Monitor Financial Performance

Introduction

This lesson covers the second half of task 6 of the Process domain in the July 2026 PMP Examination Content Outline (Process carries 41% of the exam): monitor financial variations and take action in line with governance, manage reserves, and anticipate future financial challenges. The previous lesson covered estimating, the cost baseline, the budget, and reserves. Here the project is running, and the question becomes: are we spending as planned, what will the project cost at the end, and what should we do about it?

Exam questions in this area mix calculations (cost variance, CPI, EAC, TCPI) with judgement (which forecast formula fits the situation, who must approve the use of a reserve, how to report bad news). After this lesson you will be able to compute and interpret all earned value metrics, choose the right forecast, assess whether the budget can still be met, respond to variances through the governance route, and adapt monitoring to agile work.

Learning objectives

• Define PV, EV, and AC, and compute CV, SV, CPI, and SPI.
• Forecast EAC with the four standard formulas and choose the right one for the situation.
• Compute ETC, VAC, and TCPI, and interpret them.
• Interpret an S-curve and a variance report, and decide on corrective action.
• Follow governance when variances exceed thresholds, including reserve use and baseline change.
• Anticipate future financial challenges such as inflation, currency, supplier price changes, and funding cuts.
• Monitor money on agile and hybrid projects with burn charts and value-based indicators.

1. Earned value management in one picture

Earned value management (EVM) combines scope, schedule, and cost in a single measure. Three values at a status date:

And the budget at completion (BAC): the total planned value of the project (the cost baseline).

Variances and indices

Remember: EV is always the first term. CPI of 0.90 means that for every euro spent only 90 cents of planned value has been earned.

Measuring earned value

How EV is measured must be defined in the cost management plan before work starts: 0/100 (credit only when done, for short tasks), 50/50 (half when started, half when done), weighted milestones, equivalent units, or percent complete (subjective and less reliable). Early reports claiming 90% complete for weeks, the "90% syndrome", are a warning that percent complete is being guessed.

Worked example: a status report

Statement. A project has a BAC of EUR 600,000. At the end of month 6 the plan said 50% of the work should be complete. The team has completed 40% of the work and has spent EUR 270,000. Compute PV, EV, AC, CV, SV, CPI, and SPI, and interpret them.

Reasoning.

1. PV = 50% x 600,000 = 300,000.
2. EV = 40% x 600,000 = 240,000.
3. AC = 270,000.
4. CV = EV - AC = 240,000 - 270,000 = -30,000 (over budget).
5. SV = EV - PV = 240,000 - 300,000 = -60,000 (behind schedule).
6. CPI = 240,000 / 270,000 = 0.89.
7. SPI = 240,000 / 300,000 = 0.80.

Interpretation. The project is both over budget and behind schedule. For each euro spent, 89 cents of value has been earned. Only 80% of the planned work has been done. SV in money terms (-60,000) is not a time; to see time impact, look at the critical path or use earned schedule.

Why other answers are wrong. Using PV - EV for the schedule variance reverses the sign. Using AC / EV for the cost index gives the inverse, which is a different measure. Calling the project "on track because spend (270,000) is below PV (300,000)" ignores that less work was done than planned.

2. Forecasting: EAC, ETC, VAC

Forecasting estimates the cost at completion (EAC) and the remaining cost (ETC).

Other forecasts:

• ETC (estimate to complete) = EAC - AC (or the bottom-up ETC).
• VAC (variance at completion) = BAC - EAC. Negative means a forecast overrun.
• TCPI (to-complete performance index) = (BAC - EV) / (BAC - AC) when aiming at the BAC; = (BAC - EV) / (EAC - AC) when aiming at a new EAC.

The TCPI is the cost efficiency the team must achieve for the remaining work to meet the target. If TCPI is well above 1 and the CPI so far is below 1, the target is unrealistic unless something changes. A common rule of thumb is that TCPI above about 1.10 is very hard to achieve.

Worked example: forecasting with the same project

Using BAC = 600,000, EV = 240,000, AC = 270,000, CPI = 0.889, SPI = 0.80.

