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33 Key PMP Formulas to Pass the PMP Certification Exam

33 key pmp formulas
Earning the Project Management Professional (PMP) certification demonstrates your proficiency in leading and directing projects. The exam tests your knowledge of PMP formulas, including your ability to correctly calculate schedule, cost, quality, and risk management formulas.

Mastering PMP formulas is key to passing the certification exam. This blog post provides an overview of the most important formulas to know and how to apply them. With proper preparation, you can enter the exam room with confidence in your formula knowledge.

Complete List of PMP Formulas You Need to Know

 

Critical Path Method Formulas:

  • Critical Path (CP)
  • Total Float (TF)
  • Free Float (FF)
  • Project Finish Date = Early Start + Duration
  • Late Finish = Late Start + Duration

Earned Value Management Formulas:

  • Planned Value (PV)
  • Earned Value (EV)
  • Actual Cost (AC)
  • Schedule Variance (SV)
  • Cost Variance (CV)
  • Schedule Performance Index (SPI)
  • Cost Performance Index (CPI)
  • Estimate to Complete (ETC)
  • Estimate at Completion (EAC)

Cost Management Formulas:

  • Cost Estimate
  • Cost Baseline
  • Cost Variance (CV)
  • Budget at Completion (BAC)
  • To-Complete Performance Index (TCPI)

Quality Management Formulas:

  • Defects per Million Opportunities (DPMO)
  • Six Sigma Quality
  • Cost of Poor Quality (COPQ)
  • Rework Percentage

Risk Management Formulas:

  • Probability Impact (PI)
  • Expected Monetary Value (EMV)
  • Present Value (PV)
  • Internal Rate of Return (IRR)
  • Return on Investment (ROI)

Communication Management Formulas:

  • Frequency Index
  • Performance Reporting Frequency
  • Stakeholder Engagement Planning

Procurement Management Formulas:

  • Bidder Evaluation Criteria
  • Contract Pricing

Now let us see the 34 PMP Formulas in Detail

 

  1. Critical Path (CP)

    • Definition: The critical path is the sequence of project network activities that represents the longest path through the project. It determines the minimum time required to complete the project.
    • How to Calculate: To find the critical path, identify all the activities in the project and create a network diagram showing the dependencies and durations. The critical path includes activities with zero total float. Add up the durations of the critical path activities to calculate the overall project duration.
    • Formula: Critical Path = Longest sequence of activities in terms of duration
    • Calculation Example:

    Activity A has a 5-day duration Activity B has a 3-day duration Activity C has a 7-day duration Activity D has a 5-day duration

    The network diagram shows A -> B -> C -> D as the longest path.

    Therefore: Critical Path = A + B + C + D = 5 + 3 + 7 + 5 = 20 days

    • Key Things to Know:
      • The critical path determines the shortest time to complete the project.
      • Any delays on the critical path will delay the project.
      • Critical path activities have zero floats.
      • Improving estimates on the critical path can help shorten the project timeline.
      • Re-calculating the critical path is key as the project progresses.
  2. Total Float (TF)

    • Definition: Total float is the amount of time an activity can be delayed without delaying the overall project finish date.
    • Formula: Total Float (TF) = Late Finish – Early Finish
    • Calculation Example:

    Activity A Early Finish: Day 5 Late Finish: Day 7

    TF = Late Finish – Early Finish = 7 – 5 = 2 days

    • What Total Float Means:
      • TF = 0 means the activity is on the critical path
      • TF > 0 means the activity has flexibility in scheduling
      • TF helps determine the critical path
      • Lower float activities have a higher risk of delaying the project
    • Managing Float:
      • Monitor float throughout the project
      • Use up available float before delaying the project finish
      • Prioritize activities with the lowest float
      • Re-calculate float as schedule changes
      • Identify causes if an activity uses up its float
    • Key Things to Remember:
      • Total float depends on preceding and succeeding activities
      • Adjusting preceding activities affects the total float
      • Project managers use float to schedule efficiently
  3. Free Float (FF)

    • Definition: Free float is the amount of time an activity can be delayed without delaying the early start of its successor activity.
    • Formula: Free Float (FF) = Early Start of Successor – Early Finish of Predecessor
    • Calculation Example:

    Activity A
    Early Finish: Day 5

    Activity B Early Start: Day 7

    FF = Early Start of B – Early Finish of A
    = 7 – 5 = 2 days

    • What Free Float Indicates:
      • Amount of float available before affecting next activity
      • Scheduling flexibility for an activity independent of project finish
      • Lower free float means higher risk of delaying successor
    • Using Free Float:
      • Monitor free float throughout project
      • Prioritize activities with lowest free float
      • Adjust schedule to use free float
      • Look for causes if an activity uses up free float
    • Key Points:
      • Not necessarily correlated with total float
      • Can identify binding constraints between activities
      • Critical chain method aims to protect free float

    So in summary, free float helps optimize activity scheduling while total float helps optimize project duration.

