Project Forecasting using Estimate to Complete Formulas
Consider this scenario. The Project Sponsor and the Project Manager are having a light conversation. And suddenly the Sponsor asks
How much money is needed to complete the remaining project work?
This is a normal question. Project Sponsors are mostly worried about the finances. On the other hand, the PMs try to shirk these kind of questions. Even if the project is progressing smoothly, the PMs do not want to forecast. I am sure you would have faced similar questions and you would have tried to bypass them. You believe that projects go through lot of uncertainty and these questions cannot be answered correctly. You just don’t want to commit anything lest things do not turn out as expected.
Your dilemma is not unexpected. Rather, it is understandable. You may not want to give an answer to your Sponsor but you should know the answer for better management. Projects should be managed scientifically with proper estimations and forecasts. As the project progresses, you should periodically find answer to the above question.
We are in luck. Help is at hand. There has to be a reasonable way to find out the cost of remaining work of the project. Earned Value Management (EVM), specifically Estimate to Complete helps us to forecast. It helps us to find answer to the above question. Let us look at the definition of Estimate to Complete.
Estimate to Complete (ETC) is a forecast of monetary value of the remaining project work. It is estimated on the basis of project’s past performance and team’s future projections. This Estimate can be revised periodically as project progresses and project moves towards the completion.
You can also look at my previous article that provides simple and easy definitions of ETC and various other other EVM terms. You can also refer to Max Wideman Glossary to read some other standard definitions of Estimate to Complete.
Understanding Estimate to Complete
Let us try to understand Estimate to Complete with the help of an example. Let us refer to the same example that we had used in Basics of Earned Value Analysis. The project was about building 80 tables. The cost of building 1 table was estimated as 1000 units of money and the total budget was 80000 units of money.
Refer to Table 4 of Basics of Earned Value Analysis. The current status of the project is:
So, in EVM terms, we can say that remaining work is 45 tables out of total work of 80 tables. Going by the above definition, Estimate to Complete would be a forecast of monetary value for building 45 tables.
You would say ETC is easy to calculate.
Mathematically, if 35 tables were built using 36000 units of money then 45 tables can be built in (45*36000/35) or 46286 units of money.
Yes, ETC is that easy. But let us do a scientific analysis and evolve a generic ETC formula.
Generic ETC Formula
We have to forecast the monetary value (cost) of remaining work to determine ETC. So, we can write ETC equation as
ETC = (monetary value of remaining work)/(future projected cost efficiency)
Let us look at the numerator of the above equation
monetary value of remaining work = monetary value of total work – monetary value of completed work
monetary value of remaining work = BAC – EV (refer to Basics of Earned Value Analysis or Earned Value Management System Explained in Easy Language)
Let us look at the denominator of the above equation
In EVM Cost Efficiency is represented as CPI (Cost Performance Index). Let us represent the future projected cost efficiency as CPIp
So, the final ETC equation is
ETC = (BAC – EV)/CPIp
Let us now determine the denominator CPIp. Let us consider 4 different scenarios to determine 3 different ETC formulas.
Scenario I / Formula I
The project team determines, after analyzing project’s past performance, that the remaining work would be completed at project’s current cost efficiency.
By replacing CPIp with CPI (refer to Basics of Earned Value Analysis or Earned Value Management System Explained in Easy Language) in the ETC equation, we get
ETC Formula I ⇒ ETC = (BAC – EV) / CPI
In EVM parlance, we say that the project performance was typical. Typical means that past performance is indicative of the future performance.
Calculation for our example
ETC = (80000-35000)/(35000/36000)
ETC = 46286 units of money (this figure is same as our mathematical calculation)
It simply means that the project team will require 46286 units of money to build remaining 45 tables.
Scenario II / Formula II
The project team determines, after analyzing project’s past performance, that the past performance has no bearing on the future performance. The team believes that the aberrations, that happened in the past, would not happen in future. They determine that remaining work would be completed at 100% cost efficiency (as per the original estimates).
By replacing CPIp with 100% (or 1) in the ETC equation, we get
ETC Formula II ⇒ ETC = (BAC – EV)
In EVM parlance, we say that the project past performance was atypical. Atypical means that past performance is not indicative of the future performance.
Calculation for our example
ETC = (80000-35000)
ETC = 45000 units of money
It simply means that the project team will will require 45000 units of money to build remaining 45 tables.
Scenario III / Formula III
The project team determines, after analyzing project’s past performance, that the past performance has no bearing on future performance. The team believes that it can neither complete the work at current cost efficiency (CPI) nor at 100%. The analysis of current performance suggests that future cost efficiency would be different from the current cost efficiency. The future cost efficiency can either be more or less than the current CPI. This could happen due to number of reason e.g. implementation of new technology, realized opportunities or threats, process changes etc. In such a scenario ETC equation will remain as it is.
ETC Formula III ⇒ ETC = (BAC – EV) / CPIp
Calculation for our example. Let us assume that project team determines that future cost efficiency would be 120% (or 1.2).
ETC = (80000-35000)/1.2
ETC = 37500 units of money
It simply means that the project team will will require 37500 units of money to build 45 remaining tables.
Scenario IV / No Formula
The project team determines, after analyzing project’s past performance, that their original estimates were not good. The team believes that the cost of remaining work should be re-estimated i.e. ETC should be determined afresh. A fresh ETC can by found by estimating the cost of remaining (unfinished) work in the Work Breakdown Structure (WBS). You can re-estimate the cost of remaining work components at the bottom of WBS and then total then total them Upwards in the WBS to determine a fresh ETC. There is no ETC formula for this scenario.
While doing the PMP questions, you should not overtly focus on memorization the formulas. Pure memorization does not help. It is better understand the concept and then apply the formula(s) as required.
I have compiled a PMP Formulas Pocket Guide that is based on the PMBOK Guide 5th Edition. You can download the Pocket Guide for free. It is the most comprehensive guide to all the PMP Exam formulas. If you are looking for more, you can also buy detailed PMP Exam Formula Study Guide by Cornelius Fichtner. It contains explanations of all the formulas along with examples and 105 PMP practice questions.
Please leave a comment, if you have seen a any other ETC formula or a different explanation for ETC.
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