4 Different Indexes to Forecast the Project Final Cost Using the Earned Value Analysis

In this podcast, Ricardo talks about the indices of earned value in the project. He explains that the great secret of earned value is to evaluate current performance to project the future. Ricardo also explains how to analyze the rate of time or cost when it is less than, equal to or greater than one.

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Episode transcript

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Hello everybody welcome to the five minutes to PM podcast today. I like to discuss with you the four different ways of calculate the estimate that completion Using Earned value Analysis I'm not discussing In this podcast concepts around Earned the value. But to go back to the basics to understand we have basically three dimensions in the Earned Valley. The planet Valley is what I was thinking to do in that period of time.

There in that Valley is what I really did. The product I created. Then the third one is the actual cost or AC it's the amount of money that they spent to do that work based on this tree, I can calculate the CPI or cost performance index that is the earned value divided by the act or Cost or the SPI or a scalpel performance index. That will be the Earned Valley divided by the planet Valley.

And this to will give you an idea of performance. And what is the EAC or estimate that completion? It's the Forecast of the money that I'm expecting to spend on this project? Basically, I hate to memorize. I'd like to make you understand this. So what is the final Cost? The forecast is what I expand. I spent up to now. So the AC plus what I need to earn, what I need to aggregate too.

The project in, what is, this is the budget minus what I earned it. So minus the earner Valley. So the budget less, the urn at Valley is the amount that I need to aggregate to the project, but this component must be divided by an index and we have basically four different kinds of index. The first one is the number one, Minutes divide the budget minus Earned that Valley by one.

What I do let's translate this too. The physical aspect using this kind of Forecast, I'm assuming that the future will not repeat the past. So the performance that I did up Today each not the trend anymore. So now we it's like making the zero point rebates line of thinking, OK. In the future, I will be perfect. I will be perfect. I will forecast completely as a planet. So what I spent, if I spent more up to now, this is not a trend.

This is the first case we call. This is usually the optimist. The second one is using the index CPI. So the vide, the budget minus Earned it Valley by CPI or cost performance index prove late in this to the physical results. I'm assuming that the future will repeat the past. So if I spent more money to the brigade to earn something, does will be the same trained in the future.

For example, let's suppose that I have a CPI of 0.8 means for every single baller safe, I'm losing 20 sense. And I'm producing 80 a sense of pride. If I divide the budget minus Earned that Valley, by the way, 0.8. I'm assuming that the future, I will continue losing 20 cents per dollar spent. So this is the trend we call this realistic. This is the most usual way of Forecast the final cost use in the early Value the third one, this one I don't like too much, but this, the use of SBI, you divide the future performance by the SPI, by the scalp, the performance.

This is why I don't like this because at first, because not necessarily is scheduled is completely type that too Cost means one minute means $1 or $10 does not so usual to have this relationship and second SBI. And so one, when the project comes to the end and this Forecast will become less valuable because the Indexes, we will become a new one and this could brings me fake Forecast.

So I don't like to use this, but a lot of people like, and some people use this and the fourth one and the last one is what we call SEI SEI. What it means. Skeletal cost index scuttle cost index is a mix at index that the CPI times SPI. So this is what we call pessimistic Forecast because I'm telling that the future performance will be calculated based on the current performance in Cost and the current performance in schedule.

So let's suppose that I have 0.8, six and 0.8, SBI Minutes for each dollar. I lose plenty sense. And for every minute, if I lose also a 20% and what is 1% have one minute it's 12 seconds. So I'm wasting 20 cents and 12 seconds in when I do the mix at, in this point or eight times 0.8 or nine, you'll have 0.6, four. And so this is more, this is, it will show me a much more pessimistic.

Forecast a much higher for sure. It's because we are always thinking in a CPI and SPI that has below one in a way there's because usually it's below one, it's very strange in a very unusual you will have. Okay. My project has a CPI of 1.5, an SBI of 1.50, this in the first moment could be perceived as great. But one thing that I like to invite you to think is that maybe it's time to return back to the plan and see if you produce it a realistic plan, because the results are so great.

And the Project is usually something in the limit between what is possible, what is impossible, that this could be challenged in the planning thinking. And so this three, if you, of course, leaf will have an SBI or a CPI, both one, those will be the opposite. Then the sci will be extremely optimist in the one will be extremely pessimist because all of them we'll be greater than one. I'd like to finish this. Podcast thinking he, all of you, four, having the patient have listening all this calculation.

I challenged myself to do this first in English and also talking about all the formulas and all those numbers. But it's only to show you that if we think a little bit more, we can understand much better the concepts around Earned at Valley. Hope you enjoyed this podcast. See you next week with another five minutes, be on podcasts.

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4 Different Indexes to Forecast the Project Final Cost Using the Earned Value Analysis

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