  4. Project Finish Date = Early Start + Duration

    – This formula is used to calculate the finish date for a project activity

    Where:
    – Project Finish Date = The date the activity is scheduled to finish
    – Early Start = The earliest possible start date for the activity
    – Duration = The total time required to complete the activity

    Example:
    – Activity A
    – Early Start: January 2nd
    – Duration: 15 days
    – Project Finish Date = Early Start + Duration
    = January 2nd + 15 days
    = January 17th

    – Things to Note:
    – Early Start is based on predecessors and project schedule
    – Duration includes estimated work time to complete the activity
    – Finish Date sets schedule baseline for activity completion
    – Finish Date drives succeeding activities and ultimately project end date
    – Update Finish Date as durations change via progress updates

    – Usage:
    – Calculate initial finish dates for all activities
    – Update finish dates to reflect schedule changes
    – Compare planned versus actual finish dates
    – Identify activities with delayed finish dates
    – Determine impact on project completion date

    So in summary, this formula converts duration to a fixed date for planning and tracking project timelines.

  5. Late Finish = Late Start + Duration

    • Definition:
      • Late Finish = The latest possible date an activity can finish without delaying the project finish date
      • Late Start = The latest possible date an activity can start without delaying the project
      • Duration = The total work time required to complete the activity
    • Formula: Late Finish = Late Start + Duration
    • Example:
      • Activity A
      • Late Start: June 10
      • Duration: 5 days
      • Late Finish = Late Start + Duration
        = June 10 + 5 days = June 15
    • What the Late Finish Date Indicates:
      • The last possible date an activity can finish without affecting project end date
      • Total float available for the activity
      • Flexibility in scheduling the activity
    • How Project Managers Use Late Finish:
      • Calculate float and scheduling flexibility
      • Identify the critical path (late finish = early finish means no float)
      • Prioritize activities with least float
      • Determine impacts of activity delays
      • Update schedules based on progress
    • Key Considerations:
      • Determined by predecessors and successors
      • Must recalculate as project progresses
      • Critical path has zero total float
      • Delays in late finish delay the project

    In summary, the late finish date helps optimize schedules and monitor project timelines.

  6. Planned Value (PV)

    • Definition: Planned value (PV) is the authorized budget assigned to the work scheduled to be completed by a certain point in the project.
    • Formula: Planned Value (PV) = Planned % Complete x Budget at Completion (BAC)
    • Example:
      • Project budget (BAC): $100,000
      • Work scheduled to be completed by month 2: 25%
      • PV = % Complete x BAC
        = 25% x $100,000 = $25,000
    • What PV Measures:
      • The physical work that should have been completed as per the project plan
      • How much of the budget should have been spent
      • Provides baseline for performance measurement
    • How Project Managers Use PV:
      • Calculate it for a status date as per schedule
      • Compare PV to earned value (EV) to determine schedule variance
      • If PV > EV, the project is behind schedule
      • If PV < EV, the project is ahead of schedule
    • Key Points:
      • PV changes over time as per planned schedule
      • Used to calculate schedule variance (SV = EV – PV)
      • Delays relative to baseline appear as negative SV
      • A key metric for tracking project performance

    In summary, planned value measures the budgeted work scheduled to be completed at any given point in the project.

  7. Earned Value (EV)

    • Definition: Earned value (EV) is the measurement of the amount of work actually completed, expressed in terms of the approved budget.
    • Formula: Earned Value (EV) = Actual % Complete x Budget at Completion (BAC)
    • Example:
      • BAC = $100,000
      • Actual % complete = 20%
      • EV = 20% x $100,000
        = $20,000
    • What EV Measures:
      • The dollar value of work completed at a point in time
      • Actual physical work progress on deliverables
      • Performance relative to budget
    • How Project Managers Use EV:
      • Compare to planned value to determine schedule variance
      • Compare to actual costs to determine cost variance
      • Monitor EV over time to track budgeted work performed
    • Key Characteristics:
      • EV increases as work gets completed
      • Negative EV variances indicate problems
      • Used to forecast final project cost and completion
      • More reliable than % complete estimates

    In summary, earned value is a key metric used by project managers to track real work progress and performance.

