25 Formulas You Need to Know to Pass the PMP Exam
Tips to keep in mind for the PMP Exam:
- Every exam is uniquely generated, and there is no guarantee of how many questions you will have which will require you to use a formula. However, as a rule, be prepared to answer ten to twenty questions which will require calculations (as much as 10% of your total exam questions).
- At the beginning of your exam, before answering any questions, brain dump all the formulas you can remember onto your provided paper space. If you take the test remotely, your paper space will be provided on screen.
- There is no getting around it - to correctly answer math-based questions on the exam, you will need to memorize these formulas. However, keep in mind how many questions are likely to be formula-based for the exam. 90% or more of the questions on the PMP are likely to not include a calculation. Make sure you divide your study time appropriately. Dedicate some time to memorizing these important calculations. However, do not spend all your study time rote memorizing formulas. This will not be enough on its own to pass the PMP Exam.
With these tips in mind, let's jump into the formulas!
Earned Value Management (EVM) Formulas
Earned Value Management is one of the more difficult concepts to understand for the PMP Exam, so let's break it down.
- In project management world, "value" is an equivalent term to "money."
- Therefore, the total value of a project is equal to the project's budget.
- We can say that the earned value of a project is equal to the percent complete you are with a project, relative to how much of the project's budget has been spent.
There are many handy formulas we use to visually demonstrate earned value on a project.
- Earned Value (EV)
EV = % complete * BAC (Budget at Completion)
Earned value is a measure of how much work you have completed on your project compared to your project plan. It measures whether we are over, on, or below budget. To make this calculation, you need to know the Budget at Completion.
- Budget at Completion (BAC)
BAC = Total cost estimates + Total contingency cost reserves
Your budget at completion is defined in the Determine Budget Process of a project. It is what you expect to spend on the project in total. BAC is a number that will most likely be given to you on the exam - you probably will not have to calculate it. Nonetheless, it is important to understand for the exam that the BAC for the project includes contingency cost reserves.
- Schedule Variance (SV)
SV = EV - PV
Schedule variance can tell you whether your project is ahead, on, or behind schedule. A negative number means you are behind schedule. A positive number means you are ahead of schedule. We will go through Present Value (PV) below in formula #11.
- Cost Variance (CV)
CV = EV - AC (Actual Cost)
Cost variance can tell you whether your project is over, on, or under budget. A negative number means you are over budget. A positive number means you are under budget. The Actual Cost (AC) is what you have spent on the project to date.
- Cost Performance Index (CPI)
CPI = EV / AC
The CPI is an alternative way of looking at the cost performance of the project in terms of a ratio. If your ratio is under 1, you are getting less than $1 of value for every dollar spent. If your ratio is above 1, you are getting more than $1 of value for every dollar spent.
Remember this: Calculating an index is the equivalent of calculating a percentage.
- Schedule Performance Index (SPI)
SPI = EV / PV
Similar to the CPI, the SPI is a ratio. An SPI of over 1 means that the project is being completed faster than planned, while an SPI below 1 means that the project is behind schedule.
- Estimate at Completion (EAC) #1 Most common formula: EAC = BAC / CPI
- Original cost estimate is flawed: EAC = AC + Bottom-up ETC
- There has been a deviation from the budget so far, however the rest of the project is estimated to be completed according to plan: EAC = AC + (BAC - EV)
- If you are behind schedule or over budget and need to take this into account: EAC = AC + [(BAC - EV) / (CPI + SPI)]
- Variance at Completion (VAC)
VAC = BAC - EAC
VAC is simply the difference between the Budget at Completion (BAC) and Estimate at Completion (EAC).
- Estimate to Complete (ETC)
ETC = EAC - AC
The Estimate to Complete (ETC) shows how much will be spent on the incomplete part of the project before it is complete.
- To Complete Performance Index (TCPI)
TCPI = (BAC - EV) / (EAC - AC)
This index (another ratio) is the cost performance that must be achieved to hit the cost target. It is one of the more difficult PMP exam formulas. To understand this a bit better, assume that when calculating the TCPI, your project is currently behind schedule or over budget. You must determine the rate that your project must move at to remain "on track."
