Mastering Earned Value Calcuations for PMP Exam - Part-4 (TCPI)

Note:

These all  articles are dedicated to my teachers, my seniors, colleagues, internet bloggers, online technical material, reference books from where I learned all these. There are chances that the material presented here is duplicated somewhere on the web. If anything is replicated anywhere, I sincerely give proper credits to the contributor.

In Part-3 of “Mastering the Earned Value Calculations for PMP Exam”, we have studied about the Project Estimations mostly EAC which keeps changing as the scenario changes.

Now, in Part-4 of we will study one very important index of project performance which is To Complete Performance Index (TCPI) which also changes with the scenario. We will master all the scenarios related to that.


To-Complete Performance Index (TCPI)

It is again an estimate which is calculated basically to know what performance is need to achieve the project goal. To-Complete Performance Index (TCPI) is an estimate of the performance needed to achieve a goal. It is clear from the name itself, To Complete Performance Index.

For example, if you are driving a car from New Delhi to Dehradun and you have a goal to reach Dehradun by 11:00 AM. Dehradun is 300 kms from New Delhi. You start at 6 AM and driving at 55 kms/hr and its 10:00AM  now.

So what does it mean you have to cover 80 kms in an hours now. So your TCPI will

Formulae for TCPI

Again there are more than one formulae for TCPI and it changes with the scenario. One formula is based on the BAC; the other is based on EAC.

But what actually TCPI means. Ideally it is ration of Work Remaining to the Funds remaining.

So in simple words you can write:

TCPI = Work Remaining / Funds Remaining.

It means if TCPI >1, it is not good for project because it shows either the fund remaining are less than the value of the work remaining or Work remaining is greater than the funds remaining (either way is same)

Can you guess how you can calculate the work remaining and funds remaining?

Work remaining is the difference of total budget and what the work you have achieved, right?

So

Work Remaining = BAC – EV (makes sense?)

And what are the funds remaining?

This is a question to think. It can change based on the scenario.

Well,

1. If you fundamentals estimates are not flawed yet (original budget is still valid), then it will be the difference of Original Budget and Actual Costs.
   
   
   
   
   Funds Remaining = BAC – AC
   
   
    
   
2. If you need to calculate a new budget (EAC), then it will the difference of Estimate at Completion and Actual Costs.
   
   
   
   
   Funds Remaining = EAC – AC

                      So the formula of TCPI will be changed accordingly

            


Scenario 1 – Original Budget (BAC) is valid

We know that BAC is an estimate of the project cost that you created at the start of the project. If this estimate is still valid, use this formula:

To-Complete Performance Index = Work Remaining / Funds Remaining.

From the discussion above

TCPI (When BAC is valid) = BAC – EV / BAC – AC

Example: The project is due to be completed in two months. At the start of the project, it was estimated that the project would cost $100,000 to complete. Till date project has spent $60,000. As per the estimation project has completed the work of worth $70,000. There is nothing bad with the project and it is estimated the project will be completed on time and on budget. What is the To-Complete Performance Index?

Answer: Now if we read the question carefully, project will be completed on budget and there is no new estimate (EAC) needed. We can safely assume that BAC is still valid.

Now see the data presented in question:

BAC = $100000, AC = $60000, EV = $70000

Since the BAC is still valid

TCPI = BAC – EV / BAC – AC

TCPI = (100000-70000) / (100000-60000)

= 30000/40000 = 0.75

TCPI < 1, so it is good for project.

Scenario 2 – Original Budget (BAC) is flawed and you need a new estimation (EAC)

We know that BAC is an estimate of the project cost that you created at the start of the project. If this estimate is not valid now, you need a new estimate and that is your EAC. Then, use this formula:

To-Complete Performance Index = Work Remaining / Funds Remaining.

                 From the discussion above

TCPI (When BAC is not valid anymore) = BAC – EV / EAC – AC

Let’s modify the above example and calculate the TCPI.

Example: The project is due to be completed in two months. At the start of the project, it was estimated that the project would cost $100,000 to complete. Till date project has spent $80,000. As per the estimation project has completed the work of worth $40,000. There has been a major quality issue in the project and new estimated are needed. Now it is estimated that new costs will be 130,000 at the completion of the project. What is the To-Complete Performance Index?