  8. Actual Cost (AC)

    • Definition: Actual cost (AC) is the total of the costs actually incurred in completing the work performed on the project to date.
    • Formula: No formula, it is the actual money spent on doing project work
    • Example:
      • Planned project expenses (budget): $50,000
      • Actual expenses incurred so far: $40,000
      • Actual Cost (AC) = $40,000
    • What AC Measures:
      • The real monetary cost of the work completed so far
      • Sunk costs spent on project activities
      • Efficiency of executing the budget
    • How Project Managers Use AC:
      • Compare to earned value to calculate cost variance
      • Determine cost performance – Is the budget being used efficiently?
      • Forecast total project costs based on performance
    • Key Characteristics:
      • Driven by resource usage and rates
      • Increase over project life cycle as work is done
      • AC lags behind EV if performance is good
      • AC exceeds EV if costs are higher than planned

    In summary, tracking actual costs spent is essential for project cost management and performance measurement.

  9. Schedule Variance (SV)

    • Definition: Schedule variance (SV) is the difference between the earned value (EV) and the planned value (PV) of the project.
    • Formula: Schedule Variance (SV) = Earned Value (EV) – Planned Value (PV)
    • Example:
      • Earned Value (EV) = $80,000
      • Planned Value (PV) = $100,000
      • Schedule Variance = EV – PV = $80,000 – $100,000 = -$20,000
    • What Positive or Negative SV Indicates:
      • Positive SV means ahead of schedule
      • Negative SV means behind schedule
      • Higher negative SV indicates greater schedule problems
    • How Project Managers Use SV:
      • Monitor SV each period to identify schedule issues
      • Take corrective actions if SV is negative
      • Assess performance of schedule management
      • Forecast delays to completion based on SV trend
    • Key Considerations:
      • Useful leading indicator of future delays
      • Should be tracked closely for critical activities
      • Can be used to calculate Schedule Performance Index (SPI)

    In summary, schedule variance measures how much ahead or behind the schedule a project is tracking based on earned value.

  10. Cost Variance (CV)

    • Definition: Cost variance (CV) is the difference between the earned value (EV) and the actual cost (AC) of work performed.
    • Formula: Cost Variance (CV) = Earned Value (EV) – Actual Cost (AC)
    • Example:
      • Earned Value (EV) = $80,000
      • Actual Cost (AC) = $100,000
      • Cost Variance (CV) = EV – AC = $80,000 – $100,000 = -$20,000
    • What Positive or Negative CV Means:
      • A positive CV means under budget
      • A negative CV means over budget
      • A higher negative CV indicates greater cost overruns
    • How Project Managers Use CV:
      • Monitor CV to identify any cost issues
      • Take corrective action if the CV is negative
      • Assess the performance of cost management
      • Forecast cost overruns based on CV trend
    • Key Considerations:
      • Useful leading indicator of future cost issues
      • Should be tracked closely for critical activities
      • Used to calculate Cost Performance Index (CPI)

    In summary, cost variance measures the difference between budgeted costs and actual costs to identify any cost overruns.

  11. Schedule Performance Index (SPI)

    • Definition: Schedule performance index (SPI) is a measure of schedule efficiency calculated by dividing earned value (EV) by planned value (PV).
    • Formula: Schedule Performance Index (SPI) = Earned Value (EV) / Planned Value (PV)
    • Example:
      • Earned Value (EV) = $80,000
      • Planned Value (PV) = $100,000
      • SPI = EV / PV = $80,000 / $100,000 = 0.8
    • What the SPI Indicates:
      • SPI = 1 means on schedule
      • SPI < 1 means behind schedule
      • SPI > 1 means ahead of schedule
      • Lower SPI indicates greater schedule problems
    • How Project Managers Use SPI:
      • Track SPI each period to identify schedule issues
      • Calculate estimate at completion (EAC)
      • Take corrective actions if SPI drops below a threshold
      • Forecast delays to completion based on SPI trend
    • Key Considerations:
      • Useful leading indicator of future schedule performance
      • Critical activities should be closely tracked
      • Changes in SPI indicate efficiency improvements or deterioration

    In summary, SPI measures schedule efficiency and provides an early warning signal of project delays.

