If you’re studying for the PMP® exam, you have probably already learned that you need to know some frequently used project management formulas—along with where to use them, how to use them, how to compute them, and most importantly, how to derive the values. In fact, many say that the most difficult part of the exam is learning all the PMP formulas. We’ve put together a list of cost management formulas that you’ll need to know, along with a breakdown of how and when to use them.

Cost Management Knowledge Area PMP Formulas

Although there are more than 25 project management formulas that you might need to tackle during the exam, there are a few cost management formulas that are very important, and which you’re likely to encounter more than once during the exam. Further, many of the calculation-based questions are based on these top 8 cost management formulas.

1

Cost Variance (CV) = Earned Value (EV) – Actual Cost (AC)

2

Schedule Variance (SV) = Earned Value (EV) – Planned Value (PV)

3

Cost Performance Index (CPI) = EV / AC

4

Schedule Performance Index (SPI) = EV / PV

5

EAC = AC + Bottom-up ETC

6

EAC = BAC / Cumulative CPI

7

EAC = AC + (BAC – EV)

8

EAC = AC + [BAC – EV / (Cumulative CPI ´ Cumulative SPI)]

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Formulas 1 – 4

Take a look at the first four PMP formulas above and try to find out the commonalities in them. Not getting it yet? Yes, the easiest part is Earned Value (EV). It appears above in all the formulas, which means you have to derive the values of cost variance, schedule variance, cost performance index, and schedule performance index, keeping Earned Value in mind at first.

Earned Value comes before any other value. Most importantly, if you are working cost-related questions; think about the actual cost with Earned Value. If the question is about a schedule, think about planned value along with the earned value. If it is a matter of variance, you need to subtract actual cost and planned value from earned value—depending on the situation.

Similarly, if it is a question of getting index values, actual cost and planned value will be divided from earned value. If it is a matter of cost performance index; actual cost will be divided from earned value and if it is scheduled performance index; the planned value will be divided from Earned Value. So, in all these circumstances, Earned Value plays a huge role, which is why it’s at the top of the list.

Formula 5

5

EAC = AC + Bottom-up ETC

Since you will derive the estimate at completion, you need to focus on the actual costs incurred; only then can you obtain the future value you need for processing the project. See the above formula; it is used when the original estimate is fundamentally flawed. You use this formula to calculate an actual plus new estimate for the remaining work.

Formula 6

6

EAC = BAC / Cumulative CPI

If you were asked during the examination whether you are a good project manager, working on the project as planned—i.e., are you able to maintain positive values in both CPI and SPI—in this case, you would use the above-mentioned formula from other PMP formulas. This formula is used when the original estimation is met without any deviation.

Formula 7

7

EAC = AC + (BAC – EV)

If you find yourself in bad shape during the project execution and have incurred more money on the project than expected or planned, use this formula to calculate the estimate at completion value. Again, your actual cost will be used first. one of the best from all PMP formulas.

Formula 8

8

EAC = AC + [BAC – EV / (Cumulative CPI ´ Cumulative SPI)]

This pmp formula is used to calculate actual to date plus the remaining budget changed based on performance—used when we believe the current ratio is typical as planned. In order to meet the schedule as decided earlier, we calculate the EAC accordingly to meet that schedule.

9. Beta value in PERT 

When planning a project, budget and duration are key factors. PERT (Project Evaluation and Review Technique) is used to estimate these two factors by considering three points of reference. An optimistic estimate, a pessimistic estimate, and a most likely estimate. This formula is expressed as follows.

Beta = (Pessimistic + 4 Most Likely + Optimistic) / 6

The most likely estimate is given higher weightage in the formula since it is expected to be the most likely outcome.

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10. Estimated Monetary Value Formula (EMV)

The EMV formula calculates the monetary value of any project. Often, the parameters that factor into project management are unknown variables. The EMV formula determines what effect risk factors will have on the project. The formula is expressed as:

EMV = P x I

'P' is the probability of a certain event occurring.

