made while collectingrequirements.

The mistake has now been fixed and a risk mitigation plan put in place.

During a review of the project, the PMO has asked for an updated estimate of the total costof the project.

At the start of the project, the costs of the project were estimated as $200,000 for design,

$300,000 for development, $200,000 for quality assurance.

The project has spent $400,000 so far. The value of the work completed is $500,000.


Answer: The Estimate At Completion is $600,000


In this example, the CPI is considered abnormal.

So we will calculate Estimate At Completion using the formula from scenario three:

Estimate At Completion = Actual Cost + (Budget At Completion Earned Value)

Knowing this we can calculate: $400,000 + ($700,000$500,000) = $600,000

Example 4

Rajesh is working on a project to create a new inventory management system for a foodmanufacturer in Sheffield, England.

The CEO has told the shareholders that the new system will be in place in six months,without discussing this first with the PMO.

At the start of the project, the costs of the project were estimated as $150,000 for design,

$700,000 for development, $225,000 for quality assurance.


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The project has spent $450,000 so far. The value of the work completed is $375,000. The CPI

for the project is 0.83 (CPI = $375,000 / $450,000) and the SPI is 0.8.


Answer: The Estimate At Completion is $1,510,606.06


In this example, the project has to meet a deadline.

So we will calculate Estimate At Completion using the formula from scenario three:

Estimate At Completion = Actual Cost + [(Budget At Completion - Earned Value) / (CostPerformance Index X Schedule Performance Index)]Knowing this we can calculate:

= $450,000 + [($1,075,000 - $375,000) / (0.83 X 0.8)]

= $450,000 + [$700,000 / 0.66]

= $450,000 + $1,060,606.06

= $1,510,606.06


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How to Calculate Estimate To Complete

(ETC)

Estimate To Complete is a prediction of how much more money the project will cost to

complete.

Estimate To Complete Formula

The Estimate To Complete is calculated as follows:

Estimate To Complete = Estimate At CompletionActual Cost

TipAC is also known as Actual Cost of Work Performed (ACWP).


Estimate To Complete = Estimate At CompletionActual Cost of Work PerformedEstimate To Complete = EACACWP

What does ETC mean?

The result of the Estimate To Complete formula is a dollar amount. (or rupees, pounds etcyou get the point) So what does this amount represent?

Estimate To Complete tells you and the PMO (which may be more important), how muchcash you need to finish the project.

This information is crucial when trying to determine the future of a project.

For example, imagine that the company you are working for is having to rationalise its budgetby cutting projects.

You are working on a large project whose Actual Cost is $2.3 million. The PMO could sayThis project has cost us $2.3 million and isnt even finished yet. Lets cut the project its

bound to save us money.

But then you run the numbers and calculate that the Estimate To Complete is $20,000. So yourespond by saying Hey but we only need $20,000 to finish the project. And the EarnedValue of the project is $3.4 million. So cutting the project makes no sense.
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The PMO agree, the project is saved and everyone loves you! (Well you get the idea)

Example of Calculating Estimate To Complete


Joe is the project manager for a software development company based in Vancouver. He ismanaging a project to create a new sports news app. So far the project has spent $430,000.

The predicted total cost of the project is $650,000.

What is the Estimate To Complete?

Answer: The Estimate To Complete is $220,000.


Well we know that Estimate To Complete = Estimate At CompletionActual Cost.

The Estimate At Completion is $650,000.

Tipthe PMP exam may use slightly different descriptions to describe the input to a

formula. This is to test your knowledge and make sure you understand what you arecalculating. EG predicted total cost of the project is is another way of saying Estimate AtCompletion.

The Actual Cost is $430,000. (the project has spent is another way of saying Actual Cost).


Estimate To Complete = $650,000$430,000 = $220,000


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How to Calculate To-Complete

Performance Index (TCPI)

TCPI is an estimate of the performance needed to achieve a goal.

To-Complete Performance Index Formula

As withEAC,there is more than one formula for TCPI.

One formula is based on the BAC; the other is based on EAC.

Scenario 1 BAC is valid

We know thatBACis an estimate of the project cost that you created at the start of theproject.

If this estimate is still valid, use this formula:

(Budget At CompletionEarned Value) / (Budget At CompletionActual Cost)

How do you know if the BAC is still valid? Remember that the BAC is estimated at the startof the project based on certain assumptions.

If any of those assumptions arent valid anymore, dont use this formula.

For example, one of those assumptions for the tablet project was probably that you need xpeople working x hours a day to finish the project on time. (EG I need 200 people working 6hours per day to finish this project in four months).

If the project now has to be complete in two months, then you will probably need morepeople or to work longer hours. (Actually it will most likely be both)

So in this case the BAC is no longer valid and this formula should not be used.