  12. Cost Performance Index (CPI)

    • Definition: Cost performance index (CPI) measures the cost efficiency of work completed by comparing earned value to actual costs.
    • Formula: Cost Performance Index (CPI) = Earned Value (EV) / Actual Cost (AC)
    • Example:
      • Earned Value (EV) = $80,000
      • Actual Cost (AC) = $100,000
      • CPI = EV / AC
        = $80,000 / $100,000 = 0.8
    • What CPI Indicates:
      • CPI > 1 means under budget
      • CPI = 1 means on budget
      • CPI < 1 means over budget
      • Lower CPI indicates greater cost overruns
    • How Project Managers Use CPI:
      • Monitor CPI to identify any cost issues
      • Calculate estimate at completion (EAC)
      • Take corrective action if CPI drops below a threshold
      • Forecast cost overruns based on CPI trend
    • Key Considerations:
      • Leading indicator of future cost performance
      • Critical activities should be closely tracked
      • Changes in CPI show efficiency improvements or deterioration

    In summary, CPI measures how efficiently the budget is being spent and helps forecast final project costs.

  13. Estimate to Complete (ETC)

    • Definition: Estimate to complete (ETC) is the estimated cost required to complete the remaining project work.
    • Formula: ETC = Estimated Remaining Costs
    • Example:
      • Total Project Budget: $100,000
      • Actual Costs to Date: $40,000
      • ETC = Estimated remaining costs = $100,000 – $40,000 = $60,000
    • What ETC forecasts:
      • The expected costs to finish the outstanding work
      • How much budget is needed going forward
      • Remaining funding requirements
    • How Project Managers use ETC:
      • Estimate remaining work costs
      • Calculate Estimate at Completion (EAC)
      • Determine if more funding is required
      • Re-plan budget based on new estimates
    • Key considerations:
      • Based on expert judgment and estimation
      • Considers remaining work and trends
      • May include management reserve funds
      • Should be reviewed and updated periodically

    In summary, ETC provides a forecast of the expected costs to complete the project work.

  14. Estimate at Completion (EAC)

    • Definition: EAC is the estimated total cost of completing all work for the project.
    • Formula: EAC = Actual Costs to Date + Estimate to Complete
    • Example:
      • Actual Costs (AC) = $80,000
      • Estimate to Complete (ETC) = $60,000
      • EAC = AC + ETC
        = $80,000 + $60,000 = $140,000
    • What EAC forecasts:
      • The total expected cost when the project finishes
      • The projected final budget required
      • Future cost performance based on performance to date
    • How Project Managers Use EAC:
      • Update EAC periodically based on new data
      • Compare EAC against the budget
      • Take action if EAC exceeds the budget
      • Reforecast costs and request budget increases
    • Key Considerations:
      • Several EAC forecasting methods can be used
      • Most common is actual costs plus ETC
      • Accuracy increases as project progresses
      • Requires monitoring of actual costs

    In summary, EAC provides a forecast of total project costs based on performance to date and estimates of remaining work.

  15. Cost Estimate

    • Definition: A cost estimate is the approximation of the total costs required to complete project activities.
    • Formula: There is no single formula, it involves estimating costs
    • Methods of Estimating Costs:
      • Expert judgment based on past experience
      • Analogous estimating using similar projects
      • Parametric estimating using project parameters
      • Bottom-up estimating from work breakdown structure
    • Types of Cost Estimates:
      • Order of magnitude estimate (-25% to +75% accuracy)
      • Budget estimate (-10% to +25% accuracy)
      • Definitive estimate (-5% to +10% accuracy)
    • What a Good Cost Estimate Includes:
      • Labor costs based on work and resources
      • Material costs
      • Equipment and facility costs
      • Indirect costs like overhead
      • Contingency reserve
      • Inflation adjustment
    • How Project Managers Use Cost Estimates:
      • Develop project budget
      • Support funding requests
      • Set cost performance baselines
      • Monitor and control project costs
    • Key Considerations:
      • Estimates should be reviewed and refined
      • Document assumptions used
      • Handle uncertainty through contingency reserves

    In summary, cost estimating establishes an approved budget baseline helps manage control, and reduces project costs.

  16. Cost Baseline

    • Definition: Cost variance (CV) is the difference between the earned value (EV) and the actual cost (AC) of work performed.
    • Formula: Cost Variance (CV) = Earned Value (EV) – Actual Cost (AC)
    • Example:
      • Earned Value (EV) = $80,000
      • Actual Cost (AC) = $100,000
      • Cost Variance (CV) = EV – AC = $80,000 – $100,000 = -$20,000
    • What Positive or Negative CV Means:
      • Positive CV means under budget
      • Negative CV means over budget
      • Higher negative CV indicates greater cost overruns
    • How Project Managers Use CV:
      • Monitor CV to identify any cost issues
      • Take corrective action if CV is negative
      • Assess performance of cost management
      • Forecast cost overruns based on CV trend
    • Key Considerations:
      • Useful leading indicator of future cost issues
      • Should be tracked closely for critical activities
      • Used to calculate Cost Performance Index (CPI)

    In summary, cost variance measures the difference between budgeted costs and actual costs to identify any cost overruns.