'I' is the monetary impact of this event.

11. Risk Priority Number Formula (RPN)

In project management, risks and crises are analyzed using three factors. These are the severity of the risk factor, occurrence of the risk factor, and detectability. The Risk Priority Number formula ranks all risks to the project by considering these three factors. The formula is expressed as:

RPN = Severity x Occurrence x Detection

The values for the S, O, and D values can be obtained from FMEA Severity, Occurrence, and Detection tables.

12. Earned Value Formula (EV)

Earned Value Management is a critically acclaimed method of determining project cost and schedule perspectives. The EV formula achieves this by calculating the earned value by factoring the project's total budget with the total percentage of project completion. This is expressed mathematically as:

EV = % Complete x Budget at Completion

13. Cost Variance Formula (CV)

Project managers use the cost variance formula to determine whether they are over or under budget. It is a simple subtraction formula expressed as

CV = Earned Value (EV) – Actual Cost

In simple terms, this formula lets you figure out the difference between what you planned on spending versus what you ended up spending.

14. Schedule Variance Formula (SV)

Schedule variance is quite similar to cost variance. The key difference is that SV uses time as a point of reference when calculating the variance. This is expressed mathematically as:

SV = Earned Value (EV) – Planned Value (PV)

This formula calculates the value of work done with respect to the work scheduled to be done.

15. Cost Performance Index Formula (CPI)

The Cost Performance Index is a ranking system that determines the project's cost-effectiveness. This is achieved by dividing the earned value of the project by the actual cost of the project. Here is the formula:

CPI = EV / AC, where

EV = Earned Value

AC = Actual Value

If the CPI is a value that is 1 or greater than 1, it indicates that the project is running as per the budget.

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16. Schedule Performance Index Formula (SPI)

The SPI formula quite simply calculates the progress of the project. By using the earned and planned value of the project, it is easy to determine if the project is on target.

SPI = EV / PV, where

EV = Earned Value

PV = Planned Value

An SPI value of 1 or higher indicates that the project is running on schedule.

17. Estimate at Completion Formula (EAC)

There are four methods to calculate the EAC formula. The EAC formula is required to calculate the estimated budget required to complete the project. This is a very important factor for project managers as they are often in charge of fixing and justifying a budget for a project.

EAC = Actual Cost + Bottom-up Cost to Complete

EAC = Budget at Completion / Cost Performance Index

EAC = Actual Cost + [(Budget at Completion – Earned Value) / (Cost performance Index x Schedule Performance Index)]

EAC = Actual Cost + (Budget at Completion – Earned Value)

Any of the above formulas can be used to figure out the estimate at completion.

18. Variance at Completion Formula (VAC)

The Variance at Completion formula is defined as a projection of the budget amount exceeded or leftover after the project. It is a simple subtraction formula expressed as follows:

VAC (Variance at Completion) = BAC (Budget at Completion) – EAC (Estimate at Completion)

The VAC can have a positive, negative, or zero value.

A positive value indicates a leftover budget at the end of project completion. A negative value indicates that the project has overrun the budget. A zero value indicates that the project was completed at the same budget that was estimated at the start.

19. Estimate to Complete Formula (ETC)

The Estimate to Complete formula gives the project manager an idea of the cost-performance index (CPI) that is required to complete the project. There are two ways to represent the formula:

TCPI = (BAC – EV) / (EAC – AC)

TCPI = (BAC – EV) / (BAC – AC)

Where,

BAC = Budget at completion

EV = Earned Value

EAC = Estimate at completion

AC = Actual cost

20. Standard Deviation Formula

Standard deviation is a factor used to determine the accuracy of the statistical figures produced during a project's planning phase. The standard deviation will determine whether the numbers set during the planning phase will vary while the project is running.

Standard Deviation (σ) = (Pessimistic – Optimistic) / 6

This formula uses the pessimistic value expected and the optimistic value expected for any factor when determining the standard deviation.

