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)
 ToComplete 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

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 5day duration Activity B has a 3day duration Activity C has a 7day duration Activity D has a 5day 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.
 Recalculating the critical path is key as the project progresses.

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
 Recalculate 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

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 5Activity 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.

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

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.
 Definition:

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.

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.

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.

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.

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.

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.

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.

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
 Replan 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.

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.

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
 Bottomup 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.

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.

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.

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
 A project has the following cost estimates:
 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.

ToComplete 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 replanning 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.

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 statisticallybased quality metric to identify issues, benchmark, and improve processes.

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 nearperfect quality by minimizing defects and variations in processes. The central metric is 3.4 DPMO.

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.

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.

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 reevaluated throughout the project
In summary, probability impact provides a numerical way to quantify risk exposure for improved analysis and decisionmaking.

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 decisionmaking and response prioritization.

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.

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.

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.

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.

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 highrisk 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 lowrisk projects
 Biweekly or weekly for mediumrisk
 Daily or multiple times per week for highrisk

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 ondemand access
 Automate where possible for efficiency
In summary, optimizing performance reporting frequency improves project oversight while balancing workload and costs.


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 buyin 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.


Bidder Evaluation Criteria

Definition: Predefined 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 knockout factors to disqualify vendors
 Set minimum acceptable scores

Developing Criteria Involves:
 Identifying musthave 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 WellDefined 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.


Contract Pricing
 Pricing Models:
 Firm Fixed Price – Single fixed total price for defined work.
 Cost Plus Fee – Reimbursed costs plus an agreedupon 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 marketbased 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 ontime delivery.
 Pricing Models:
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 realworld 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