  17. Cost Variance (CV)

    • Definition: Cost variance (CV) is the difference between the earned value (EV) and the actual cost (AC) of work performed.
    • Formula: Cost Variance (CV) = Earned Value (EV) – Actual Cost (AC)
    • Example:
      • Earned Value (EV) = $80,000
      • Actual Cost (AC) = $100,000
      • Cost Variance (CV) = EV – AC = $80,000 – $100,000 = -$20,000
    • What Positive or Negative CV Means:
      • A positive CV means under budget
      • A negative CV means over budget
      • A higher negative CV indicates greater cost overruns
    • How Project Managers Use CV:
      • Monitor CV to identify any cost issues
      • Take corrective action if the CV is negative
      • Assess the performance of cost management
      • Forecast cost overruns based on CV trend
    • Key Considerations:
      • Useful leading indicator of future cost issues
      • Should be tracked closely for critical activities
      • Used to calculate Cost Performance Index (CPI)

    In summary, cost variance measures the difference between budgeted costs and actual costs to identify any cost overruns.

  18. Budget at Completion (BAC)

    • Definition: BAC is the total authorized budget for completing all work to deliver the project scope.
    • Formula: No formula, it is the approved total budget
    • Example:
      • A project has the following cost estimates:
        • Labor: $80,000
        • Materials: $50,000
        • Equipment: $20,000
      • Total budget = $80,000 + $50,000 + $20,000 = $150,000
      • Therefore, BAC = $150,000
    • What BAC Represents:
      • The approved budget baseline
      • Total expected costs for all project work
      • Funding required to complete the project
    • How Project Managers Use BAC:
      • Compare against Earned Value to calculate variances
      • Use as basis for performance measurement
      • Approve changes that impact BAC
      • Request additional funding if needed
    • Key Points:
      • Set at the beginning but can change
      • Increase requires change control process
      • Cost baselines sum to BAC at the project level
      • Used to track cost performance

    In summary, the budget at completion represents the total approved budget and is a key performance measurement baseline.

  19. To-Complete Performance Index (TCPI)

    • Definition: TCPI calculates the cost performance required on remaining work to meet the budget at completion (BAC).
    • Formula: TCPI = (BAC – EV) / (BAC – AC)
    • Example:
      • BAC = $100,000
      • EV = $50,000
      • AC = $40,000
      • TCPI = ($100,000 – $50,000) / ($100,000 – $40,000) = 0.83
    • What TCPI Indicates:
      • The CPI needed on remaining work
      • If less than 1, need better performance
      • If greater than 1, cost overrun likely
    • How Project Managers Use TCPI:
      • Identify if major improvements in CPI are feasible
      • Determine if the project can meet the BAC
      • Support re-planning or requesting more funds
      • Provide an early warning signal
    • Key Considerations:
      • TCPI changes as project progresses
      • Used along with other EVM metrics
      • Considers both past and future performance
      • Signals unachievable economic goals

    In summary, TCPI compares the performance achieved versus what’s required to meet the approved budget.

  20. Defects per Million Opportunities (DPMO)

    • Definition: DPMO measures process performance by quantifying the number of defects per million opportunities.
    • Formula: DPMO = Number of Defects / Opportunities for Defects x 1,000,000
    • Example:
      • 200 defects in a process with 300,000 opportunities for defects
      • DPMO = 200 / 300,000 x 1,000,000 = 67,000
    • What DPMO Indicates:
      • The higher the DPMO, the poorer the quality
      • Allows comparison across processes
      • Shows quality deterioration or improvement over time
    • How Project Managers Use DPMO:
      • Identify quality problems in a process
      • Compare process quality over time
      • Benchmark against industry standards
      • Set quality improvement targets
    • Key Considerations:
      • Need to identify defects and opportunities
      • Statistical quality control technique
      • Useful for monitoring continuous processes
      • Must be consistently calculated

    In summary, DPMO provides a statistically-based quality metric to identify issues, benchmark, and improve processes.

