Origin of the Term

The term “Burn Rate” is originally a financial term, and it was first coined in the 90s during the “Internet Boom” to describe the rate at which new Internet Startups were spending their invested funds, while making no revenue. The term is highly relevant in a Project Management environment since most projects do not make any revenue and spend their initial capital in their execution phase. It is unknown when and by whom the term was introduced to Project Management.

How to Use the Burn Rate

As mentioned earlier, the burn rate is an indicator of the project performance with respect to the budget. A burn rate greater than 1 means that the project budget is exhausted faster than originally planned, which indicates that the project may be finished over-budget. A burn rate less than 1 means that the project budget is exhausted slower than originally planned, which indicates that the project may be finished under budget. A burn rate equals to 1 means that the project is exhausting the budget exactly as originally planned, and indicates that the project may be finished on budget. Note that the latter case is not uncommon at the beginning of the project, but is not maintainable through the rest of the project, as it is nearly impossible to capture a project budget with a 100% accuracy at the beginning of any project.

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.

How to Calculate the Burn Rate

The calculation of the burn rate is quite simple and straightforward. Here’s the formula:

Burn Rate = 1/CPI

Where CPI is the Cost Performance Index which is calculated the following way (from here):

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

Where AC is the Actual Cost, and EV is the Earned Value.

Example of Calculating the Burn Rate

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.

• CV = EV – AC (where CV is Cost Variance, EV is Earned Value, and AC is the Actual Cost).
• SV = EV – PV (where SV is Schedule Variane, EV is Earned Value, and PV is Planned Value).
• CPI = EV / AC (where EV is Earned Value, AC is the Actual Cost, and CPI is Cost Performance Index). A CPI < 1 means that the project is over-budget. A CPI = 1 means that the project is on budget, and a CPI > 1 means that the project is spending less than budgeted for.
• SPI = EV / PV (where EV is Earned Value, PV is Planned Value, and SPI is Schedule Performance Index). An SPI < 1 means that the project is behind schedule. An SPI = 1 means that the project is on schedule, and an SPI > 1 means that the project is ahead of schedule.
• EAC = BAC / CPI (where BAC is Budget At Completion, CPI is Cost Performance Index, and EAC is Estimate At Completion). EAC is the estimate of the final cost of the project based on the current numbers.
• ETC = EAC – AC (where EAC is Estimate At Completion, AC is the Actual Cost, and ETC is Estimate To Complete). ETC is the estimate of how much more the project will cost until its finished.
• VAC = BAC – EAC (where BAC is Budget At Completion, EAC is Estimate At Completion, and VAC is Variance At Completion). VAC is the difference between the planned budget and current estimate of the final project cost. A VAC of -$50,0000 means that the project is $50,000 over-budget.

Note: This short article serves as a great set of notes for studying for the PMP Exam.

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