Statement. Compute the EAC under each assumption, then ETC, VAC, and TCPI to BAC. Which forecast should the project manager use if the overspend came from a one-off supplier error that has been fixed?

Reasoning.

1. Atypical variance: EAC = AC + (BAC - EV) = 270,000 + (600,000 - 240,000) = 270,000 + 360,000 = EUR 630,000.
2. Typical variance (CPI continues): EAC = BAC / CPI = 600,000 / 0.889 = EUR 675,000 (using exact CPI 240/270 = 0.8889).
3. CPI x SPI: CPI x SPI = 0.8889 x 0.80 = 0.7111; EAC = 270,000 + 360,000 / 0.7111 = 270,000 + 506,250 = EUR 776,250.
4. For the one-off error, the atypical formula is right: EAC = 630,000.
5. ETC = EAC - AC = 630,000 - 270,000 = 360,000.
6. VAC = BAC - EAC = 600,000 - 630,000 = -30,000 (the original overrun is carried but no more is expected).
7. TCPI to BAC = (600,000 - 240,000) / (600,000 - 270,000) = 360,000 / 330,000 = 1.09. The team would need 1.09 value per euro for the rest to finish on budget, which is above the 0.89 achieved so far, so finishing at BAC is unlikely.

Solution. EAC 630,000, ETC 360,000, VAC -30,000, TCPI to BAC 1.09.

Why other answers are weaker. BAC / CPI assumes the same inefficiency continues, which contradicts the information about a one-off cause. The CPI x SPI formula applies when the schedule pressure will add cost, such as overtime or crashing, which the scenario does not say. Reporting EAC = BAC ignores real information.

Choosing the formula from the wording

• "The variance is a one-time event" or "will not recur": AC + (BAC - EV).
• "The project will continue at the current rate" or no extra information: BAC / CPI.
• "The original estimate is no longer valid" or "new estimate": AC + new ETC.
• "Must recover the schedule, cost and schedule both matter": CPI x SPI formula.

3. Reading a project's financial story

Numbers alone do not give the answer. Interpret them with the schedule and the risk picture.

The S-curve

Plot PV, EV, and AC against time. When EV is below PV, the project is behind. When AC is above EV, it is over budget. Diverging curves show a worsening trend; converging curves show recovery. The gap between EV and AC at a point in time is the cost variance, and the gap between EV and PV the schedule variance.

Trend analysis

A single month can mislead. Track CPI and SPI over several periods. A CPI that stays near 0.90 is a stable pattern; a CPI that falls from 1.0 to 0.80 over three months is a deteriorating trend and needs action even if the cumulative figure still looks acceptable. The cumulative CPI becomes hard to change after about 20% of the work is completed, so early detection matters.

Reserve analysis

Compare the remaining contingency to the remaining risk. If EUR 40,000 of contingency remains but the open risks have an EMV of EUR 65,000, the reserve is insufficient and the sponsor should hear about it now. If risks have passed, release the unused contingency according to the organization's rule, not by spending it on extras.

4. Acting on variances within governance

Variances within the agreed threshold are managed by the project manager within the plan. Variances beyond the threshold need a formal response.

1. Verify the data. Check that AC includes all accruals and commitments, that EV is measured as planned, and that the status date is the same for all figures.
2. Find the root cause. Was it an estimating error, scope growth, rate increases, rework, resource inefficiency, a supplier issue, or an external factor? Use a cause-and-effect diagram or five whys.
3. Evaluate options. Reduce or reprioritize scope, improve productivity, change suppliers or contract terms, use contingency, fast track or crash if schedule drives cost, or request additional funding.
4. Assess the impact on schedule, quality, risk, benefits, and stakeholders.
5. Decide and request approval. Use contingency within your authority. Use management reserve or change the baseline only through change control with the sponsor or the change control board.
6. Communicate. Tell the sponsor and stakeholders early, with facts, the forecast, and the proposed action. No surprises.
7. Update the forecast, the risk register, the lessons learned, and, if approved, the baseline.

Do not rebaseline merely to make the variances disappear. A baseline changes only when an approved change alters the scope, schedule, or budget. Hiding a variance by shifting costs into another account is an ethical and compliance problem.

