All the PMP Formulas and Calculations - PMBOK 6th Edition

Hello and welcome everyone! I'm so excited that you are all here. In today's video, you are going to learn all of the formulas you need to know for your upcoming PMP or CAPM exams. PMP stands for Project Management Professional. This is a leading certification for anyone who is interested in a career in project management, and if you haven't done so already, be sure to sign up for our free course where we will teach you exactly how to get your certification in the next 6 weeks. Plus a lot of other really amazing tips and tricks that you need to know for your exam, so make sure you sign up at Examspm.com-free. Now let's get right into the formulas that you need to know. So the biggest chunk of formulas you need to know are the Earned Value Management formulas, or EVM. There's a lot of formulas under this category, so without further ado, let's start taking a look at them. Okay, the first term within EVM, or Earned Value Management, is Earned Value. What Earned Value is, it is a present value of all the work that's completed on your project. Sometimes this value would just be given to you in the questions, other times you had to calculate the earned value, and the way that you calculate the earned value is with the following formula: earned value equals percentage complete times the BAC. The BAC stands for budget at completion. So let's say that you have a budget of $10,000 and you're 50% complete on the project, so 50% times $10,000 is $5,000. So in this case, your earned value will be $5,000. Next, let's take a look at cost variance. The cost variance is the difference between the earned value and the actual cost. So if the amount of work, the present value of the amount of work is $5,000, like in our past example, and the actual cost that you spent to complete this work is $4,000, that means you have a cost variance of $1,000. So again, earned value is the present value, so how much the work that you have already completed is worth to your company. The actual cost is how much you've actually spent. So if the value that you have created is more than the actual cost that you've spent, then the cost variance would be positive, which is a great thing. If the cost variance is negative, then that means that you spent more money to acquire the value that you got through your project. So the reason you want to calculate a cost variance is that it will tell you how efficient you are at spending your budget. So not only do you have to know these formulas for your upcoming PMP exam, you should also know how to interpret them as well. So in this case, when you calculate the cost variance, when it is a positive number, that is good. When it's negative, That is bad. Our next formula is the Cost Performance Index, or the CPI. The way that we calculate the CPI is using our earned value, and instead of subtracting like we're doing in the variance, we're dividing by the actual cost. And this will express in an index or a ratio term how efficient we are at realizing the value of our projects through— compared to how much we have actually spent. Spent to realize that value. So let's go back to our previous example. Let's say that our earned value is $5,000 and our actual cost is $4,000. So we do $5,000 divided by $4,000, and this number is greater than 1. So whenever your CPI is greater than 1, that means that it is good and that you are more efficient at realizing the value compared to how much you have actually spent to acquire the value for your project. Conversely, let's say our actual cost was $6,000 whereas our earned value was $5,000, then the CPI will be less than 1, and that is bad. That means that you spend more money trying to acquire how much that value is worth to your organization. What the Cost Performance Index allows you to do is to compare projects in your organization that are of different sizes. Let's say that you have one project that's over $1 million, and then you have your current project which has a budget of $10,000. So if you just see the cost variance was $1,000 on your project, and then the cost variance on the $1 million project is $10,000, then you can't really compare these 2 because they have different budgets to begin with. But if you convert everything into an index, then that tells you the scale at which this project is over or under budget. So it makes it easier for the organization to compare projects of different sizes. That's why you want to calculate both your cost variance as well as your cost performance index. Now similarly, we do the same thing for schedule. What the schedule variance is going to tell us is whether or not we're behind or ahead of schedule. The way that we calculate our schedule variance is using our earned value, and instead of subtracting our actual cost, in this case we're subtracting by our planned value. So this is how much work we have planned to do at any point in time, and the earned value is how much work we have actually done at any point in time. Thus, the formula for SV is EV minus PV. And similar to the cost performance index, in order to make it easier to compare projects of different sizes, we want to turn the number into an index. And to do so, instead of subtracting, we're dividing instead. So CPI is equal to EV divided by PV. And if this number is greater than 1, then that is good, and if it's less than 