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Mastering The PMP Calculations
Mastering The PMP Calculations
Calculations
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PMBOK Flashcards
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Page 3
BAC
TCPI
SV
EV
CV
ETC
PV
SPI
AC
CPI
EAC
BETC
The arrows show the formulas that are needed by the target formula.
(The dotted arrows show a formula that is required dependent on the scenario)
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Contents
Is this book right for me? ............................................................................................................................ 2
How can TestEagle Help You? ..................................................................................................................... 3
Learn All of the Calculations ....................................................................................................................... 4
Actual Cost (AC) .......................................................................................................................................... 7
AC Formula ............................................................................................................................................. 7
Example of Calculating Actual Cost ..................................................................................................... 7
Budget At Completion (BAC) ....................................................................................................................... 9
BAC Formula ........................................................................................................................................... 9
Example of Calculating BAC .................................................................................................................... 9
Planned Value (PV) ................................................................................................................................... 10
PV Formula............................................................................................................................................ 10
Example of Calculating PV ..................................................................................................................... 10
Earned Value (EV) ..................................................................................................................................... 11
EV Formula ............................................................................................................................................ 12
Example of Calculating EV ..................................................................................................................... 12
Cost Variance (CV) .................................................................................................................................... 13
CV Formula ........................................................................................................................................... 13
Example of Calculating CV..................................................................................................................... 14
Schedule Variance (SV) ............................................................................................................................. 15
SV Formula ............................................................................................................................................ 15
Example of Calculating SV ..................................................................................................................... 16
Cost Performance Index (CPI) ................................................................................................................... 17
CPI Formula ........................................................................................................................................... 17
Example of Calculating CPI .................................................................................................................... 18
Schedule Performance Index (SPI) ............................................................................................................ 19
SPI Formula ........................................................................................................................................... 19
Example of Calculating SPI .................................................................................................................... 20
Estimate At Completion (EAC) .................................................................................................................. 21
EAC Formula ......................................................................................................................................... 21
Scenario 1 Original estimate is no longer valid .............................................................................. 21
Scenario 2 CPI will stay the same for the rest of the project .......................................................... 22
Mastering the PMP Calculations TestEagle.com
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AC Formula
As we already said, theres no formula for AC. But that doesnt mean theres no math involved.
To calculate the AC for a project, you add up all the costs incurred by the project as of the point
in time you are measuring. Usually this means adding all the costs incurred by the project as of
today.
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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 miscellaneous costs.
The project team has just begun installing the equipment needed starting with the Wi-Fi
antennas.
The project has spent $400,000 on Wi-Fi equipment, $50,000 on site surveys, $3,000 on team
meetings and team building sessions. Tom will be signing a contract for an extra ten Wi-Fi
antenna tomorrow for $30,000.
What is the AC of the project?
Answer: $453,000.
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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BAC Formula
How is BAC calculated? Usually for the PMP exam you wont need to calculate it. You will
normally be given the BAC in the question as part of figuring out another value.
For example, the question may want you to calculate the To-Complete Performance Index. To
do that, the BAC could be included in the question text.
Answer: $343,000.
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Tip The $20,000 of ongoing maintenance was not included as this is not part of the
project to install the fence.
PV Formula
Planned Value = Planned % Complete X BAC
Example of Calculating PV
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.
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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).
Understanding EV is vital as its used in many of the other calculations that you will need to
know to master the PMP exam.
Its used to calculate:
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EV Formula
Earned Value = Percent Complete * Budget At Completion
Example of Calculating EV
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 the project is
expected to be $50,000.000.
Answer: $13,500,000.
We know that BAC is the estimated total cost of the project. So in this case, BAC = $50,000,000.
With these figures we can calculate that the EV = 27% * $50,000,000 = $13,500,000.
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CV Formula
Cost Variance = Earned Value Actual Cost
The formula produces a dollar amount (or pounds, rupees etc). But what does this mean?
A negative number is over budget. And a positive number is under budget.
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An important point to remember is that on a perfect project, the CV is $0. This because a CV of
$0 is neither over budget or under budget.
Most people understand instinctively why being over budget is bad. But why is being under
budget bad?
It could be a sign that the team has missed a requirement, forgot to install a piece of equipment
etc.
Anytime the CV isnt $0 you need to investigate.
Example of Calculating CV
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?
Answer: The CV is -$260,000. And this tells us that the project is over budget.