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21. Calculating Communication Channels

Communication is one of the most important aspects of project management. The formula for finding the required number of communication channels considers the number of stakeholders in the project. It is represented as:

Communication Channels = n(n-1) / 2

Where 'n' is the number of stakeholders.

As the formula shows, the more stakeholders involved, the higher the number of communication channels required.

22. Cost plus percentage of Cost Formula

This is a specific kind of contract between a buyer and a seller that is strikingly in favor of the seller. In this contract, the buyer agrees to pay the seller all the costs incurred as well as add a percentage of the total cost to the payment. Mathematically this is represented as:

Cost plus Percentage of Cost = Cost + n%

Where 'n' is the percentage of the total cost that is added.

23. Cost plus Fixed Fee

In this contract, the buyer agrees to pay the seller all the costs incurred as well as add a fixed fee to the total cost of the payment. Mathematically this is represented as:

Cost plus Percentage of Cost = Cost + n

Where 'n' is the fixed fee.

24. Cost Plus Award Fee

Cost Plus Award fee differs from cost plus a fixed fee in the way that this type of contract awards the seller a fixed amount of money based on pre-set guidelines. The formula remains the same.

Cost plus Percentage of Cost = Cost + n

Where 'n' is the award fee.

25. Cost plus Incentive Fee

In this case, the seller is paid an incentive based on how quickly the project is completed. A fixed amount is decided as an incentive, and a condition is set to trigger that incentive. If the condition is triggered, the incentive is awarded.

Cost plus Percentage of Cost = Cost + n

Where 'n' is the incentive

26. Return on Investment (ROI)

A Return on Investment is a percentile rate at which the total amount invested in the project is recovered over a while. The formula is very simple, and it is represented as,

ROI = (Net Profit / Cost of Investment) x 100

27. Payback Period

The payback period is quite simply the amount of time it takes for the investment amount of the project to be recovered.

Initial Investment / Periodic Cash Flow 

The payback period is usually represented in months.

28. Cost Benefit Ratio Formula

The project's cost-benefit ratio is a direct comparison between the project's initial investment and its value now. This is represented as:

Net Present Value of Investment / Initial Investment Cost

If the number is greater than 1, there is a net profit on the initial investment. If it is less than 1, the investment is currently at a loss.

29. Future Value Formula (PV)

The future value formula helps us understand what a fixed amount of money in the present time will be worth at a given time. Future value can be calculated along with compound interest using the following formula:

FV = Present Value x (1 + i)n

Where,

i = interest rate

n = time period in a number of months/years

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30. Present Value Formula (PV)

Present value denotes the project's future value by adjusting today's money to inflation rates. This gives the project manager a great idea about how profitable the project is.

Present Value = Future Value / (1 + i)n

Where,

i = interest or discounting rate

n = time period in a number of months/years

31. Target Price

A target price is an agreed-upon amount of money between the buyer and the seller. The target price includes the cost and any fee given to the seller above the cost. This simple addition is represented as:

Target Price = Target Cost + Target Fee

32. Point of Total Assumption

The Point of Total Assumption is the cost tipping point beyond which the project will not make any profits. Beyond the PTA amount, all expenses are losses on the part of the seller. Here is the formula:

PTA = [(Ceiling Price — Target Price) / Buyer’s Share Ratio] + Target Cost

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Conclusion

In order to best decide which PMP formulas to use and where to make sure you’re reading the question carefully and consider the hypothetical situation, a project manager would be in when faced with this sort of problem.

In addition to these important cost management formulas, you’ll want to stay current with any updates on the Project Management Institute website. Simplilearn offers online training for the PMP certification that delivers hands-on projects in scope management, time and cost management, and risk assessment, designed to prepare you as much as possible for the PMP® exam.

PMP is a registered mark of the Project Management Institute, Inc.

Are you looking forward to making a mark in the Project Management field? If yes, enroll in the Project Management Certificate Program now and get a step closer to your career goal!

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