Are you studying for the PMP certification exam?
If so, there are a few key areas you should concentrate on. The first thing would be formulas. Some essential formulas for the PMP exam are critical for passing the PMP certification exam. Although there is no adequate set of formula questions, one must consider these formulas during preparation.
In the PMP exam, you may encounter several simple and direct questions based on the PMP formulas to assess your understanding of these formulas. As a result, understanding these PMP formulas is critical.
In this article, we will go through all the formulas for the PMP exam and provide you with the knowledge of PMP formulas. We’ve put together a list of the cost management formulas you’ll need to know, along with a description of when and how to use them.
What Exactly are the PMP Formulas and Concepts?
If you’re studying for the PMP exam, you probably already know that you’ll need to know a few common project management formulas, where to use them, how to use them, how to calculate them, and, most importantly, how to get the values. Many say that the PMP exam’s hardest part is learning all the formulas.
We employ project management formulas in various project planning activities. Resource management, PMP cost management formulas, and schedule estimation are examples.
On the other hand, the PMP Syllabus includes many concepts that the Project Management Institute (PMI) frequently uses in PMP exams alongside the PMP formulas. PMI uses these concepts to assess your knowledge of fundamental project management terminology.
Formula 1:
Cost Variance (CV) = Earned Value (EV) – Actual Cost (AC)
Cost Variance (CV): This formula calculates the variance between the earned value (EV), which represents the value of work completed, and the actual cost (AC), which represents the actual expenses incurred. A positive CV indicates that the project is under budget, while a negative CV indicates that the project is over budget.
Formula 2:
Schedule Variance (SV) = Earned Value (EV) – Planned Value (PV)
Schedule Variance (SV): SV measures the variance between the earned value (EV) and the planned value (PV), which represents the authorized budget assigned to scheduled work. A positive SV means the project is ahead of schedule, while a negative SV indicates the project is behind schedule.
Formula 3:
Cost Performance Index (CPI) = EV / AC
Cost Performance Index (CPI): CPI indicates the efficiency of cost performance by comparing the earned value (EV) to the actual cost (AC). A CPI greater than 1 indicates that the project is under budget, while a CPI less than 1 suggests the project is over budget.
Formula 4:
Schedule Performance Index (SPI) = EV / PV
Schedule Performance Index (SPI): SPI measures the efficiency of schedule performance by comparing the earned value (EV) to the planned value (PV). An SPI greater than 1 indicates that the project is ahead of schedule, while an SPI less than 1 suggests the project is behind schedule.
Formula 5:
EAC = AC + Bottom-up ETC
Actual Cost (AC): By adding the actual costs incurred (AC) to the new, more accurate estimate for completing the remaining work (Bottom-up ETC), the formula adjusts the total expected cost (EAC) of the project. This allows project managers to account for any discrepancies between the original estimate and the actual project progress, providing a more realistic projection of the total cost needed to complete the project.
Formula 6:
EAC = BAC / Cumulative CPI
EAC = BAC / Cumulative CPI: This formula calculates the Estimate at Completion (EAC) by dividing the Budget at Completion (BAC) by the Cumulative Cost Performance Index (CPI). The Cumulative CPI represents the average CPI calculated based on the project’s performance up to the current point. It measures the efficiency of cost performance by comparing the Earned Value (EV) to the Actual Cost (AC).
This formula assumes that the cost performance will remain constant for the remainder of the project and provides an estimate based on the project’s historical cost performance.
Formula 7:
EAC = AC + (BAC – EV)
EAC = AC + (BAC – EV): This formula calculates the Estimate at Completion (EAC) by adding the Actual Costs (AC) incurred up to the current point to the difference between the Budget at Completion (BAC) and the Earned Value (EV). The difference between BAC and EV represents the remaining budget needed to complete the project. This formula assumes that the project’s cost performance will continue at the same rate as it has been up to the current point.
Formula 8:
EAC = AC + [BAC – EV / (Cumulative CPI ´ Cumulative SPI)]
EAC = AC + [BAC – EV / (Cumulative CPI’ Cumulative SPI)]: This formula calculates the Estimate at Completion (EAC) by adding the Actual Costs (AC) incurred up to the current point to the difference between BAC and EV, adjusted by the ratio of the Cumulative CPI to the Cumulative Schedule Performance Index (SPI). This formula accounts for cost and schedule performance in estimating the total cost needed to complete the project.
Formula 9:
Beta = (Pessimistic + 4 Most Likely + Optimistic) / 6
Beta = (Pessimistic + 4 Most Likely + Optimistic) / 6: This formula calculates the Beta value, which is used in the Program Evaluation and Review Technique (PERT) for estimating the duration or cost of an activity in project management. It involves averaging the Pessimistic, Most Likely, and Optimistic estimates of the duration or cost, giving more weight to the Most Likely estimate.
