The Estimate That Grew Legs
You are estimating a 14-month software and hardware deployment for a regional logistics firm. The approved budget is 3.2 million, built bottom-up from a work breakdown structure. At month four, actuals are 1.1 million against a planned 0.8 million. The cost engineer reports earned value of 0.75 million. Two causes are suspected: the hardware vendor raised prices 12% after contract signature due to currency movement, and the integration work is taking longer because the client's legacy systems were undocumented. The client's finance director says the budget is fixed and any overspend is your problem. Your sponsor wants a forecast to complete by end of week.
1. Calculate and interpret the cost performance position, and explain what the forecast to complete should and should not assume.
Read the worked answer
Cost performance index is earned value divided by actual cost: 0.75 / 1.1 = approximately 0.68. Schedule performance index is earned value divided by planned value: 0.75 / 0.8 = approximately 0.94. So the project is slightly behind but spending far more than it is earning.
A simple forecast, budget at completion divided by CPI, gives 3.2 / 0.68 = approximately 4.7 million. That is a useful upper-bound signal but should not be presented as the answer, because the two causes behave differently.
The 12% hardware increase is a one-off price effect on remaining hardware, so it should be modelled as a specific addition to the remaining estimate, not extrapolated across all future work. The integration overrun is a productivity problem likely to continue, so it should be extrapolated using the integration-specific CPI rather than the whole-project CPI.
What the forecast must not assume: that the undocumented legacy systems will suddenly become documented, or that the vendor will absorb the currency movement. Both are unverified. State the assumptions explicitly and give a range, for example 4.1 to 4.7 million, with the drivers named. A single-point forecast hides the uncertainty the sponsor most needs to see.
2. The client says the budget is fixed. How do you respond, and what do you do about the vendor price increase?
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Separate the two issues because they have different remedies.
The vendor increase is a contract matter. Check the contract for currency or price-adjustment clauses and for the mechanism for a variation. If the contract is genuinely fixed-price with no adjustment clause, the vendor bears it and you should hold them to the signed terms while documenting the dispute. If there is an adjustment clause, the increase is a legitimate change and must go through change control with client visibility. Do not quietly absorb it into the project budget.
The undocumented legacy systems are a scope and risk issue. The original estimate assumed a level of documentation that did not exist. That is a change in the basis of estimate, and you should quantify the additional integration effort and raise it as a formal change request with evidence.
On "the budget is fixed": accept it as a constraint and present the consequences. A fixed 3.2 million buys a defined scope at a defined quality. If the scope cannot be delivered for that sum, the client must choose: reduce scope, accept a later date, or increase funding. Put those three options in writing to the sponsor and the finance director. Absorbing the overspend silently is the one option that fails everyone, because it hides the decision until it is too late to make it well.