  21. Six Sigma Quality

    • Definition: Six Sigma aims to improve process quality by minimizing defects and variations.
    • Key Metric: DPU (Defects per Unit)
    • Formula: DPU = Total Defects / Total Units
    • Six Sigma Metric: 3.4 DPMO (defects per million opportunities)
    • What Six Sigma Quality Indicates:
      • Achieving six sigma means less than 3.4 defects per million
      • Equivalent to 99.99966% accuracy
    • Benefits of Six Sigma:
      • Improved product quality
      • Reduced process variation
      • Increased customer satisfaction
      • Better efficiency and productivity
    • Implementing Six Sigma Involves:
      • Define, Measure, Analyze, Improve, Control (DMAIC)
      • Training on tools like statistical process control
      • Cultural focus on reducing defects
    • Certifications:
      • Green Belt
      • Black Belt
      • Master Black Belt

    In summary, Six Sigma aims for near-perfect quality by minimizing defects and variations in processes. The central metric is 3.4 DPMO.

  22. Cost of Poor Quality (COPQ)

    • Definition: COPQ captures the costs associated with preventing, detecting, and correcting defective work.
    • Components of COPQ:
      • Prevention costs (quality planning, training)
      • Appraisal costs (inspections, testing)
      • Internal failure costs (rework, scrap)
      • External failure costs (warranty work, liability)
    • Formula:

    COPQ = Prevention Costs + Appraisal Costs + Internal Failure Costs + External Failure Costs

    • Example:
      • Prevention: $5,000
      • Appraisal: $3,000
      • Internal Failure: $4,000
      • External Failure: $1,000 COPQ = $5,000 + $3,000 + $4,000 + $1,000 = $13,000
    • How Project Managers Use COPQ:
      • Evaluate tradeoffs for improving quality
      • Identify potential cost savings opportunities
      • Focus quality improvements on high COPQ areas
      • Lower COPQ by optimizing quality control
    • Key Consideration:
      • Failure costs are much greater than prevention
      • Reducing failures provides the greatest payoff
      • Need visibility into all COPQ components

    In summary, COPQ helps quantify the cost of quality which highlights opportunities for improvement.

  23. Rework Percentage

    • Definition: Rework percentage measures the amount of time and effort spent on redoing defective work.
    • Formula:

    Rework % = (Time Spent on Rework / Total Actual Work Time) x 100

    • Example:
      • 40 hours spent reworking defects
      • Total actual work time = 200 hours
      • Rework % = (40 / 200) x 100 = 20%
    • What a high rework % indicates:
      • Many defects are escaping to downstream
      • Quality control is not working effectively
      • Opportunity for quality improvement
    • How project managers use rework %:
      • Identify processes needing quality improvement
      • Prioritize efforts on defect reduction
      • Calculate costs of quality and defects
      • Benchmark against quality objectives
    • Key considerations:
      • Varies by industry, complexity, technology
      • Higher for new processes and products
      • Experience and training can reduce the %
      • Automated testing lowers rework

    In summary, rework percentage quantifies the impact of defects and provides a quality metric to target improvements for reducing escaped defects.

  24. Probability Impact (PI)

    • Definition: PI quantifies risk exposure by multiplying the probability and impact of a risk event.
    • Formula: PI = Probability x Impact
    • Example:
      • Probability of risk occurring: 60%
      • Impact if risk occurs: $8,000
      • PI = 0.6 x $8,000 = $4,800
    • What PI Indicates:
      • Higher PI means higher risk exposure
      • Allows comparison of multiple risks
      • Enables prioritization of risk responses
    • How Project Managers Use PI:
      • Quantify overall risk exposure
      • Rank and prioritize risks for mitigation
      • Focus resources on highest PI risks
      • Calculate risk reserves based on aggregate PI
    • Key Considerations:
      • Probability and impact are estimated
      • Can be used on both threats and opportunities
      • PI, not individual factors, should guide decisions
      • Must be re-evaluated throughout the project

    In summary, probability impact provides a numerical way to quantify risk exposure for improved analysis and decision-making.

  25. Expected Monetary Value (EMV)

    • Definition: EMV estimates risk exposure by multiplying probability and monetary impact of each risk.
    • Formula:

    EMV = Probability x Monetary Impact

    • Example:
      • 30% probability of $10,000 impact
      • EMV = 0.3 x $10,000 = $3,000
    • What EMV Provides:
      • Potential loss/gain amount from a risk
      • Quantitative estimate of risk impact
      • Way to prioritize responses
    • How Project Managers Use EMV:
      • Calculate EMV for all risks
      • Rank risks from highest to lowest EMV
      • Prioritize mitigation based on the highest EMV risks
      • Estimate contingency reserves based on aggregate EMV
    • Considerations:
      • Based on estimates of probability and impact
      • This can be applied to both threats and opportunities
      • Should be updated throughout the project
      • The limitation is the accuracy of estimates

    In summary, EMV analyzes quantitative risk information to improve decision-making and response prioritization.