Formula 10:
EMV = P x I
EMV (Expected Monetary Value) = P × I: EMV represents the expected value of an uncertain outcome and is calculated by multiplying the Probability (P) of a specific outcome by its Impact (I) in terms of cost, time, or other relevant factors. It is commonly used in decision-making to assess the potential value of different scenarios or risks.
Formula 11:
RPN = Severity x Occurrence x Detection
RPN (Risk Priority Number) = Severity × Occurrence × Detection: RPN is a risk assessment tool used to prioritize risks based on their Severity, Occurrence, and Detection. Each factor is assigned a numerical value, and the product of these values determines the risk’s priority. RPN helps project teams focus on addressing high-priority risks first.
Formula 12:
EV = % Complete x Budget at Completion
EV (Earned Value) = % Complete × Budget at Completion: EV measures the value of work completed at a specific point in time and is calculated by multiplying the percentage of work completed (% Complete) by the total Budget at Completion (BAC). It is a key metric in earned value management, providing insight into project progress and performance.
Formula 13:
CV = Earned Value (EV) – Actual Cost
CV (Cost Variance) = Earned Value (EV) – Actual Cost: CV measures the variance between the earned value (EV), representing the value of work completed, and the actual cost (AC) incurred. A positive CV indicates that the project is under budget, while a negative CV suggests the project is over budget.
Formula 14:
SV = Earned Value (EV) – Planned Value (PV)
SV (Schedule Variance) = Earned Value (EV) – Planned Value (PV): SV measures the variance between the earned value (EV) and the planned value (PV), representing the authorized budget assigned to scheduled work. A positive SV indicates that the project is ahead of schedule, while a negative SV suggests the project is behind schedule.
Formula 15:
CPI = EV / AC
Cost Performance Index (CPI): compares the value of completed work to actual costs in project management. A CPI greater than 1 reflects cost efficiency, indicating completion under budget, while a CPI less than 1 suggests overspending, prompting adjustments to manage costs effectively.
Formula 16:
SPI = EV / PV
Schedule Performance Index (SPI): measures schedule efficiency by comparing the value of completed work to planned work. An SPI greater than 1 denotes progress ahead of schedule, while an SPI less than 1 indicates falling behind, prompting adjustments to meet project deadlines efficiently.
These metrics offer concise insights into cost and schedule performance, guiding decision-making to keep projects within budget and on schedule.
Formula 17:
The overarching formula for Estimate at Completion (EAC) encompasses multiple variations tailored to different project scenarios.
EAC = Actual Cost + Bottom-up Cost to Complete
The first iteration calculates EAC by summing the Actual Cost with the Bottom-up Cost to Complete, offering a revised estimate for completing the remaining work.
EAC = Budget at Completion / Cost Performance Index
The second formula divides the Budget at Completion by the Cost Performance Index (CPI), providing an adjusted estimate based on cost efficiency.
EAC = Actual Cost + [(Budget at Completion – Earned Value) / (Cost performance Index x Schedule Performance Index)]
The third iteration combines cost and schedule performance metrics, using the difference between Budget at Completion and Earned Value, adjusted by the product of CPI and SPI, to derive EAC.
EAC = Actual Cost + (Budget at Completion – Earned Value)
Finally, the fourth variation adds the difference between Budget at Completion and Earned Value to the Actual Cost, reflecting a straightforward adjustment for the remaining work.
These formulas offer comprehensive approaches to estimating the total cost needed to complete a project, incorporating actual costs, budget allocations, and performance metrics to provide accurate projections.
Formula 18:
VAC (Variance at Completion) = BAC (Budget at Completion) – EAC (Estimate at Completion)
VAC (Variance at Completion) = BAC – EAC: VAC represents the Variance at Completion, which is calculated by subtracting the Estimate at Completion (EAC) from the Budget at Completion (BAC). It provides insight into the projected variance between the original budget and the expected final cost of the project.
Formula 19:
TCPI (To-Complete Performance Index): TCPI is calculated in two ways:
- TCPI = (BAC – EV) / (EAC – AC)
TCPI = (BAC – EV) / (EAC – AC): This formula evaluates the future performance required to achieve the project within the original budget (BAC), considering the earned value (EV), actual cost (AC), and estimate at completion (EAC).
- TCPI = (BAC – EV) / (BAC – AC)
TCPI = (BAC – EV) / (BAC – AC): This alternative formula considers the original budget (BAC), earned value (EV), and actual cost (AC) to determine the required future performance to complete the project within budget.
Formula 20:
Standard Deviation (?) = (Pessimistic – Optimistic) / 6
Standard Deviation (?) = (Pessimistic – Optimistic) / 6: This formula calculates the Standard Deviation, a measure of the dispersion or variability of a set of values. It is determined by subtracting the Optimistic estimate from the Pessimistic estimate and dividing the result by 6. Standard Deviation helps assess the uncertainty or risk associated with project estimates.