Answer: It is very clear from the question that original budget is flawed and no more valid. New costs are estimated at project completion (EAC). Since BAC is flawed, we will not use this in our calculation. BAC is just presented to create confusion or you can say, to make the question more complete.

Now see the data presented in question:

BAC = $100000, EAC = $130000, AC = $80000, EV = $40000

Since the BAC is no more valid and EAC is in place now

TCPI = BAC – EV / EAC – AC

= (100000-40000)/(130000-80000) = 60000/50000 = 1.2

TCPI > 1, so it is not good for project.

 Note: Please note that “Work Remaining” is always BAC-EV doesn’t matter what the scenario is. Because work remaining is always measured from Original Budget and Earned value (Check other parts of “Mastering Earned Value Calculations”)

Mastering Earned Value Calcuations for PMP Exam - Part-3 (EAC, ETC and VAC)

In Part-2 of “Mastering the Earned Value Calculations for PMP Exam”, we have studied about the Project Performance calculations like Cost Variance (CV), Schedule Variance (SV), Cost Performance Index (CPI) and Schedule Performance Index (SPI). In this part, we will master the calculations related to Project Forecast mostly Estimate at Completion (EAC). There are other things to be known like Budget at Completion (BAC), Variance at Completion (VAC).

The important thing to be noted here is EAC formula change with the difference scenarios. It means, if the exam is asking to calculate any of the above, we need to check for scenario given. So results of the calculation will be different based on the scenario or situation given. So let’s move forward now.

 

Estimate at Completion (EAC)

 

It is very much clear from the term itself that it is the estimated cost when the project will complete.

So, what is the big deal?

 

There is one more term BAC (Budget at Completion). BAC you decide at the start of the project. It is basically the planned budget (costs)

But the actual costs changes when the project completes. You need to keep estimating these cost throughout the project and that is basically EAC i.e. the estimated cost (you need to estimate in advance), when the project will complete.

 

Come on… I cannot explain better than this.

 

Now we need to learn the different scenarios and corresponding EAC.

1. Original Estimate is fundamentally flawed i.e. Original estimate is no more valid:
    
   There is actually no formula to calculate EAC in this case. You just need a little understanding.
   Let’s say you need an estimate at completion today. So you have already done some work and you have some left. Means you know the AC for the work you have done. So what will be the Estimated Cost at Completion.
    
   It should be the Actual Cost of the work + Remaining Cost.
    
   Now you don’t know about the remaining cost because your original estimates are no more valid, so you need to estimate this remaining cost. The best way to estimate is Bottom up Estimation (you remember or forgot). So you need to estimate the cost of remaining work that is also called Estimate to Complete (How much you need now to complete the remaining work)
    
   So what will be formula?
    
   Estimate at Completion = Actual Costs of work done + Remaining cost estimated by Bottom-up technique.
    
   So
    
                     EAC = AC + Bottom Up ETC
    
   If you understand the above theory, nobody can stop you remembering the fundamentals behind this formula.
   We didn’t memorize here, we just understood the things, right?
    
   Example: Shampi is the project manager on a project for developing and E-Commerce portal. The project is expected to last 12 months. During the middle of the project, she and her team has faced some issue with the project and they decided not to go with the current approach. They need to redesign the portal. The total Budget for the project is $200000 and the current CPI is 1.2.  Till date she has spent $90000. With the new approach she estimated that she will need $40000 for design, $30000 for testing and $80000 to pay her team? What will be the Estimate at Completion for this project?
   Answer: Did you notice, original estimates are flawed in the example. AC is given and data is there to estimate the cost to complete (ETC).
    
   So
                     EAC = AC + Bottom Up ETC
    
                     EAC = 90000 + 40000+30000+80000 = $250,000
    
   I hope it was easy.
    
2. Cost Performance of the project will be same throughout the project i.e. CPI will stay same:
    

You know about CPI.

Just take an example: If it is > 1 project is under budget what does it mean? It means your Estimate at Completion should be less than your original budget, right?

So how is this possible mathematically?

Means BAC is being divided by something greater than one (>1) so that we can have EAC < BAC and in our case what is greater than 1. It is CPI.

So how we can calculate our EAC

                  EAC = BAC / CPI  (makes sense or not)

Let’s modify the above example to match the case here.