- Present Value (PV)
PV = FV / (1+i)n
Where "i" = interest rate and "n" = time period.
This is the present value (current value) of a future lump sum.
- Future Value (FV)
FV = PV(1+i)n
Where "i" = interest rate and "n" = time period.
This is the value of money at a specified date in the future.
- Expected Monetary Value (EMV)
EMV = Probability * Impact
This is a risk management formula. It is used to calculate the monetary impact that a risk event has on the project by multiplying the probability the event will occur by the cost to the project if the event does occur.
- Payback Period
Payback Period = Initial Investment / Periodic Cash Flow
The payback period is the time required to earn back the money invested in a project. This is often used as an estimation tool to determine whether a project is worth the estimated budget (BAC).
- Return on Investment (ROI)
ROI = (Net Profit / Cost of Investment)
The ROI is another ratio, used to determine whether a project will have enough monetary return (earned value) to be worth the cost. Expect to see ROI on a question where you are deciding whether to initiate a project.
The Estimate at Completion is the expected final and total cost of the project, based on project performance. There are many ways to calculate EAC based on the type of problem you are encountering. The above formula is the one that you will most likelyuse on the exam. Other ways to calculate EAC include:
- Critical Path Method (CPM) Formulas
- PERT - The Weighted Average of Estimates
Beta = (P + 4M + O) / 6
This formula is used to estimate either duration or cost of activities. To use this formula, we need to know the Pessimistic (P), Most Likely (M), and Optimistic (O) estimates for the activity. As you can see, "Most Likely" (M) is weighted much more heavily than the pessimistic or optimistic outcome.
- Standard Deviation (SD)
SD = (Pessimistic - Optimistic) / 6
Standard Deviation measures the standard variation an activity will have from the average estimate. Low standard deviation means that activities will not vary much from the average.
- Float (Slack) Formulas
Total Float = Late Start (LS) - Early Start (ES)
Total Float = Late Finish (LF) - Early Finish (EF)
Float determines how long an activity can be delayed without affecting the schedule of the project. Float on the Critical Path is always 0. Non-critical path activities may have some float, measured in days.
Other Formulas to Know - Communications and Contracts
Here are other formulas related to communications and contract management that will be handy to know for the exam.
- Communication Channels Formula
Communications Channels = n(n-1) / 2
"n" is the number of stakeholders. This formula is used to determine how many lines of communication a project has and demonstrates that the number of stakeholders on a project has an increasing relationship to the lines of communication on that exist.
- Cost Plus Percentage of Cost (CPPC) Contract
Contract = Cost + (percent of cost as fee)
These types of contracts are also referred to as "cost reimbursement contracts." It pays the seller all allowed expenses, plus an additional payment for ex profit. In this type of contract, the buyer has more cost risk than the seller.
- Cost Plus Fixed Fee (CPFF) Contract
Price = Cost + Fee
In this type of contract, the seller has more cost risk than the buyer, as the seller must agree to the fixed amount to be paid for the work in advance.
- Cost Plus Award Fee (CPAF) Contract
CPAF = Cost + award fee
In this type of contract, as in any cost-plus contract, the buyer has more cost risk than the seller, as the buyer will not know the exact amount of the award fee to be paid upon completion.
- Cost Plus Incentive Fee (CPIF) Contract
CPIF = Cost + incentive fee
In this type of contract, as in any cost-plus contract, the buyer has more cost risk than the seller, as the buyer will not know the exact amount of the incentive fee to be paid upon completion.
- Time & Materials Contract
Price = Rate * Quantity
With this type of contract, both buyers and sellers face cost risk as neither party has any knowledge about the quantity to be produced at the time of signing the contract.
- Point of Total Assumption (PTA)
[(Ceiling Price - Target Price) / Buyer's Share Ratio] + Target Cost The Point of Total Assumption is only associated with Fixed Price Incentive Fee contracts. It is the amount above which the seller accepts all extra costs. Costs above the PTA level are unacceptable by the buyer and are due to mismanagement of the contract.
- Communication Channels Formula
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