  26. Present Value (PV)

    • Definition: PV calculates the current worth of a future cash flow by accounting for the time value of money.
    • Formula:

    PV = FV / (1 + r)^n

    Where: FV = Future cash flow amount r = Discount rate n = Number of periods

    • Example: FV = $1,000 received in 5 years, 10% discount rate PV = $1,000 / (1 + 0.10)^5 = $620.92
    • What PV Provides:
      • Today’s value of a future amount
      • Way to compare cash flows at different times
      • Ability to evaluate investments or projects
    • How Project Managers Use PV:
      • Calculate PV of expected project benefits
      • Compare PV of costs and benefits
      • Rank competing projects based on PV
      • Determine optimal investment decisions
    • Considerations:
      • PV decreases as the length of time increases
      • A higher discount rate decreases the PV
      • Useful for comparing different cash flow scenarios

    In summary, analyzing present value helps maximize return on project investments over time.

  27. Internal Rate of Return (IRR)

    • Definition: IRR is the discount rate that makes the net present value of a project zero.
    • Formula:

    NPV = 0 = ∑ Present Value of Cash Flows

    • What IRR Indicates:
      • The estimated rate of return for a project
      • The breakeven discount rate
    • How Project Managers Use IRR:
      • Compute IRR to evaluate project returns
      • Compare IRR to the required rate of return
      • Rank competing projects based on IRR
      • Select projects where IRR exceeds requirements
    • Considerations:
      • A higher IRR is generally better
      • IRR should exceed the company discount rate
      • Limitations include reinvestment assumptions
      • May differ from actual realized returns
    • Example Comparison:
      • Project A has an IRR of 12%
      • Project B has an IRR of 15%
      • If the discount rate is 10%, Project B is better

    In summary, IRR helps determine if a project’s expected returns meet required thresholds and maximize value.

  28. Return on Investment (ROI)

    • Definition: ROI measures the amount of return on an investment relative to the investment cost.
    • Formula:

    ROI = (Net Benefit / Total Investment) x 100

    • Example: A project with $100,000 in net benefits after an investment of $1 million has:

    ROI = ($100,000 / $1,000,000) x 100 = 10%

    • What ROI Provides:
      • The expected return per dollar invested
      • Way to compare projects based on returns
    • How Project Managers Use ROI:
      • Calculate ROI for potential projects
      • Rank projects from highest to lowest ROI
      • Prioritize projects with the highest ROI
      • Set ROI objectives and thresholds
    • Considerations:
      • Higher ROI is typically better
      • ROI should exceed the minimum requirements
      • Limitations include intangible benefits
      • The time value of money is not considered
    • ROI vs. IRR:
      • ROI is simpler to calculate
      • IRR accounts for TVM and cash flow timing

    In summary, ROI is a metric used to evaluate financial returns and prioritize projects based on investment efficiency.

  29. Frequency Index

    • Definition: The frequency index is a guideline for how often project communications should occur.
    • Formula:

    Frequency Index = Need Frequency x Audience Size

    • What it measures:
      • The overall frequency demand for a communication
      • How regularly info should be shared
    • Factors in the formula:
      • Need Frequency: How often info is actually needed
      • Audience Size: The number of people receiving it
    • Using the frequency index:
      • Combine with other factors to set communication frequency
      • Higher index means more frequent updates
      • Balance cost vs. need for communication
    • Example:
      • Need Frequency: Daily
      • Audience Size: 20 team members
      • Index = Daily x 20 = 100
    • Considerations:
      • Different indices for each audience
      • Doesn’t consider communication complexity
      • Should adjust based on audience needs

    In summary, the frequency index guides appropriate communication frequency based on audience demand.

  30. Performance Reporting Frequency

    • Definition: How often performance reports are generated and distributed to stakeholders.

    • Factors Determining Frequency:

      • Information Needs – how recent does info need to be?
      • Cost vs. Value – what’s the optimal cost balance?
      • Risk Level – higher for high-risk projects.
      • Phase – typically more frequent in execution.
      • Audience – some want updates more often.
    • Performance Report Elements:

      • Status summary – budget, schedule, risks
      • Progress details – milestones, deliverables
      • Issues and resolutions
      • Change log
      • Forecasts
    • Setting Frequency:

      • Monthly or quarterly for low-risk projects
      • Bi-weekly or weekly for medium-risk
      • Daily or multiple times per week for high-risk
    • Optimizing Frequency:

      • Increase during critical phases
      • Adjust based on audience needs
      • Ensure sync with governance meetings
    • Considerations:

      • Excessive reporting burnout vs. insufficient misinformation
      • Use dashboards to provide on-demand access
      • Automate where possible for efficiency

    In summary, optimizing performance reporting frequency improves project oversight while balancing workload and costs.

