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TOPIC: Burn Rate

Burn Rate 8 months 3 weeks ago #7109

  • MIchael
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I am at the part of my training where I take as many assessments as I can find. I am identifying gaps but also putting my knowledge to the test.
I recently came across a question I am getting a lot of contradicting answers on. I am finding no consistency.

What is the equation for Burn Rate? I originally used EV/AC, which according the the mock exam I am taking is incorrect. Upon further investigation, I am finding a lot of people using EV/AC AND AC/EV or 1/CPI. It wouldn't have been that bad to process of elimination but both EV/AC and AC/EV are listed as an option to pick from.

Which is correct and if possible please go into detail as to why that is the correct answer.

Burn Rate 8 months 3 weeks ago #7113

  • Rahul Kakkar
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Hi Michael,

Burn rate is basically a metric to assess the performance of a certain project with respect to the original budget. In short, burn rate is the rate at which the project is spending its original budget.

The burn rate is an excellent “early alarm” that the project may be over-budget. A burn rate bigger than 1 should be immediately reported to the stakeholders. Since the burn rate seldom goes down, it is extremely unwise to “hope for the better” and not to report this metric to the stakeholders.

Burn Rate = 1/CPI

Where CPI is the Cost Performance Index which is calculated the following way:

CPI = EV / AC

Looking at the above formula of calculating CPI, a more direct formula for the burn rate would be:

Burn Rate = 1/CPI = 1/EV/AC = AC/EV

This can be explained with the help of the following example:

Assuming the Earned Value of a construction project so far is $3,000,000, and the Actual Cost is $3,500,000. Then:
Burn Rate = AC/EV = $3,500,000/$3,000,000 = 1.16
Since the burn rate is above 1, then the project is spending the budget faster than it should, and may finish over budget.

Your response of EV / AC is the CPI and not the burn rate. CPI measures the cost efficiency of a project, is the budget being spent as planned?

Hope this helps.
Rahul Kakkar, PMP, MBA
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