1, then that is bad. Now, with the 4 formulas that we saw so far, let's do some quick summaries. So all of these formulas begin with EV, the earned value, and whenever you have a variance, you subtract. Whenever you have an index, you divide. Whenever it's anything related to cost, so cost variance and cost performance index, you want to use your second term is the actual cost, and when it's a schedule variance and schedule performance index, the second term in your equation is the PV or planned value. Now let's move on to our estimate at complete formula. So there's a couple of formulas that you can use to calculate your EAC or estimate at complete. So this is how much your project will cost once it is finished, so how much you estimate your final budget to be once it is complete. Now there's a couple formulas for EAC. However, they are not equal to each other. The formula that you use will depend upon the assumption that's made on the project, and also it would depend on what values you're given in the question. So a really great tip is that whenever there is a number that's given in the, in the multiple choice question, then just make a note on the side as to what that number is. So if you're given the budget completion, then just write on the side BAC. Equals whatever that is. And if you're given the CPI number, write CPI equals and whatever that is. And then so you have all of the values right in front of you. And then another great tip is to write down all of your formulas on quote-unquote cheat sheet before your exam starts, so then you can just match the formulas with the numbers that you are given. So when you walk into your exam, you'll be given 2 blank pieces of legal-sized paper that you can use to write whatever you want. So I would recommend using before your exam starts to write down all of the formulas. So this will count towards your 4 hours of the exam time that you have, but I think it's really well worth it to write down all your formulas before your exam starts so you are well prepared. Okay, now let's jump right into our EAC formulas. So the first formula that you can use to calculate your EAC is EAC equals BAC divided by CPI. So BAC is the budget at completion. So this is at the start of your project how much you estimate your project will cost. However, at any given point in your project, you may realize that this budget at completion is no longer relevant because things changed on your project, so then you need to re-estimate how much your project will cost, and this becomes your EAC. The first formula you can use to calculate your EAC is BAC, budget at completion, divided by the cost performance index, or CPI, and you would use this formula when you assume the cost performance is not expected to change and the budget will continue to be adjusted at the same rate as the cost performance index. Basically, you're using the budget that you originally estimated and adjusting it by the cost performance index. The assumption you're making here is that the cost performance index will continue— the project will continue to change at the same same rate as the current Cost Performance Index. The second formula that you can use to calculate your EAC is using your actual cost, so how much you have already spent on your project, and then you would re-estimate all of the other tasks that you have left. So you would roll up all of the activities that you have into work packages and those work packages into control accounts and finally into a final budget and then add that number to your actual cost in order to determine your estimate at completion. You would use this formula when you're assuming the original budget that you came up with is fundamentally flawed and you have to re-estimate everything in order to come up with a new estimation at completion. The next formula that you can use to calculate your EAC is AC, or actual cost, plus your budget at completion minus your earned value. And you would use this formula when you assume Assume the cost variance will not happen again. So let's take a look at this formula. AC is how much you have already spent on your project, and the BAC is how much you budgeted to spend on your project. And so if you're assuming that the project will continue to evolve at the same rate as what you have originally budgeted, and whatever happened in the past was just a one-off, and that's why you were a bit off track, so you would subtract the earned value. So this is the amount of value that you have already realized on your project, right? So you subtract that off, and then that would tell you how much your EAC is. The next formula for EAC is very similar to the one that we just saw. So in this formula, we are adjusting the number that we're getting by both the Cost Performance Index and the Schedule Performance Index. The assumption we're making here is that both the CPI and the SPI will influence the EAC. So in this formula, we still start with the the actual cost, so this is how much we spent so far, and then we add the remaining work that's remaining on our project, which is represented by the BAC minus the EV. BAC is the budget at completion and earned value is represented by how much work we have done so far. So when you subtract the 2, it tells you the amount of work that's remaining. Then after that, we would divide that by CPI times SPI because we're assuming the progression