Forecasting

 

The KPIs can only provide performance information for work that was already done. But the goal is to have an accurate forecast to the end of the project. This projection into the future will answer the question “will we deliver within budget?”.

Earned Value Management in SAP calculates this forecast according to these formulae. This is according to the Earned Value Management principles. Though more accurate methods exist (see below).

Estimate to Complete: ETC = (BAC – EV) / CPI

Estimate at Complete: EAC = AC + ETC

Firstly we are unhappy with the term “BAC” (Budget at Complete). This value has nothing to do with the budget. In fact it is the “PVAC” (Planned Value at Complete) and it should be compared with the “BAC” (to check if there is enough budget available). Secondly this forecasting method is inaccurate. It uses the current CPI for forecasting the cost of the remaining work. This means it assumes that in future the same cost performance will be achieved as in the last period. Or in other words – nothing can be changed.

There are other methods using different factors than 1 / CPI. But it is common that the ETC is being calculated by multiplying the remaining PV with a factor. The reason for this simplified method is that EVM systems typically don’t integrate with an estimating system.

In our solution we integrate an estimating system and therefore can provide a much more accurate forecasting method that also leads to more valuable performance indicators. We recommend with our solution following these steps.

Analyze

First analyze the data for WBS Elements where the CPI differs from “1”. If the data collected seems correct then discuss with site managers why different consumptions of resources happened compared to the estimate.

Decide

Once the reasons are clear it must be decided if these reasons were temporary (e.g. weather, inexperience, etc.) and will not continue in the next period.

Adjust

If decision was made that the reasons for different resource consumption will continue in the future then the estimate has to be adjusted. This can be done easily by factoring the estimate e.g. man hours for a certain task. (Adjustments have to be made as well in case rates changed)

The result of these adjustments is a new estimate. It spreads the adjustments over the activities and a new version of the cost plan can be uploaded to SAP. In other words a new baseline is created for the next period(s). As this baseline reflects the accurate rates and lessons learnt about resource consumptions, any cost variance (CV) in the next period clearly identifies that the output had changed. (The original baseline exists as well so that the performance indicators can also be calculated using the original plan.)

With this adjusted estimate now the cost of the remaining work can be calculated accurately.

In our solution the forecasting equations look like.

Estimate to Complete: ETC = Estimate of Remaining Work

Estimate at Complete: EAC = AC + ETC

Now we can answer the question if we will deliver within budget.

Budget Variance: BV = BAC – AC – ETC = BAC – EAC

(BV > 0 means delivery within budget)

In case the BV is negative it indicates that cost will overrun the budget unless the cost performance will be improved. (The CPI required to meet the BAC calculates as CPI = (BAC – EV) / (BAC – AC)). If this is unlikely to happen then budget has to be shifted from better performing tasks or the management reserve.