What Is Burn Rate?

Burn Rate is 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.

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.


Comments

  1. Quote
    Adrian Hill said April 27, 2010, 12:38 pm:

    The article states,

    “A burn rate less than 0 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 0 means that the project is exhausting the budget exactly as originally planned, and indicates that the project may be finished on budget.”

    Should this not read, “A burn rate less than 1 means that the project budget is exhausted slower than originally planned, and, “A burn rate equal to 1 means that the project is exhausting the budget exactly as originally planned”?

    If this is not the case, please clarify.

    Thank you for your attention to this matter.

    Adrian

  2. Quote

    Hi Adrian,

    Thanks for spotting this error. I have updated the article.

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