Scenario 2 BAC is no longer valid

If the BAC is invalid, use this formula:

(Budget At CompletionEarned Value) / (Estimate At CompletionActual Cost)
http://testeagle.com/blog/2013/03/how-to-calculate-to-complete-performance-index-tcpi-for-the-pmp-exam/http://testeagle.com/blog/2013/03/how-to-calculate-to-complete-performance-index-tcpi-for-the-pmp-exam/http://testeagle.com/blog/2012/03/how-to-calculate-estimate-at-completion-eac-for-the-pmp-exam/http://testeagle.com/blog/2012/03/how-to-calculate-estimate-at-completion-eac-for-the-pmp-exam/http://testeagle.com/blog/2012/03/how-to-calculate-estimate-at-completion-eac-for-the-pmp-exam/http://testeagle.com/blog/2012/01/how-to-calculate-budget-at-completion-bac-for-the-pmp-exam/http://testeagle.com/blog/2012/01/how-to-calculate-budget-at-completion-bac-for-the-pmp-exam/http://testeagle.com/blog/2012/01/how-to-calculate-budget-at-completion-bac-for-the-pmp-exam/http://testeagle.com/blog/2012/01/how-to-calculate-budget-at-completion-bac-for-the-pmp-exam/http://testeagle.com/blog/2012/03/how-to-calculate-estimate-at-completion-eac-for-the-pmp-exam/http://testeagle.com/blog/2013/03/how-to-calculate-to-complete-performance-index-tcpi-for-the-pmp-exam/http://testeagle.com/blog/2013/03/how-to-calculate-to-complete-performance-index-tcpi-for-the-pmp-exam/


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What does TCPI mean?

Imagine you are the driver of a freight train 5506. You are due in Boston by 4:00pm.

It is now 2:40pm and you have 80 miles to go.

Your TCPI is the speed you need to squeeze out of 5506 to arrive in Boston by 4:00pm.

Example of Calculating To-Complete Performance Index

Scenario 1 BAC is valid

John is the project manager on a project to install new light fixtures in a hotel in Houston.The hotel is currently closed and the light fixtures are being replaced as part of a

refurbishment. The project is estimated to last for six months.

The project is due to be completed in two months. At the start of the project, John estimatedthat the project would cost $120,000 to complete. The costs incurred by the project so far are

$80,000. John has also estimated that the value of the work completed so far is $85,000.

At a recent meeting with the stakeholder, he was informed that the hotel will be opening

ahead of schedule and that the project needs to be completed in one month.

What is the To-Complete Performance Index?

Answer: The To-Complete Performance Index is 0.875.


In this example, the BAC is $120,000. The EV is $85,000 and the AC is $80,000.

The BAC can be considered valid.

Why? The BAC was estimated to be $120,000. The project is two thirds complete (fourmonths work has been completed on a six month project).

The AC is $80,000 which is exactly what you would expect two thirds of the way through theproject.

So we will calculate the TCPI using the formula from Scenario 1:

To-Complete Performance Index = (Budget At CompletionEarned Value) / (Budget AtCompletionActual Cost)

To-Complete Performance Index = ($120,000$85,000) / ($120,000$80,000)


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To-Complete Performance Index = $35,000 / $40,000

To-Complete Performance Index = 0.875

Scenario 2 BAC is no longer valid

Greg is the project manager on a project to create a new mobile sharing app. The project isdue to go live in twelve months.

The project is due to be completed in four months. At the start of the project, Greg estimated

that the project would cost $2,400,000 to complete. The costs incurred by the project so farare $2,100,000. John has also estimated that the value of the work completed so far is

$1,200,000.

At a recent meeting with the stakeholder, he was informed that the project must now go livein two months. After the meeting John estimated that the total project will cost $2,700,000.

What is the To-Complete Performance Index?

Answer: The To-Complete Performance Index is 2.


In this example, the BAC is $2,400,000. The EV is $1,200,000 and the Actual Costs are$2,100,000.

The BAC cannot be considered valid. Why? The BAC was estimated to be $2,400,000. Theproject is three quarters complete (eight months work has been completed on a twelve monthproject).

So you would expect the AC to be $1,600,000. However the AC is $2,100,000 adiscrepancy of $500,000.

So we will calculate the TCPI using the formula from Scenario 2:

To-Complete Performance Index = (Budget At CompletionEarned Value) / (Estimate AtCompletionActual Cost)

To-Complete Performance Index = ($2,400,000$1,200,000) / ($2,700,000$2,100,000)

To-Complete Performance Index = $1,200,000 / $600,000

To-Complete Performance Index = 2


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Spm 4th Unit Numericals

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