Formula 21:
Communication Channels = n(n-1) / 2
Communication Channels = n(n-1) / 2: This formula calculates a project’s total number of communication channels, where “n” represents the number of stakeholders or team members. It provides a quantitative measure of the potential interactions and complexity of communication within the project team.
Formula 22:
Cost plus Percentage of Cost = Cost + n%
Cost plus Percentage of Cost = Cost + n%: This formula represents a method of pricing or estimating costs, where the final cost is determined by adding a percentage (n%) to the base cost. It is commonly used in contracts or procurement processes to account for additional expenses or profit margins.
Formula 23:
Cost plus Fixed Fee/ Cost Plus Award Fee/ Cost plus Incentive Fee
Cost plus Percentage of Cost = Cost + n
These three contract types—Cost Plus Fixed Fee, Cost Plus Award Fee, and Cost Plus Incentive Fee—operate under the same mathematical formula, where the buyer agrees to cover all incurred costs and adds an additional fee to compensate the seller. This fee remains constant throughout the project for Cost-plus Fixed Fee contracts.
In Cost Plus Award Fee contracts, the seller is awarded a fixed amount based on predefined criteria. Cost plus Incentive Fee contracts offer a variable fee based on project performance, with incentives awarded upon meeting specified conditions.
Despite their differences in fee structure and incentives, all three contracts are represented mathematically as “Cost plus Percentage of Cost = Cost + n,” with ‘n’ denoting the fixed fee, award fee, or incentive, respectively.
Formula 24:
ROI = (Net Profit / Cost of Investment) x 100
ROI (Return on Investment): ROI measures the profitability of an investment relative to its cost. It is calculated by dividing the Net Profit by the Cost of Investment and multiplying by 100 to express the result as a percentage. A higher ROI indicates a more profitable investment.
Formula 25:
Initial Investment / Periodic Cash Flow
Initial Investment / Periodic Cash Flow: This formula calculates the ratio of the initial investment to the periodic cash flow. It helps assess the relationship between the upfront investment required for a project and the subsequent cash flows generated over time.
Formula 26:
Net Present Value of Investment / Initial Investment Cost
Net Present Value (NPV) of Investment / Initial Investment Cost: NPV measures the present value of future cash flows generated by an investment, considering the initial investment cost. A positive NPV indicates that the investment is expected to generate more cash inflows than outflows, making it financially attractive.
Formula 27:
FV = Present Value x (1 + i)n
FV (Future Value) = Present Value × (1 + i)^n: This formula calculates the future value of an investment based on the present value, interest rate (i), and the number of periods (n). It is commonly used in financial analysis to estimate the value of an investment over time, considering compound interest.
Formula 28:
Present Value = Future Value / (1 + i)n
Present Value = Future Value / (1 + i)^n: This formula calculates the present value of a future cash flow, discounting it by the interest rate (i) and the number of periods (n). It helps determine the current worth of future cash flows, enabling better decision-making regarding investments or project financing.
Formula 29:
Target Price = Target Cost + Target Fee
Target Price = Target Cost + Target Fee: This formula is used in cost-reimbursable contracts to determine the total price the buyer (customer) will pay the seller (contractor). The Target Price is the sum of the Target Cost, representing the seller’s estimated costs to complete the project, and the Target Fee, which is the profit or fee the seller will earn if the project is completed within the specified cost parameters.
Formula 30:
PTA = [(Ceiling Price — Target Price) / Buyer’s Share Ratio] + Target Cost
PTA (Price Target Adjustment) = [(Ceiling Price — Target Price) / Buyer’s Share Ratio] + Target Cost: PTA is used in incentive contracts, such as cost-plus-incentive-fee (CPIF) contracts, to adjust the final price paid to the seller based on the actual performance of the project.
It calculates the final contract price by considering the difference between the Ceiling Price (maximum amount the buyer is willing to pay) and the Target Price, adjusted by the Buyer’s Share Ratio, which determines the portion of the cost overrun or underrun shared by the buyer and seller. The Target Cost represents the seller’s estimated costs to complete the project.
Conclusion:
Mastering the numerous PMP formulas presented in this blog is crucial for success on the PMP exam in 2024. However, it’s equally essential to carefully analyze exam questions and understand the context in which each formula is applied.
Project managers should consider hypothetical scenarios to determine the appropriate formula and approach. Additionally, staying updated with any changes or updates from the Project Management Institute (PMI) is essential to ensure alignment with the latest exam requirements.
To advance your PMP exam preparation, consider enrolling in the Invensis Learning PMP course. This course will equip you with the knowledge and skills needed to excel in your project management career.