of the project will be influenced by both the cost performance index and the Schedule Performance Index. Now that we have our budget at completion, let's look at our budget to complete. The budget to complete is how much more money you need at a certain point in the project in order to complete the entire project. So the budget at completion is how much money you need in total in order to complete the project at any certain point in the project. So you could really just reverse the formulas for budget at complete in order to get your budget to complete. There's a couple of ways that you can calculate your budget to complete. We'll look at this on this slide right here. The first way that you can calculate your budget to complete is by using your budget at completion and subtracting the actual cost. How much money you need in total to complete your project minus what you have actually spent to get how much more you need in order to complete the project. This makes sense. The second way that you can calculate your budget to complete is using your budget at completion and subtracting the earned value. The earned value represents the value of the work that you have completed so far. And the third way to calculate your estimate to complete is to make a completely new estimate, so calculating how much each of your activities you have remaining will cost, roll that up to the work package level, roll that up to the control account level, and then finally roll it up to the project level, so doing a completely new estimation. Now these 3 formulas are not equal to each other. The one that you use would depend upon the assumptions that you're making on your project. For example, if you are assuming that the project will progress at the same rate that you originally budgeted, then you will use the second formula, which is BAC minus EV. If you're assuming the project will progress at the new EAC that you just estimated, then you want to use the first formula, which is EAC minus AC. Our next formula is variance at completion, or VAC. The variance at completion is the difference between your original budget at completion and the new estimation at completion that you calculated midway through the project. So the formula for EAC is VAC minus EAC. And our next formula is TCPI, which is to-complete performance index. There's 2 ways that you can calculate your TCPI, and this would depend upon the assumption that you're making on your project. So if the BAC that you originally calculated is no longer relevant, then you want to use a second formula which takes the new EAC that you recalculated throughout your project into consideration. If the budget at completion that you calculated is still relevant, then you want to use the first formula which does not use the EAC. Now let's talk about what What is the TCPI? The TCPI computes the future required cost efficiency needed in order to achieve the target budget. So it is computed by calculating the work remaining, which is your BAC minus your EV. So BAC, or budget completion, minus EV, which is the present value of all of the work you completed so far. So this will tell you the amount of work that's remaining, and you would divide that by the amount of budget you have remaining. And the budget you have remaining is represented by the BAC, so the budget you have, minus the AC, so how much you have spent so far. Now, if again, like what we said earlier, if the budget that you calculated at the beginning is no longer relevant, then you want to replace this with the EAC. So instead of using BAC minus AC, you want to use EAC minus AC to get your budget that you have remaining. So once you have done Once you've done this, you also need to know how to interpret the TCPI. So the first— let's just look at this numerically. The first term that we have is the amount of work that we have remaining, and we're dividing this by how much money we have remaining. So if we have more work than we have budget, so then the only way is for the numerator to be greater than the denominator. So the work we have remaining is greater than the amount of budget we have remaining. Then the TCPI would be greater than 1, which is bad. So this is the opposite of the CPI and SPI we just looked at, which is, you know, if it's more than 1, then that's a good thing. So let's look at the reverse. If the budget— if the work we have remaining is less than the budget that we have remaining, so we have more budget than the work that we have to do, so the numerator is smaller than the denominator, This would mean that TCPI is less than 1, and that's good because that tells us we have more budget available than the amount of work we have, which means that we will be more likely to finish the project on budget. The next formula we can look at is the percentage complete. We can calculate the percentage complete for any specific task on the project or the project as a whole. The way that we calculate the percentage complete is we use EV, the Earned Value, so this is the present value of the work we have done so far, divided by our budget, which is our BAC, and we multiply that by 100, and this will tell us the percentage complete of our project. Here's a summary of all of the Earned Value formulas that we have looked at so far. We will be having a link in the comments below to all the slides, so you don't have to copy this down. You can just