All Formulas PMP Exam

Critical Path Analysis (CPM)

Forward Pass through the network determines Early Start for each activity
Backward Pass through the network determines Late Start for each activity
ES: Early Start date of an activity
EF: Early Finish date of an activity
LS: Late Start date of an activity
LF: Late Finish date of an activity
Forward Pass Calculation:
Given: Project Start Date
Project Start Date = Early Start (ES) date for the first activity in the network
Project Start Date = ES 1st Activity
(ES + Duration) 1st Activity = (ES) Subsequent Activity
Backward Pass Calculation:
Given: Project Late Finish (LF) date (from forward pass through network)
(LF Duration) Last Activity = (LS) Last Activity
(LF Duration) Last Activity = (LF) Prior Activity
Float Calculation:
Total Float: TF = LF EF
= LS ES
i.e. the amount of time an activity can be delayed without impacting the planned end date of
the project.
Free Float: FF = ES Successor EF Predecessor 1
Three Points Duration Calculation
Estimated Durations: Optimistic (O), Most Likely (M), Pessimistic (P)
Three Points Average = Expected Duration = (O + M + P) / 3
PERT Weighted AvePERT Duration Calculation
Estimated Durations: Optimistic (O), Most Likely (M), Pessimistic (P)
PERT Weighted Average = Expected Duration = (O + 4 * M + P) / 6

Triangular Distribution
Estimated Durations: Optimistic (O), Most Likely (M), Pessimistic (P)
Mean = (O + M + P) / 3
Variance or a task: = [(P O) + (M O) (M P)] / 18
Standard Deviation:

i
i

Beta Distribution (using PERT approximations)

Estimated Durations: Optimistic (O), Most Likely (M), Pessimistic (P)
PERT Weighted Average = Expected Duration = (O + 4 * M + P) / 6
Variance of a task using PERT: = [(P O) / 6]

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Standard Deviation of a task: = (P O) / 6
+/- 1 is 68.3%
+/- 2 is 95.5%
+/- 3 is 99.7% (Three Sigma)

+/- 6 is 99.9% (Six Sigma)

Monte Carlo Simulation

This simulation performs (in simulation) the project many times and uses the network diagram and
PERT estimates to simulate the cost or schedule results of the project: Each project run provides a set
of project cost or schedule figures per activity which are aggregated to get total project cost or
schedule figures. Total figures are assigned a specific probability according to their frequency of
occurrence.
This method allows describing the relationship between project cost or schedule figures and risk.

Estimating Accuracy

Order of Magnitude Estimates

Budget Estimates
Definitive Estimates

-25% to +75%
-10% to +25%
-5% to +10%

Earned Value Analysis

PC = Planned Cost or "The Budget" or The Baseline
former: Budgeted Cost of Work Scheduled:
BCWS
AC = Actual Cost
Former: Actual Cost of Work Performed: ACWP
EV = Earned Value
former: Budgeted Cost of Work Performed:
BCWP
Cost Variance: CV = EV AC = BCWP ACWP
Cost Performance Index: CPI = EV / AC = BCWP / ACWP
Cost Variance Percentage: CV% = 100 * CV / EV = 100 * CV / BCWP
Schedule Variance: SV = EV PV = BCWP BCWS
Schedule Performance Index: SPI = EV / PV = BCWP / BCWS
Schedule Variance Percentage: SV% = 100 * SV / PV = 100 * SV / BCWS
Budget at Completion (BAC) = sum of all PVs (or BCWSs) of all activities
Forecasting:
Estimate at Completion (EAC)

= Actual to date + remaining Budget

= Actual to date + new estimate for remaining Work
= Actual to date + Cost Performance * remaining Budget

EAC = BAC / CPI

(the lower the CPI the higher the EAC)
EAC = AC + (BAC EV) / CPI = ACWP + (BAC BCWP) / CPI
Estimate to Complete: ETC = EAC AC = EAC - ACWP
Variance at Completion: VAC = BAC EAC

