With ever increasing demands from your customer, executives, and other stakeholders, providing an accurate forecast is more important than ever. Whether the project baseline started from an excel project management template or is a proper project s curve, these indicators serve to better predict the direction of your project and help you take corrective action. But what cost management and scheduling techniques should we use on each project so that our project forecast is believable and realistic?
The most effective way to visually display a project forecast is through a project s curve. Given that, this article assumes you have a basic understanding of cost and schedule integration or otherwise known as earned value management (EVM). The approach to evaluate the accuracy of the forecasting techniques available in earned value management consists of a three step procedure, as summarized:
- Step 1: Define uncertainty
- Step 2: Simulate project progress
- Step 3: Evaluate the forecast accuracy
Uncertainty is everything. Uncertainty can be hidden on activity durations or costs, resource use, the presence of precedence relations or even on the existence of an activity in the project network. Therefore, single point estimates should be better replaced by probability distributions to incorporate this uncertainty. In doing so, project parameters that are considered to be deterministic are then modeled as random variables that enable the project manager to develop a computerized simulation model that imitates project progress.
Simulate Project Progress
Random numbers are generated from the probability distributions defined earlier to imitate a fictitious project progress run. This process is repeated a (huge) number of times such that each simulated project run is different. The general idea is that each simulation run reflects a realistic project run that can possibly happen when the project is in real progress.
Evaluate The Forecast Accuracy
During each project simulation run, the periodic time and cost performance of the project is measured using earned value management data which are then used to predict the final duration and total real cost of the project. At the end of each project run, the simulated project duration and cost is known and is compared to the planned duration and budgeted cost in order to evaluate the accuracy of these periodic predictions.
To conclude, the experienced project manager who is knowledgeable about the use of EVM metrics and predictions can choose among a set of time and cost prediction techniques, as discussed in Earned Value Management: Forecasting time and Earned Value Management: Forecasting cost. However, despite the rich availability, no guidelines are given on which techniques to use for a specific project.
Explore why yesterday’s approach to managing cost and risk with spreadsheets no longer works. While spreadsheets serve many purposes on the construction of capital projects, it can be ineffective as a core “business critical” application.