Worked example: choosing a response

Statement. A software project has BAC EUR 900,000, EV 300,000, AC 360,000, and PV 330,000. The sponsor's threshold is plus or minus 10% on CPI. Calculate CPI and SPI, state whether escalation is needed, and propose a response, given that the overrun comes from underestimated testing effort that will continue.

Reasoning.

1. CPI = 300,000 / 360,000 = 0.83; SPI = 300,000 / 330,000 = 0.91.
2. CPI of 0.83 is a 17% shortfall, beyond the 10% threshold, so escalate to the sponsor.
3. Because the cause will continue, EAC = BAC / CPI = 900,000 / 0.8333 = EUR 1,080,000; VAC = -180,000.
4. TCPI to BAC = (900,000 - 300,000) / (900,000 - 360,000) = 600,000 / 540,000 = 1.11, which is not realistic given CPI of 0.83.
5. Options: (a) reduce scope with the product owner by moving lower-value features out; (b) add test automation to improve productivity, which has an up-front cost but lowers the cost of repeated testing; (c) request additional funds or management reserve through change control; (d) combine (a) and (b).
6. Present to the sponsor: forecast 1,080,000, options with costs and effects, a recommendation, and a decision date.

Solution. Escalate with a forecast of EUR 1,080,000 and a recommended combination of scope reprioritization and test automation, with a change request for any extra funding.

Why other responses are weaker. Quietly using management reserve breaks governance. Cutting testing to save cost damages quality and creates a larger future cost. Waiting for another reporting period lets the trend worsen.

5. Anticipating future financial challenges

A project manager looks forward as well as back. Typical factors:

• Inflation and price escalation on long projects or procurement; use economic price adjustment clauses or add allowance.
• Currency exchange when suppliers or customers use other currencies; consider forward contracts or pricing in a stable currency.
• Supplier insolvency or price increases; monitor supplier financial health, keep alternatives.
• Funding cuts or reprioritization by the organization; keep the business case current and communicate value delivered.
• Resource rate changes (salary increases, contractor rates).
• Regulatory changes that add compliance cost.
• Technology costs, including cloud usage that grows with consumption; track usage-based costs against forecast and set alerts.
• Sustainability and energy costs, where energy price or carbon rules affect operating costs.
• AI-assisted analysis can support forecasting with historical data and pattern detection; the project manager still checks assumptions and keeps accountability for the decision.

Scenario planning helps: define best, expected, and worst cases for the forecast, and the triggers that would move the project from one to another.

6. Agile and hybrid financial monitoring

EVM works for agile projects if story points or features are used as the measure of progress (for example, release burn-up). Often, simpler indicators are enough:

• Budget burn-down: remaining budget over time against the remaining backlog value.
• Release burn-up: completed scope (story points) against total scope, compared to money spent.
• Cost per delivered story point or per feature, trended over time.
• Forecast to complete: remaining points divided by velocity gives the number of iterations left; multiplied by the cost per iteration it gives the forecast cost.
• Value delivered earlier: the percentage of the high-value backlog delivered at a given spend.

Example: agile forecast

A team costs EUR 60,000 per iteration. The release backlog is 400 points, 160 are done after 4 iterations, and the average velocity is 40 points. Remaining points: 240. Iterations left: 240 / 40 = 6. Forecast remaining cost: 6 x 60,000 = 360,000. Total forecast: 4 x 60,000 + 360,000 = 600,000. If the approved budget is 550,000, the options are to cut about 50,000 / 60,000 x 40 ≈ 33 points of lowest-value scope, or to seek extra funds. Because the product owner orders the backlog by value, dropping the lowest items has the least effect on benefits.

In hybrid projects, report predictive components with EVM and agile components with burn charts, then combine at the level of total committed spend and forecast.

7. Common pitfalls and exam tips

Pitfalls

• Mixing up the formulas: CV = EV - AC (not AC - EV).
• Using BAC / CPI when the scenario says the cause was one-off.
• Reading SV in money as a time delay.
• Ignoring commitments and accruals, so AC looks better than reality.
• Rebaselining to remove variance without an approved change.
• Using management reserve without approval.
• Reporting only the cumulative figures and missing the trend.
• Waiting for a formal report to tell the sponsor about a known overrun.