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Risk
No information

Some information

Complete information

Unknown unknowns

Known unknowns

Knowns

Uncertainty

Certainty

Risk Quantification
Expected Value or Expected Monetary Value: EMV = Risk Event Probability * Risk Event Value
The EMV allows you to define what your reserve (contingency budget, management reserve) should
be.
Decision Trees:
EMV of a Decision = EMVi
i

where EMVi are all outcomes of that decision path

i.e. all EMVs dependant from a single decision are added up (the sum of their probabilities is 1):
Uncertain
Outcome

Decision

EMV1

Alternative 1
EMV2
Alternative 2

Total EMV (for Alternative 1) = EMV1 + EMV2

Combination of Probabilities of two Events:
Probability (for Event 1) * Probability (for Event 2) = Probability (for both Events to happen)
prob (A AND B) = probA * probB
Probability (for Event 1) + Probability (for Event 2) = Probability (for either Event 1 or Event 2 to
happen)
prob (A OR B) = probA + probB

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Present Value
Document cash flow with cash flow diagram:

t0

t1

t2

t3

Time

Arrow up = Positive cash flow ($s in)

Arrow down = Negative cash flow ($s out)
FV
Present Value: PV =
Example:

(1 + r) n

where FV = Future Value, r = interest rate, n = number of time periods

FV = $5.000, r = 10%, n = 5 years, what is PV?

PV = $5.000 / (1 + 0,1)5 = $5.000 / 1,61 = $3.105

Net Present Value:

NPV = total benefit (income or revenue less the costs)

= PV (of all income)i i

PV (of all costs)j

j

Usually, one PV is negative and is the initial investment.

In case:
NPV negative = poor investment
NPV positive = consider further
NPV zero consider other factors
Internal Rate of Return: IRR = the relationship (interest rate) between project income as compared to
project costs (no calculations will be required during the exam)
IRR is the interest rate at which NPVof all cash flows = zero
or max rate for capital without loss
Payback Period:

The number of time periods it takes for your income to recover the costs
This is the time before you start making a profit.

Benefit Cost Ratio:

Compares the costs to the outcome (benefits) of different projects

BCR > 1
this means the outcome is greater than the costs
BCR < 1
this means the outcome is less than the costs
BCR = 1
this means the outcome is equal to the costs

Opportunity Cost:

The cost of giving up the profit (NPV) of one project if another is selected.

Sunk Costs:

Already expended costs. Be aware that accounting standards say that sunk
costs should not be considered when deciding whether to continue with a
troubled project (a project which has overspent its budget and still hasnt
completed, yet).

Law of Diminishing Returns: The more you put into a project (e.g. resources or finances), the less you
will get out of it.
Working Capital:

Current assets minus current liabilities or the amount of money the company
has to invest, incl. investment in project.

Project Selection Techniques include:

Present Value
Net Present Value
IRR
Payback Period
Benefit Cost Ratio
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Number of Communication Channels
Communication channels grow at a rate greater than linear in dependence from the number of
participants in the communication:
Number of channels = N * (N-1) / 2
communication

