Cost Estimating, Budgeting, and Earned Value Management
Cost and earned value questions are arithmetic with traps. The exam wants correct formulas, correct interpretation of indices, and a forecast chosen for the right reason.
Core rules
- Estimating types: analogous (fast, low accuracy), parametric (rate times quantity), bottom-up (accurate, costly), three-point weighted. Rough order of magnitude is about minus 25% to plus 75%; definitive about minus 5% to plus 10%.
- Cost baseline = approved time-phased budgets for work packages plus contingency reserves for identified risks. Management reserve covers unknown-unknowns and sits outside the baseline; total funding requirement = baseline + management reserve.
- EVM: CV = EV minus AC, SV = EV minus PV, CPI = EV divided by AC, SPI = EV divided by PV. Negative variance is bad; an index below 1 is bad.
- Forecasting: if the current variance is typical, EAC = BAC divided by CPI; if it was one-off, EAC = AC + (BAC minus EV); otherwise EAC = AC + bottom-up ETC. VAC = BAC minus EAC; TCPI = (BAC minus EV) divided by (BAC minus AC).
- Progress is measured in earned value, not money spent; AC alone never proves progress.
Worked example
BAC $200,000; at month 3 PV $80,000, EV $70,000, AC $90,000. CV = 70 minus 90 = minus $20,000; SV = 70 minus 80 = minus $10,000; CPI and SPI are both 0.875. The project is behind and over cost. If that cost performance is typical, EAC = 200,000 divided by 0.875 = $228,571, so VAC is minus $28,571. If the overrun was a one-off remediation invoice, EAC = 90,000 + (200,000 minus 70,000) = $220,000. TCPI to finish at BAC = 130,000 divided by 110,000 = 1.18, a stretch.
Traps
Using the typical-variance EAC when the variance is one-off. Treating SPI on a non-critical path as project status. Reporting AC as progress. Mixing contingency with management reserve. Including sunk costs in the forecast.