Exam tips

• EV comes first in CV, SV, CPI, and SPI.
• EAC default (no other information): BAC / CPI. One-off variance: AC + BAC - EV.
• VAC = BAC - EAC; ETC = EAC - AC; TCPI > 1 means harder to achieve.
• Beyond the threshold, analyse root cause, evaluate options, and escalate through change control.
• Contingency is within the project manager's authority; management reserve needs approval.
• The best answer is rarely "reduce quality to save money" or "hide the figures".
• In agile, forecast with velocity and cost per iteration, and cut the lowest-value scope before extending the budget.

8. Mini case study

Situation. A hospital IT modernization has BAC EUR 1,500,000. At month 8, PV is 1,000,000, EV is 850,000, and AC is 1,020,000. Remaining contingency is EUR 60,000, and open risks have an EMV of EUR 110,000. The sponsor's rule: any CPI below 0.90 triggers a formal review. The overrun is mostly caused by licence prices that rose 15% and will apply for the rest of the project. A funding review is due in six weeks.

Questions. Calculate the indicators, choose a forecast, and recommend actions.

Commented solution.

1. CV = 850,000 - 1,020,000 = -170,000. SV = 850,000 - 1,000,000 = -150,000.
2. CPI = 850,000 / 1,020,000 = 0.833; SPI = 850,000 / 1,000,000 = 0.85.
3. CPI below 0.90 means a formal review is triggered. The sponsor must be informed, with a forecast.
4. The licence price rise will continue, so the cost pattern is typical: EAC = BAC / CPI = 1,500,000 / 0.8333 = EUR 1,800,000. VAC = -300,000. ETC = 1,800,000 - 1,020,000 = 780,000.
5. TCPI to BAC = (1,500,000 - 850,000) / (1,500,000 - 1,020,000) = 650,000 / 480,000 = 1.35, so the BAC is not achievable at the current performance.
6. Reserve analysis: contingency 60,000 versus open risk EMV 110,000 leaves a 50,000 shortfall even before the overrun.
7. Actions: (a) hold a root cause review with procurement on the licence contract and look for volume discounts or alternative licensing; (b) assess scope options with the product owner (defer two low-value modules); (c) prepare a change request for additional funding with the options and their effect on the schedule and benefits, ready before the funding review in six weeks; (d) update the risk register and the forecast monthly; (e) inform stakeholders now rather than at the funding review.
8. What not to do: do not apply the atypical formula to appear closer to the budget; do not use management reserve without approval; do not cut testing to recover cost.

Key terms

• PV, EV, AC, BAC: planned value, earned value, actual cost, budget at completion.
• CV, SV: cost and schedule variance (EV - AC, EV - PV).
• CPI, SPI: cost and schedule performance indices (EV / AC, EV / PV).
• EAC, ETC, VAC: estimate at completion, estimate to complete, variance at completion.
• TCPI: efficiency needed on remaining work to reach a target.
• Cost threshold: variance limit that triggers action or escalation.
• S-curve: cumulative PV, EV, and AC over time.
• Reserve analysis: comparing remaining reserves with remaining risk.
• Burn-up / burn-down: agile charts of completed work or remaining budget.

Summary checklist

• I can compute PV, EV, AC, CV, SV, CPI, and SPI and interpret them.
• I can choose and compute EAC, ETC, VAC, and TCPI for a scenario.
• I can read the CPI/SPI combinations and S-curves, including trends.
• I follow governance for variances, reserves, and baseline changes.
• I communicate financial problems early with options.
• I anticipate inflation, currency, supplier, and funding risks.
• I can forecast and monitor agile budgets with velocity and burn charts.

Official sources

• PMI, PMP Examination Content Outline (July 2026): https://www.pmi.org/-/media/pmi/documents/public/pdf/certifications/new-pmp-examination-content-outline-2026.pdf (opens in a new tab)
• PMI, PMP certification: https://www.pmi.org/certifications/project-management-pmp (opens in a new tab)
• PMI, PMP exam change: https://www.pmi.org/blog/pmp-exam-change (opens in a new tab)