Example: Shampi is the project manager on a project for developing and E-Commerce portal. The project is expected to last 12 months. Management has asked her to provide the EAC for the project. Current CPI is 1.2.  In start of the project she estimated that she will need $40000 for design, $30000 for testing and $80000 to pay her team? What will be the Estimate at Completion (EAC) for this project?

Answer: Did you notice, there is no symptom or statement in the question that original estimates were flawed i.e. CPI will not vary at all. So, we will calculate the EAC with the help of CPI.

 Calculate first, what the budget was estimated.

BAC = 40000+30000+80000 = 150000

CPI = 1.2

So EAC = 150000/1.2 = $125000

So see according to the CPI project is doing well and under budget and if it remains same ideally the project should be completed under budget and that is happening here. Why because EAC is less than the actual budget.

c. Current CPI is no more valid or is abnormal or flawed:

What does it mean? Say, you have some damaged in project and you used some money to fix that damage. But there is no proof that your original estimates are flawed. Means your original estimates are still good, but the CPI you calculated is abnormal, why, due to the cost in fixing the damage being part of CPI, but in future there will no such damage.

So how you will calculate the EAC now? One this is for sure, you have to ignore the CPI because it is not normal.

Of course, you will do something like this.

 EAC = Actual Cost + ETC

But now ETC is not Bottom Up ETC as in Case a) because your original estimates are still valid. So how you will calculate this? You know two things now

1. AC and ii) BAC (Budget planned for project

So what is remaining budget BAC-AC…. No, No..

Assuming this means, everything is going well. But this is not the case.

We have one more parameter which can help here. You got it right.. It is Earned Value (EV)

So what is the cost remaining?

Budget – Earned Value, right (What was the original budget and you need to subtract what we have earned till now in terms of dollar value)

 

So,

                  EAC = AC + (BAC – EV)

I hope, after that much of explanation, it should not be difficult for you.

Let’s modify the above example again:

Example: Shampi is the project manager on a project for developing and E-Commerce portal. The project is expected to last 12 months. Management has asked her to provide the EAC for the project. Current CPI is 1.2. But team has realized that they have made some mistakes in past which need to be fixed and they cannot execute the project in future with the same great CPI.  In start of the project she estimated that she will need $40000 for design, $30000 for testing and $80000 to pay her team? It has been 3 months to the project and team has completed a work of worth $20000 by spending $15000. What will be the Estimate at Completion (EAC) for this project?

Answer: Did you notice that team has to fix some mistakes and their current CPI will not be maintained. So we will not use CPI here. So we will see what project has earned. It is very clear from the above question that Earned Value (EV) is $20000. We also know the original budget (BAC) which is 40000+30000+80000 = 150000. So what is the deal? Actual Cost is also given.

                  EAC = AC + (BAC – EV) = 15000 + (150000-20000)= 145000.

d. A project deadline is to be met

Deadline is to be met. What does it mean? It means we need to consider something related to schedule. And what is that which represents the schedule performance, SPI, right? And since we are talking about cost, we also need to consider CPI.

So the formula used in Case c) will be changed to (by considering SPI and CPI)

 

EAC = AC + [(BAC – EV)/(SPI x CPI)]

Too many similar examples, let’s take a new one here.

Example: Balaji is working on a project for developing Simulators for power plants in Pittsburgh, US. It was informed to Balaji that this project is to be delivered in 8 months. At the start of the project, the costs of the project were estimated as $150,000 for Engineering, $700,000 for Testing, $150,000 for various Quality activities. The project has spent $150,000 so far. As of today, CPI for the project is 0.75 and the SPI is 0.8. The value of the work completed is $300,000. What is the Estimate at Completion?

Answer: You may need to note here that a deadline has been given. So we need to consider both SPI and CPI and these are given in the question. EV ($300000) is also given. We can calculate the original budget BAC also.

Let’s solve this.

BAC = 150000+700000+150000 = $1000000

AC = $150000, EV = $300000, CPI = 0.75, SPI=0.8

We know now

EAC = AC + [(BAC – EV)/(SPI x CPI)]

                  =150000 + [(1000000-300000)/(0.8x0.75)

                  =150000+ (700000/0.6) = 150000+1166666.67 = 1366666.67

So EAC > BAC it means when the project will be completed, it will be overbudget.

