Burn Rate PMP®
Burn Rate is a term used on the PMP Exam and is largely in Agile environments, as an indicator of how well a project is, or is not, staying within the project budget.
Project Managers should understand what burn rate is and how to calculate it. Keeping track of your burn rate is important when managing projects as it is critical work performance information that should be communicated to key stakeholders. It can mean the difference between project success and failure.
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What is Burn Rate in PMP?
You will likely see Burn Rate described as either “Burn Rate” or with “PMP” added at the end to signify it is being used in relation to project management. The definition of “Burn Rate PMP” is as follows: a formula-based metric used to calculate the rate at which a project is spending its predefined budget. In other words, it is how fast a project is “burning through” the allocated budget. It was a term originally used by internet startup companies but later adopted by the project management profession.
Specifically, when used in Agile environments, it is a very useful estimating technique that helps determine the cost associated with running a sprint. Remember a sprint is a set period during which specific work must be completed and can be thought of as a mini-project.
Burn Rate Formula in PMP
The burn rate formula is Actual Cost (AC) divided by Earned Value (EV) or: AC / EV.
According to the PMBOK® Guide, Actual Cost (AC) is the realized cost incurred for the work performed on an activity during a specific time period and Earned Value (EV) is the measure of work performed expressed in terms of the budget authorized for that work.
The results of this formula are translated as follows:
Burn Rate is greater than 1
If the project burn rate is greater than 1 then the project is currently over budget. It is “burning through” the budget at a faster pace than what was planned. Once this is determined, steps should be taken to bring the project back on track so the budget can remain viable. Also, pay close attention to the factors that led to the project being over budget to assess where improvements could be made on future, similar projects.
Burn Rate is less than 1
A burn rate of less than one is the best news! This means the project is being expended at a slower than planned pace and is currently under budget. Just like with an over-budget project, determine if the burn rate is greater than 1, it would be a good idea to capture all of the project work performance data to analyze what steps led to being under budget.
Burn Rate is equal to 1
A burn rate equal to 1 means the budget is being expended in accordance with what was originally planned. This is a good position to be in because it means the original estimations were accurate and the project is progressing as intended. You may have noticed the burn rate formula is the opposite of the Cost Performance Index (CPI) formula which is EV/AC. Be careful not to get these two formulas confused as the answers derived from solving the burn rate formula are then interpreted differently than CPI.
Importance of Tracking Burn Rate PMP
It is important to track the burn rate of a project to determine how well a sprint is progressing. This is vital information when communicating with stakeholders. If you are expending your project budget at a faster rate than what was initially planned, you would have to notify your key stakeholders and develop a plan to get the project back in line with the original budget expenditure rate.
If you fail to track the burn rate of your project with the burn rate formula, you run the risk of your project expending the budget too quickly and potentially running out of funding.
Burn Rate Calculation PMP
The burn rate calculation is the process of determining what the required earned value metrics of your project are. The two values you need are Actual Cost and Earned Value. Actual Costs are the cost of the work completed. Earned Value is the percentage of the work completed multiplied by the budgeted costs. These metrics should be collected up to the data date to perform the most accurate calculations. While these are gathered for individual elements, they are used to look at the cumulative amounts through the data date.
Burn Rate PMP Examples
Here are some examples to highlight the burn rate formula and how to complete the burn rate calculation properly.
Actual Cost: $100,000
Earned Value: $35,000
AC/EV – $100,000 / $35,000 = 2.9
The result here indicates the burn rate is greater than one and so the project is over budget. Steps should be taken to get the project back on track.
Actual Cost: $100,000
Earned Value: $100,000
AC/EV: $100,000 / $100,000 = 1
Here, the burn rate is equal to 1 which means the project budget is being expended in accordance with what was originally planned. Keeping track of the burn rate will ensure it stays in line throughout the project timeline.
Actual Cost: $100,000
Earned Value: $125,000
AC/EV: $100,000 / $125,000 = .8
A burn rate lower than 1 means the project is currently under budget.
Studying for the PMP Exam?
What to know for the PMP Exam
“Burn Rate PMP” is a term you will encounter as you study for Project Management Institute’s (PMI) Project Management Professional (PMP)® exam. If you are preparing to take the PMP exam, you should understand how this formula is used as a tool to help with executing and reporting on a project. You should also understand this formula helps report to stakeholders and keep tabs on how a sprint is progressing.
In summary, project managers would benefit from tracking this key metric to assess the performance of a sprint and in turn, communicate that information to key stakeholders. While it is not a formula you are guaranteed to see on the PMP exam, it is still a metric you should be familiar with, especially if you work on agile teams.
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