where N is the number of participants in the

Contract Types
The objective of selecting an appropriate contract type is to achieve a reasonable distribution of risk
between buyer and seller and the greatest incentive for the seller to deliver on time, within budget and
to the expected quality level.
There are generally three types of contracts:
1. CR: Cost reimbursable
2. FP: Fixed price
3. T&M: Time and material
1 Cost Reimbursable Contract (CR)
The sellers costs are reimbursed, therefore, the buyer bears the risk of cost overruns.
Cost Plus Fixed Fee (CPFF): the buyer pays all costs plus a fixed fee (profit) at a specific amount.
E.g. Contract amount = Cost + fee of $10.000
Cost Plus Percentage of Costs (CPPC): bad, because in case of cost overrun the seller makes even
more profit. Sellers are not motivated to control the costs.
E.g. Contract amount = Cost + fee of 15% of Costs
Cost Plus Incentive Fee (CPIF): buyer pays all costs and an agreed upon fee, plus a bonus for
achieving the incentive.
E.g. Contract amount = Cost + fee of $10.000, for each months seller will deliver before target date, he
will get an incentive of $2.000.
2 Fixed Price Contract (FP)
Sometimes also called lump sum or firm fixed price. A single price is agreed upon for all the project
deliverables. The seller bears the risk of cost overruns.
E.g. Contract amount = $50.000
Fixed Price Incentive Fee (FPIF): as in CPIF
E.g. Contract amount = $50.000, for every month the seller delivers before the target date he will
receive $5.000.
3 Time and Material Contract (T&M)
Or Unit Price. Used for small contract amounts: costs on per hour or per item basis.
E.g. Contract amount = $100 / hour + costs for material
Incentive Fee Calculation
Contracts including incentives allow a bonus on top of the agreed upon contract price for beating cost,
time, performance, scope of work, or quality. An incentive helps to bring the sellers objectives in line
with the buyers.
E.g. CPIF contract:
Target cost = $210.000
Target fee = $25.000
Target price = Target cost + Target fee = $235.000
Sharing ratio (buyer/seller) = 80/20
Actual cost = $200.000
What is to be shared? There is Target cost Actual cost = $10.000 to be shared 80/20 =
$8.000/$2.000
What is the fee the buyer will pay? = Target fee + sellers incentive = $25.000 + $2.000 =
$27.000
What is the final Contract price? = Actual cost + fee = $200.000 + $27.000 = $227.000
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E.g. FPIF (1)
Target cost = $150.000
Target fee = $30.000
Target price = Target cost + Target fee = $180.000
Sharing ratio (buyer/seller) = 60/40
Ceiling price = $200.000
Actual cost = $210.000
What is to be shared? There is Target cost Actual cost = $60.000 to be charged 60/40 =
$36.000/$24.000
What is the fee the buyer will pay? = Target fee + sellers incentive = $30.000 $24.000 =
$6.000
What is the final Contract price? = Actual cost + fee = $210.000 + $6.000 = $216.000
However, this is above the ceiling price of $200.000, so the final price is $200.000.
E.g. FPIF (1)
Target cost = $9.000.000
Target fee = $850.000
Target price = Target cost + Target fee = $9.850.000
Sharing ratio (buyer/seller) = 70/30
Ceiling price = $12.500.000
Actual cost = $8.000.000
What is to be shared? There is Target cost Actual cost = $1.000.000 to be charged 70/30 =
$700.000/$300.000
What is the fee the buyer will pay? = Target fee + sellers incentive = $850.000 + $300.000 =
$1.150.000
What is the final Contract price? = Actual cost + fee = $8.000.000 + $1.150.000 = $9.150.000
This is under the ceiling price therefore, this contract price will be paid.

2.14 Risk and Contract Type

Scope of work
information
Degree of
uncertainty

Very little
Complete
High

Partial
Moderate

Low

Degree of risk

High

Medium

Low

Suggested risk
allocation

100%
0%

Buyer
50%
50%

Seller
Appropriate
contract type

0%
100%
CPP

CPI

CPFF

FPP

FFP

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The point of total assumption (PTA) is a price determined by a fixed price plus incentive fee contract (FPIF)
above which the seller bears all the loss of a cost overrun.

It is also known as the "most pessimistic cost" because it represents the highest point beyond which costs are not
expected to rise, given reasonable issues. If costs go beyond the PTA, they are assumed to be due to mismanagement rather than a worst-case set of difficulties.
The seller bears all of the cost risk at PTA and beyond. In addition, once the costs on an FPIF contract
reach PTA, the maximum amount the buyer will pay is the ceiling price.
Any FPIF contract specifies a target cost, a target profit, a target price, a ceiling price, and one or more share
ratios. The PTA is the difference between the ceiling and target prices, divided by the buyer's portion of the share
ratio for that price range, plus the target cost.
PTA = ((Ceiling Price - Target Price)/buyer's Share Ratio) + Target Cost

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