 

Variance at Completion (VAC)

Here no need for big calculation. It represents what will be the cost variance when the project will be completed. What did you understand? It is the difference of what was actually planned and what will be the final estimated cost. Yes, you got it right.

VAC = BAC – EAC.

Negative VAC is not good as in that case EAC is greater than BAC which means project will go over budget as of today.

In the above example VAC is 1366666.67 – 1000000 = $366666.67

 

This concludes the Part-3 of “Mastering the Earned Value Calculations for PMP Exam”, where we have studied about the Project Estimations mostly EAC which keeps changing as the scenario changes.

In Part-4 of we will study one very important index of project performance which is To Complete Performance Index (TCPI) which also changes with the scenario. We will master all the scenarios related to that. Hold on for a while and Chill…..

Mastering Earned Value Calcuations for PMP Exam - Part-2 (CV, SV, CPI and SPI)

Note:

These all  articles are dedicated to my teachers, my seniors, colleagues, internet bloggers, online technical material, reference books from where I learned all these. There are chances that the material presented here is duplicated somewhere on the web. If anything is replicated anywhere, I sincerely give proper credits to the contributor.

In Part-1 of “Mastering the Earned Value Calculations for PMP Exam”, we have studied about simple things like Actual Cost (AC), Planned Value (PV) and Earned Value (EV). Those were the very basic things and need to be understood well to move forward. In this part, we will master the calculations related to Project Performance i.e. Cost Variance (CV), Schedule Variance (SV), Cost Performance Index (CPI) and Schedule Performance Index (SPI).

 Cost Variance (CV)

It represents any variation in the cost of the project as of today (data date).

• If cost variance is positive, project is under budget.
• If cost variance is negative, project is over budget.
• If cost variance is zero, project is on budget.

The formula for Cost Variance (CV) is

                        CV = EV – AC

So, it shows you the difference between what was achieved and what we have spent. This clearly makes us understand that if we have spent (AC) more than we achieved (EV), then we are over budget and CV will be negative.

Let’s modify the previous example (no need to see anywhere, I have reproduced the complete question below) to make it easy.

Example: Shampi is the project manager on a project for developing and E-Commerce portal. The project is expected to last 12 months. The total Budget for the project is $200000. After 5 months projects has planned for 40% work to be completed. She was able to complete half of the project and spent $90000. What is the Cost Variance (CV)?

Answer: From the above examples of PV and EV we know that:

            PV = 80000

            EV = 100000

            AC = 90000

Before doing any calculation, just look at the data.

We have spent less Dollars what we have achieved. This means??? You got it right, project is under budget.

            CV = EV – AC = 100000-90000 = 10000 i.e. positive CV, Under budget.

 

Question: Can being under budget be bad for the project on a Data Date?

Answer: Yes, it can be. May be something was missed in the project which was planned and we didn’t do it and the project spent less. We need to investigate before coming to a conclusion.

Schedule Variance (SV)

It represents any variation in the Scheduled Value of the project as of today (data date).

• If schedule variance is positive, project is ahead of schedule.
• If schedule variance is negative, project is behind schedule.
• If schedule variance is zero, project is on schedule.

Warning: Please do not get confuse with the word Schedule. Schedule Variance will not calculate anything in terms of time. We are talking here about the values, so everything will be in Dollars (or Currency). It focuses on the value (amount) which was planned during a period not the period itself.

The formula for Schedule Variance (SV) is

                        SV = EV – PV

So, it shows you the difference between what was achieved and what was planned (contrary to the CV where we looked at what was spent). This clearly makes us understand that if we have planned (PV) more than we achieved (EV), then we are behind schedule and SV will be negative. But it will be in terms of Dollars or Currency not in terms of time period.

Let’s modify the above example again.

Example: Shampi is the project manager on a project for developing and E-Commerce portal. The project is expected to last 12 months. The total Budget for the project is $200000. After 5 months projects has planned for 40% work to be completed. She was able to complete half of the project and spent $90000. What is the Cost Variance (CV)?

Answer: From the above examples of PV and EV we know that:

            PV = 80000

            EV = 100000

            AC = 90000

Before doing any calculation, just look at the data.

We have planned less Dollars (80000) what we have achieved (100000). This means??? You got it right, project is ahead of schedule.

            SV = EV – PV = 100000-80000 = 20000 i.e. positive SV, ahead of schedule.