How did we calculate this? The EV is $2,300,000 (value earned by the project is another way
of saying Earned Value).
The AC is $2,560,000 (The projects costs are the costs incurred by the project).
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SV Formula
Schedule Variance = Earned Value Planned Value
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.
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Example of Calculating SV
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 for six 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?
Answer: The Schedule Variance is -10,000. This tells us that the project is behind
schedule.
How did we calculate this? Well we know that Schedule Variance = Earned Value Planned.
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CPI Formula
Cost Performance Index = Earned Value / Actual Cost
Tip EV is also known as Budgeted Cost of Work Performed (BCWP). And AC is also
known as Actual Cost of Work Performed (ACWP).
So you may see the formula written as CPI = BCWP / ACWP
The result of the Cost Performance Index formula is a number. So what does this number
mean?
A value of less than one means that money is being spent inefficiently on the project. So if your
CPI is 0.75, this means that for every $1 spent on the project you are getting $0.75 of value.
$1
$0.5
Investment
Return
A CPI of one means that your project is exactly on track. You spent $1 on the project and got $1
of value in return.
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And a value of greater than one means that money is being spent efficiently on the project. So
if your CPI is 1.4, this means that for every $1 spent on the project you are getting $1.40 of
value.
Cost Performance Index answers the question Were investing in this project, but what is the
return?
Answer: The Cost Performance Index is 1.25. This means that for every $1 spent on the
project $1.25 of value is being produced.
How did we calculate this? Well we know that Cost Performance Index = Earned Value / Actual
Cost.
The EV is $405,000.
Tip The 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 are
calculating. EG value earned by the project is another way of saying EV.
The AC is $325,000.
Knowing this we can calculate that the CPI = $405,000 / $325,000 = 1.25
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SPI Formula
Schedule Performance Index = Earned Value / Planned Value
Tip EV is also known as Budgeted Cost of Work Performed (BCWP). PV is also known as
Budgeted Cost of Work Scheduled (BCWS).
So you may see the formula written as - SPI = BCWP / BCWS
A value of less than one means that the project is potentially behind schedule. So if your SPI is
0.8, the project will not finish on time.
An SPI of one means that your project will be finish exactly when the plan predicts.
And a value of greater than one means that the project will be completed early. So if your SPI is
1.2, the project will be completed sooner than the plan predicts.
Schedule Performance Index answers the question When will the project be completed?.
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Answer: The Schedule Performance Index is 0.93. This means that Franks project is
behind schedule.
How did we calculate this? We know that Schedule Performance Index = Earned Value /
Planned Value.
The Earned Value is $116,000.
Tip The 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 are
calculating. EG value earned by the project is another way of saying Earned Value.
The Planned Value is $125,000.
Knowing this we can calculate:
Schedule Performance Index= $116,000 / $125,000 = 0.93
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Why is this different to BAC? EAC is used once the project has started and uses actual results
from the project not just estimates.
If you have been working on a project for six months and the PMO ask for an estimate of what
the project will cost you would give them the EAC not the BAC.
EAC 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.
You might be wondering how you calculate the Bottom-up Estimate To Complete. According to the
PMBOK there is no formula.
Instead this is a prediction by the team of how much work is left to complete the project.
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Scenario 2 CPI will stay the same for the rest of the project
This scenario assumes that the Cost Performance Index (CPI) experienced by the project will
stay the same until the project is completed.
In this case you would use the following formula:
Estimate At Completion = Budget At Completion / Cost Performance Index
In this case you need to calculate the Estimate At Completion but discover that your current CPI
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 on
repairs.
You have three more generators to install but you are confident that the accident wont
happen again as you have a risk mitigation plan (and you yelled at the people who caused the
damage!).
In this case it is appropriate to believe that your original estimates for installing the generators
are still good.
Its also appropriate that the current CPI (which reflects the accidental damage) does not
reflect 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 Completion Earned Value)
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Weve all worked on projects where the boss or a customer demands that a project be
delivered by a certain date.
To calculate the Estimate At Completion for such a project you need to take into account the
Schedule Performance Index and Cost Performance Index.
The formula is:
Actual Cost +
Example 1
Frank is the project manager for a software development company based in London. He is
managing 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 a
new 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 are
development $50,000, quality assurance $30,000 and documentation $10,000.
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How did we calculate this? In this example, the original estimates are bad because they are
based on a flawed architecture 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 managing a
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 design and
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.
