Predicting the future is what we’re all about. But when do you use ETC versus FTC – and what’s the difference?
Everyone gets nervous when they’re in the dark with how things are going on their project. Collecting real-time information on activities and costs is a big piece of the “Where are we at?” questions, but how do you take that data and leverage it to answer the “Where are we going…” questions?
Forecasting the near future and long-term outcomes on projects is a critical function for project controls professionals. To accomplish this, it’s important to first understand the two main methods for preparing and calculating a forecast:
- Using historical performance indicators
- Manual predictions of remaining effort
Notice that I didn’t include “Remaining Budget” as a forecasting metric. And that’s because, simply taking total project budget and subtracting costs-to-date, does not provide a reasonable forecast. It doesn’t take into consideration any new information or productivity challenges that can significantly influence the remainder of the project.
To dive deeper into these two forecasting methods, let’s drill-down into each of these to understand the difference.
Performance-based Forecast – ETC
Performance-based forecasts are the standard Earned Value method. It takes the historical project performance and determines a productivity ratio based on that performance (CPI). It then uses that ratio to calculate how the rest of the project will play-out if you continue to perform at that level. So, if you’ve been under-performing, you’ll end up over budget and behind schedule if you continue at that pace. And vice versa.
It’s a bit like how your car’s computer calculates remaining distance. If you have a reasonably new car, it’ll have screens on the dashboard showing fuel economy metrics. The way it calculates the remaining distance metric, is it takes your average fuel economy to date, along with the amount of gas left in your tank, and calculates how many miles/kilometers you can go before you run out of gas. In other words: historical performance ratio applied onto the remaining budget.
If you look at the S-Curve in the screenshot below, notice how the Actual Cost line in that chart becomes the ETC line at the last status date. This is a time-phased forecast based on the values of the other metrics on this chart.
To achieve this type of forecast, you first need to perform one or more “Progress Measurements” to determine the physical progress of your project. The calculation then uses the planned budget (PV), actual cost to date (AC), along with the physical progress (EV) together to determine performance to date. As a result, the Progress Measurement plays a critical role in this type of forecast. It therefore means that you need a solid process for establishing progress on your project before this ETC forecast can provide meaningful value.
Pros and Cons of ETC
There are a number of drawbacks to EVM forecasts. First of all, as mentioned above, you need to be good at measuring progress using objective and transparent methods. This can be a tricky thing to do – and worthy of a very meaty discussion we can have another time. The second major caution in this type of forecast, is that you can’t get a reliable indicator of progress until your project is at least 20% complete. Before that, the indicators can be very misleading since the beginning of a project can require a settling period before everything gets into a pace.
The good thing about these types of forecasts is that they can be incredibly revealing about any problem areas that need to be addressed. They can provide early warnings about vendor productivity, unanticipated costs, and other surprises that can be acted on early to make sure they don’t continue to present challenges to the project’s ultimate success. It’s an empowering tool for the project manager if you have the process and methodology in place to make it work for you.
The other great thing about ETC, it that it can be a much more Objective forecast if you have an objective method for measuring progress. FTC on the other hand, is a more Subjective forecast. Let’s have a look at that now.
Predictive-based Forecast – FTC
Predictive forecasting takes the inverted approach by asking the question of what’s remaining – as compared to ETC, which asks, what’s been done. It may sound subtle, but the difference is significant. Consider the example of an engineer working on a drawing. For an FTC forecast, you would ask that person, “How many hours is it going to take you to complete the drawing?” To play this out, let’s say you originally budgeted 20 hours to do the drawing, and the engineer has already used 10 of those 20 hours. Then, in response to your question, the engineer says, “15 hours”. There’s no calculation necessary – your FTC is 15 hours for that activity. The system will of course calculate a 5-hour cost and schedule variance; but the calculation is not based on the past (like ETC), it’s based on what you’re predicting for the future – 15 hours remaining.
Taking this to another level, let’s look at another FTC scenario. A project manager may have good reason to believe that a particular activity is going to cost an extra $50k than originally planned based on what he sees happening at the jobsite. Maybe there’s bad weather coming, or a bunch of guys just quit, or a supplier just shipped the wrong materials. He can’t say for certain that this extra cost is coming – he just wants to record it as a forecasted potential change. It’s not a proposed change-order yet (and may never be), but it is something that could end up being a change order if things play out like he thinks. If things magically iron themselves out on budget, he can back-out the $50k forecast. If they do, he can convert the forecast into a change order. This is a predictive lump-sum forecast.
Looking at the Spend Forecast chart in the screenshot to the right (click on the image), you can see the Forecast line is simply another type of project budget. This chart shows baseline, current, pending and forecast budgets – all time-phased over the remaining duration of the project. It also shows actual costs to-date.
Pros and Cons of FTC
The nice thing about FTC forecasts is that they’re better at taking into consideration subjective knowledge of what’s coming. They’re also more in-line with how people think; and as a result, more concrete in their accuracy. For example, all indicators may point to a certain task being 80% done – but when you invert that to say, “It’s going to take another 5 days”, you’re using a different part of your brain to calculate that estimate. Another advantage of the FTC, is that you can schedule and time-phase the FTC values uniquely from the current budget’s time-phasing. With ETC, you’re relying on the existing time-phasing & schedule.
On the flipside, FTC is very subjective and doesn’t take advantage of tools like Rules-of-Credit or weighted steps to calculate the forecast objectively. This subjectivity can be flawed as you’re relying on the honesty and interpretations of the people involved.
Which should you use?
There’s no question that both ETC and FTC have tremendous value for providing good indicators of progress and remaining costs to complete. I wouldn’t say that either one is any better than the other; and which you use, or use most, is highly dependent on your internal methodology.
I know that engineering organizations like to use FTC since it’s a very quantifiable method when asking for the hours remaining to complete a task. It also enables more clarity around manpower loading for discipline forecasts.
Other companies like to take away any amount of subjective assessment by using tools like Rules-of-credit to objectively increment the progress; so prefer ETC.
Some software solutions provide the capacity to use both, which can give you more context on the picture of remaining costs, and the time-phased spend of the project.
I’m very interested to hear your thoughts on this, so please feel free to leave me a comment.