 

Question: Can being ahead of schedule be bad for the project on a Data Date?

Answer: Yes, it can be. It shows that we finished the work earlier. May be the team worked overtime or missed something of a piece of equipment was not supplied by a vendor and the work related to that equipment was not completed or we skipped some quality tests, so we are ahead of schedule. We need to investigate before coming to a conclusion.

Cost Performance Index (CPI)

It is more or less like Cost Variance but it is expressed as Index. Instead of subtracting the AC from EV, we divide EV by AC. This means this will not be expressed in Dollars.

But the purpose is same, to determine, how the project is doing in terms of Costs.

It will be expressed in Number as you are dividing something in Dollars by another thing in Dollars (Simple Mathematics, right?)

CPI represents the efficiency of the money you spent till date. In other words it shows the value you are getting for each Dollar (or other currency) spent.

            CPI = EV/AC

Note the difference from CV, it was EV-AC, so instead of subtracting, you are dividing here.

As I mentioned earlier, CPI represents a number not the Dollar value. So what does it mean if a CPI is 1.1. It means EV>AC, right? It shows that we are getting more than what we are spending. Means project is under budget. It also represents that you are getting $1.1 on each $1 spent. Makes sense!

 

• If CPI is >1, project is under budget.
• If CPI is <1, project is over budget.
• If CPI is =1, project is on budget.

 

Let’s continue with the above example.

Example: Shampi is the project manager on a project for developing and E-Commerce portal. The project is expected to last 12 months. The total Budget for the project is $200000. After 5 months projects has planned for 40% work to be completed. She was able to complete half of the project and spent $90000. What is the Cost Variance (CV)?

Answer: From the above examples of PV and EV we know that:

            PV = 80000

            EV = 100000

            AC = 90000

Before doing any calculation, just look at the data.

We have spent less Dollars what we have achieved. This means??? You got it right, project is under budget. Now we need to see what is we are getting in return of each Dollar invested.

            CPI = EV / AC = 100000 / 90000 = 1.111, CPI > 1 Under budget

CPI = 1.111 represents that we are getting about $1.111 for each $1 invested.

 

Schedule Performance Index (SPI)

It is more or less like Schedule Variance but it is expressed as Index. Instead of subtracting the PV from EV, we divide EV by PV. This means this will not be expressed in Dollars.

But the purpose is same, to determine, how the project is doing in terms of Schedule.

It will be expressed in Number as you are dividing something in Dollars by another thing in Dollars (Simple Mathematics, right?)

SPI represents the efficiency of the schedule in terms of value. In other words it shows the at what rate we are progressing in terms of schedule. For example if CPI is 0.8, we are just progressing 80% of the Planned Value.

            SPI = EV/PV

Note the difference from SV, it was EV-PV, so instead of subtracting, you are dividing here.

As I mentioned earlier, SPI represents a number not the Dollar value. So what does it mean if a SPI is 1.1. It means EV>PV, right? It shows that we are getting more than what we have planned for a particular period (see, time comes in picture here, however we are still talking the about Dollars), Means project is ahead of budget. It also represents that we are progressing 10% above than what we have planned.

 

• If SPI is >1, project is ahead of schedule.
• If SPI is <1, project is behind schedule.
• If SPI is =1, project is on schedule.

 

Let’s continue with the above example.

Example: Shampi is the project manager on a project for developing and E-Commerce portal. The project is expected to last 12 months. The total Budget for the project is $200000. After 5 months projects has planned for 40% work to be completed. She was able to complete half of the project and spent $90000. What is the Cost Variance (CV)?

Answer: From the above examples of PV and EV we know that:

            PV = 80000

            EV = 100000

            AC = 90000

Before doing any calculation, just look at the data.

We have achieved more than what we have planned for. This means??? You got it right, project is ahead of schedule. Now we need to see progressing in terms of schedule.

            SPI = EV / PV = 100000 / 80000 = 1.25, SPI > 1 Ahead of Schedule

SPI = 1.25 represents that we are progressing 25% better in terms of Schedule.

This concludes the Part-2 of “Mastering the Earned Value Calculation for PMP Exam”. In Part-3, we will master the calculation related to Forecasting i.e. Estimate At Completion (EAC), Estimate to Complete (ETC), To-Complete Performance Index (TCPI) and Variance at Completion (VAC).