download this and print it out if you need to. Okay, the next formula, which is not EVM anymore, so these are other formulas you need to know for your upcoming PMP or CAPM exams, is the 3-point estimation, which is also sometimes called PERT. So there's 2 ways that you can calculate your 3-point estimation. The first one is using PERT, and you can also— they will also sometimes refer to this as beta. So if the question asks you to use the beta distribution or the PERT, then you want to use the first formula. Now the second, if they didn't specify that, if they say to use a triangular 3-point estimation, you want to use the second formula. So here's how it works. So basically when it comes to estimating for schedule or estimating for a budget, you want to come up with a pessimistic estimation, a most likely estimation, and an optimistic estimation. And this can work for both both schedule and cost. So if you're estimating the duration of a specific activity, you can say pessimistically this can take 10 weeks to complete, most likely it will take 7 weeks to complete, optimistically it can take 5 weeks to complete. You can do the same thing for budget. Pessimistically this activity will cost $1,000, most likely it will cost $500, optimistically it'll cost $300. Okay, and then once you come up with these 3 points of estimation, you will plug it in into either the beta distribution formula or the triangular distribution formula. If you plug it into the beta distribution formula, you will look at the first one. This is also called PERT. You would add the pessimistic estimation plus 4 times the most likely calculation plus the optimistic estimation, and then you would divide this by 6. If you're using the triangular distribution, then you would use the pessimistic estimation you came up with plus the most likely plus the optimistic, and in this case you would divide by 3. So what you can see here is that the PERT distribution places more emphasis on the most likely scenario, whereas the triangular one just averages out the pessimistic, most likely, and optimistic estimations. Our next formula is communication channels. You will find this in the communications knowledge area. The way that you calculate the number of communications on your project is using the formula n times bracket n minus 1 divided by 2. This will tell you how many different communication channels there are on your project, and n represents the number of people on your project. For example, if there's 5 people on your project, there's more than 5 communication channels. Bob can talk to Sally, Sally can talk to George, George can talk back to Bob, Stacy can talk to Tracy, etc. To calculate how many different ways the people on your project can talk to each other, you can use this formula. Let's say we have 5 people on our project, n equals 5. Then we use 5 times n minus 1 is 4, so 5 times 4 is 20, divided by 2 will give us 10. So there's 10 different ways these 5 people can talk to each other. And our last formula is probability. The way that we calculate probability— this is used in risk management— is by using probability of that risk occurring, multiplying it by the impact in any currency, for example dollars, of what would happen if that impact does occur. So as an example, let's say we have a risk that has a 30% probability of actually happening in the future, and if this risk does happen, it will cost our project $5,000 to fix. So the total impact of this risk is 0.3 times $5,000, which is $1,500. Using this formula, you can calculate the impact of risk And lastly, be sure to note these important values for your exam as well. So you need to know your sigma. So 1 sigma is 82.27%, 2 sigma is 95.54%, 3 sigma is 99.73%, and 6 sigma is 99.99%. Also, you need to know in what range the estimates have to be in. So at the start of your project, you just want to get a rough order of magnitude when you're estimating either your schedule or your cost, and this could be anywhere between -25% to +75%. And then as you progress through your project and you get to know more and more information, then your estimates become your preliminary estimation, which can be off by -15% to +50%. And then as you do another round of revisions and you get to know more information, you talk to your SMEs, you meet with your teams, etc., you get your budget estimate, which is between -10% to +25% of the actual budget or schedule duration that you're estimating. And finally, we get to the definitive estimation, which is even more accurate than the budget estimation. So this should be between -5% to +10%. Okay guys, so that's all of the formulas that you need to know for your upcoming PMP or CAPM exams. And again, be sure to sign up for a free course at Examspm.com/free In this 1.5-hour free course, you'll learn all sorts of things like how to fill in your application, different ways to approach the multiple choice questions on your exam, especially when all of the answers look the same. You'll get a study plan for passing your certification in the next 6 weeks. So it's a really great training. Be sure to sign up if you haven't already. And thank you so much for coming today. I hope you learned a lot. I hope you now understand all of the formulas you need to know for your upcoming exam, and I will see you in the next chapter. Be sure to like and subscribe to our channel, and I will see you soon.