  31. Stakeholder Engagement Planning

    • Definition: The process of developing an approach to involve project stakeholders effectively.

    • Key Elements of a Stakeholder Engagement Plan:

      • Stakeholder identification and analysis
      • Engagement methods and communications
      • Management of expectations
      • Feedback channels and measures
    • Best Practices:

      • Identify key messages for each group
      • Determine stakeholder influence and interest
      • Plan engagement tactics based on stakeholder needs
      • Define metrics for engagement effectiveness
    • Developing the Plan Involves:

      • Identifying stakeholders and their requirements
      • Defining roles on the project
      • Determining optimal level of involvement
      • Selecting engagement methods and frequency
    • Maintaining the Plan:

      • Monitor ongoing stakeholder satisfaction
      • Refine strategies and communications
      • Manage feedback and resolve issues promptly
      • Update the plan with lessons learned
    • Benefits of Stakeholder Planning:

      • Increased stakeholder buy-in and support
      • Reduced issues and risks
      • Effective requirements gathering
      • Better decision making

    In summary, thoughtful stakeholder engagement planning helps gain stakeholder support and manage expectations.

  32. Bidder Evaluation Criteria

    • Definition: Pre-defined metrics used to assess and select suppliers during solicitation.

    • Common Criteria Include:

      • Technical capability and experience
      • Quality and performance history
      • Financial strength and stability
      • Pricing and total cost of acquisition
      • Proposed delivery schedule
      • Compliance with requirements
    • Best Practices:

      • Base criteria on project objectives and needs
      • Use weighted scoring to reflect importance
      • Include knock-out factors to disqualify vendors
      • Set minimum acceptable scores
    • Developing Criteria Involves:

      • Identifying must-have technical and business requirements
      • Consulting with stakeholders on key factors
      • Researching past supplier performance
      • Considering pricing models and costs
    • Evaluating Bids Using Criteria:

      • Apply criteria to score and rank proposals
      • Assess each bidder using a consistent process
      • Select best value bidder based on results
    • Benefits of Well-Defined Criteria:

      • Fair and equal comparison of proposals
      • Reduction in bid protests
      • Selection of the optimal vendor for the project
      • Alignment with project objectives

    In summary, developing solid bidder evaluation criteria is essential for successful solicitation and source selection in procurement.

  33. Contract Pricing

    • Pricing Models:
      • Firm Fixed Price – Single fixed total price for defined work.
      • Cost Plus Fee – Reimbursed costs plus an agreed-upon fee.
      • Time and Materials – Pay for labor hours plus material costs.
    • Factors in Pricing:
      • Scope of work
      • Technical complexity
      • Cost analysis of labor, materials, etc.
      • Overhead, profit, risk margins
      • Supply and demand influences
    • Pricing Approaches:
      • Sealed Bid – Bidder proposes firm fixed price in sealed proposal.
      • Negotiated – Back and forth discussion to agree on pricing.
    • Establishing Fair Pricing:
      • Conduct market research on pricing norms
      • Perform cost estimation of the full work scope
      • Analyze vendor rates and inputs
      • Consider value over lowest cost
    • Managing Pricing Risks:
      • Clarify assumptions, terms and accountability
      • Price fluctuation and escalation clauses
      • Open book pricing for transparency
      • Payment tied to delivery milestones
    • Key Advantages:
      • Competitive and market-based pricing
      • Risk sharing between parties
      • Pay for results achieved not effort
      • Financial incentives promote performance

    In summary, contract pricing aims to get optimal value by balancing risk, cost, quality, and on-time delivery.

Final Words

Mastering PMP exam formulas demonstrates you have the hard skills to successfully manage projects.

Accurately calculating schedule estimates, earned value, forecasted costs, and quality metrics will prepare you for exam day and real-world project management challenges.

Use this overview of key PMP formulas to study and practice applying your calculation skills. With preparation, you can pass the exam and achieve the PMP certification.

Enroll in our: PMP Certification
Also check: 49 Processes of PMP
And read: What is a Matrix Diagram in PMP?

Note
: The PMP certification is provided by PMI

Last Updated on October 26, 2023 by Krishna