How did we calculate this? 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 a
project to create a new accounting software package.
During construction, the team realized that mistakes were made while collecting requirements.
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 cost of
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.
What is the Estimate At Completion?
How did we calculate this? 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
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Example 4
Rajesh is working on a project to create a new inventory management system for a food
manufacturer 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.
The project has spent $450,000 so far. The CPI for the project is 0.9 and the SPI is 0.8. The value
of the work completed is $375,000.
What is the Estimate At Completion?
How did we calculate this? 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 +
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Actual Costs
ETC
Now
6 Months Ago
Project End
ETC Formula
Estimate To Complete = Estimate At Completion - Actual Cost
The result of the ETC formula is a dollar amount (or rupees, pounds etc - you get the point). So
what does this amount represent?
Estimate To Complete tells you and the PMO (which may be more important), how much cash
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 rationalizing its budget by cutting
Mastering the PMP Calculations TestEagle.com
Page 27
projects.
You are working on a large project whose Actual Cost is $2.3 million. The PMO could say This
project has cost us $2.3 million and isn't 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 you
respond by saying Hey but we only need $20,000 to finish the project. And the Earned Value of
the project is $3.4 million. So cutting the project makes no sense.
How did we calculate this? Well we know that Estimate To Complete = Estimate At Completion
- Actual Cost.
The EAC is $650,000.
Tip The 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 are
calculating. EG predicted total cost of the project is is another way of saying Estimate At
Completion.
The AC is $430,000. (the project has spent is another way of saying Actual Cost).
Knowing this we can calculate Estimate To Complete = $650,000 - $430,000 = $220,000
Mastering the PMP Calculations TestEagle.com
Page 28
TCPI Formulas
As with EAC, there is more than one formula for TCPI.
One formula is based on the BAC; the other is based on 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 still valid, use this formula:
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How do you know if the BAC is still valid? Remember that the BAC is estimated at the start of
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 x
people working x hours a day to finish the project on time. (EG I need 200 people working 6
hours 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 more people
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.
After calculating the TCPI, you will have an index value that you can compare to the current CPI.
This will give you an idea of how likely you are to achieve what is being asked.
For example, if the current CPI is 0.97 and the TCPI is 1.45 then more funds will be needed to
complete the project by the required date.
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Example 1
How did we calculate this? 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 (four months
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 the
project.
So we will calculate the TCPI using the formula from Scenario 1:
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($120,000 - $85,000)
($120,000 - $80,000)
$35,000
$40,000
Example 2
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($2,400,000 - $1,200,000)
($2,700,000 - $2,100,000)
$1,200,000
$600,000
Communication Channels
Calculating the number of communication channels on a project is important for two reasons.
First of all it gives you an idea of how complex the communication will be on the project. More
communication channels mean more complexity.
Secondly, its likely that there will be a question about communication channels on the exam!
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The Communication Channel value shows you the number of communication channels on a
project.
Communication is a vital part of any project. Emails are created, reports are written and change
requests are documented.
These communications then need to reach their recipients.
So communication flows back and forth between team members and stakeholders via
communication channels. These channels could be email, status reports, meetings, instant
message - basically any way of sending and receiving the communication.
In the example below there are four people involved in the project.
This creates six communication channels.
1
Project Manager
Customer
5
6
3
Analyst
Mastering the PMP Calculations TestEagle.com
Developer
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Acronym
AC
Formula
None - calculate all the costs incurred by the project as of the
point in time you are measuring.
Budget At Completion
BAC
Planned Value
Earned Value
Cost Variance
Schedule Variance
Cost Performance Index
Schedule Performance Index
Estimate At Completion
PV
EV
CV
SV
CPI
SPI
EAC
None - calculate how much money you believe you will need to
complete the project.
Planned % Complete X BAC
Percent Complete * Budget At Completion
Earned Value Actual Cost
Earned Value Planned Value
Earned Value / Actual Cost
Earned Value / Planned Value
Scenario 1 Original estimate is no longer valid
Actual Cost + Bottom-up Estimate To Complete
Scenario 2 CPI will stay the same for the rest of the project
Budget At Completion / Cost Performance Index
Scenario 3 Current CPI is abnormal
Actual Cost + (Budget At Completion Earned Value)
Estimate To Complete
To-Complete Performance
Index
ETC
TCPI
Communication Channels
[N(N-1)] / 2
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