Estimate To Complete Formulas Explained
Estimate To Complete is a very important Earned Value Management (EVM) concept. In this post, I will define Estimate To Complete (ETC) and explain its utility in project management.
Estimate To Complete Formulas and other Earned Value Formulas are important for the PMP exam. Most PMP Study Guides just list these formulas without really explaining them. In this post, I will tell you about the importance of ETC formulas for project forecasting. We will also look at an example to calculate ETC.
What is Estimate to Complete?
I am sure you would have faced similar questions. How do you generally respond to these question?
Most PMs try to avoid answering these kind of questions. The PMs do not want to forecast, even if the project is progressing smoothly. PMs believe that projects go through lot of uncertainty and these questions cannot be answered correctly. PMs just don’t want to commit anything lest things do not turn out as expected. But the Sponsors want to gauge the performance of the project. And the best way to gauge the performance is by doing numerical analysis.
We are in luck. Help is at hand. We can determine the cost of remaining project work by calculating Estimate to Complete.
Estimate to Complete is the expected cost to finish all the remaining project work.
PMBOK Guide Fifth Edition
ETC is an estimated forecast. It can be done either on the basis of project’s past performance or by re-evaluating the remaining project work. This estimate can be revised periodically as project progresses and the project moves towards the completion.
Note: It is true that all projects have some inherent risks. But still projects should be managed scientifically with proper estimates and forecasts. As the project progresses, one can always revise the estimates. EVM helps us measuring current project performance and forecast for future. In EVM, Estimate To Complete, Estimate At Completion, and To Complete Performance Index are used for project forecasting.
Estimate To Complete Example
Let us look at an ETC example and understand the concept. Refer to the project that we had considered 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. As per the current data, the project team:
- has built 35 tables out of a total of 80 tables (work completed).
- has spent 36000 units of money to build 35 tables (actual expenditure).
- needs to build another 45 tables to complete the project (remaining project work).
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, ETC would be expected cost of building remaining 45 tables. Let us look at the following scenarios
Scenario I – 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.
Scenario II – There was an aberration in the past. Moving forward the 45 tables can be built as per the original estimate (45*1000) or 45000 units of money.
Scenario II – The project team has gained knowledge about building tables. Moving forward the efficiency will improve and each table can built in 800 units of money. 45 tables can be built in (45*800) or 36000 units of money.
Let us now do a more scientific analysis and evolve a generic ETC formula.
Generic ETC Formula
We have to determine the expected cost of remaining work. So, we can write ETC equation as
ETC = (monetary value of remaining work)/(future projected cost efficiency)
monetary value of remaining work = monetary value of total work – monetary value of completed work
Refer to Basics of Earned Value Analysis or Earned Value Management System Explained in Easy Language, we can rewrite numerator as:
monetary value of remaining work = BAC – EV
In EVM, Cost Efficiency is represented as Cost Performance Index (CPI). Let us represent the future projected cost efficiency as CPIp
Final ETC Equation
ETC = (BAC – EV)/CPIp
Let us now determine the denominator CPIp.
3 ETC Formulas
Let us consider 4 different scenarios (3 scenarios from above example) to derive 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 125% (or 1.25).
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 (work packages and activities) and then total then total them Upwards in the WBS to determine a fresh ETC. There is no ETC formula for this scenario.
Note For PMP Aspirants
There are number of formulas in EVM. You can read Earned Value Management Formulas for a quick snapshot of all the EVM formulas. You need to understand the these formulas to answer PMP questions. A mere memorization of the formulas would not help – you may not be able to apply the correct formula. It is better understand the concept and then apply the formula(s) as required.
I have also compiled a PMP Formulas Pocket Guide. You can download it free for exam prep. It is the most comprehensive pocket guide that is based on the PMBOK Guide 5th Edition. 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 & 105 PMP practice questions.
EVM is difficult topic. If you still have any confusion on ETC or EVM, you can write a comment and I will respond to it.
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