Your Budget isn’t Your Forecast!
For an Earned Value Management (EVM) practitioner, the term ‘budget’ and the term ‘forecast’ have two very distinct meanings. However the terms are not always used in correct context, particularly in organizations that are new to earned value.
Sometimes the words “budget” and “forecast” are incorrectly used interchangeably, which can be very confusing to EVM experts if they don’t realize that the organization is making no distinction between the two. This article outlines the difference between a budget and a forecast and why the terminology matters.
Let’s start with the question of why using the correct terms in earned value is critical. If your questions to an EVM expert are concerned with the planned budget, and you use the term forecast, the answer you’re likely to get back isn’t going to make much sense.
Adjusting a forecast requires no formal process per se. Budget changes however, require authorization and some form of signed baseline change request by the program manager or the customer; these are two very different things entirely.
“We forecast the weather, but we cannot plan it.”
Such verb confusion is an easy mistake to make because the budget is derived from a plan of how to spend money and execute work scope. It is therefore an attempt at calculating a future event or outcome; which is the very definition of a forecast in most dictionaries.
However, we should never fall into the habit of referring to this budget as a forecast. The budget plan becomes our performance measurement baseline. The budget is therefore a rigid plan of spending that is established prior to the start of work. The forecast is a separate mechanism for predicting the final outcome once the work starts or it becomes clear that things aren’t going exactly according to plan.
Think of it in these simple terms: we forecast the weather, but we cannot plan it. The weather, in this case, is the unexpected thing that happens to our projects once work gets under way. Cost overruns, delays and rate changes are common examples of the weather we encounter.
If there is a delay that starts to require more hours than planned, the manager can use forecasting mechanisms within the EVM system to see the predicted impact of this delay (statistical forecasting), mitigate the problem and then show the effect of that mitigation using manual forecasting mechanisms.
In short, forecasting is used to protect the Estimate At Completion (EAC) figure and manage the project to keep this figure within thresholds. What the manager cannot do is change anything that affects the budget without following a formal process. If the budget was changed every time there was a problem and without a formal audit trail of the change, then the performance measurement baseline would be compromised along with the integrity of the earned value data.
Budget Versus Forecast
Both the budget and the forecast are two powerful and very distinct management tools. Each has its part to play in providing management and the customer with vital data about the state of the project.
Think of it this way; once work starts, the budget belongs to the customer but the forecasting mechanisms belong to the Control Account Managers. Used wisely, forecasting can warn of problems well before management is forced into uncomfortable budget change negotiations with the customer.