The definitive guide to project forecasting

If you’re lying awake at night wondering if your project is going to hit its targets, you’re unfortunately doing a bit of nocturnal forecasting. You’re not alone, as we’ve all had those bolt upright in bed moments, but you’ll be pleased to learn there is a better way.

If you actively and systematically track the performance of your project during actual working hours, you can make educated predictions about what the final result might be.

Read on to discover how project forecasting has benefits that extend beyond a better night’s sleep, see forecasting examples, and hear expert tips from seasoned project professionals.

What is forecasting in project management?

A forecast is a prediction of what will happen based on evidence or assumptions. In project management, forecasting means looking at the current status information and figuring out what the performance will be at the end of the project.

Forecasts are not wild guesses. They are thorough estimations or predictions based on a careful evaluation of all the information and knowledge at hand. Forecasts should be updated and reissued as the project progresses. Things change, and this will impact forecasts.

“The quality of your forecast always improves as you progress through a project. As time passes, your confidence improves because there is more actual project performance data in your estimate, and less need for crystal ball gazing.”

Les Carleton, Program Director 

The success of any project is judged by how well it meets its performance targets. Most projects gain initial approval based on their forecasted outcomes. And many projects are at risk of cancellation if the forecasted outcome no longer stacks up. As project managers, we need to regularly update our forecasts so that the organisation can make the right decisions based on the latest information we have.

The benefits of effective project forecasting

Project forecasting is an effective planning tool that helps management lessen the uncertainty. By using past and present data, analysing trends, and reporting regularly, decisions can be data-driven rather than shots in the dark. Effective project forecasting can:

• Improve cash flow planning: forecasting cash flow is a must. It identifies trends and highlights future cashflow problems ahead of time, so you can make adjustments to your activities or manage the impact on the business. It’s important to review regularly, so it’s a good idea to include monthly actual figures to forecast the updated future cash position. This keeps information relevant and up to date and ensures money is available when the project needs it.
• Identify threats to achieving project timelines: particularly when you’re managing a long-term, complex project, time slippages can creep up on you. If left unchecked, they can compound and lead to an unrecoverable position. Extending the timeline of a project almost always leads to budget disaster, so forecasting the timeline is essential to highlight any deviations from the plan before they are out of control.
• Reduce resource costs: resource costs are often the biggest line item in the budget. It’s a complex task to make sure you have the right resources available at the right time across multiple projects in an organisation. Using under-skilled or overqualified staff can significantly affect the bottom line. So can having excesses or shortages of resources. Timely and detailed forecasting can have a huge impact on project and business profitability.
• Identify resource gaps: one of the trickiest parts of managing any business is the people. No matter how carefully you’ve planned your schedule, someone could become sick or a team member with niche skills may resign. By continually forecasting your requirements, you can highlight issues ahead of time and address them before they impact project delivery.
• Improve decision making: forecasts provide knowledge and insight to management that helps guide better decisions. Executives often have their eyes on multiple projects and can’t have intimate knowledge about the progress of them all. Forecasts can often be adjusted to account for different scenarios, so you (and senior management) can understand the impact of different decisions.

Types of forecasting

As the project manager, you should be forecasting:

Time: which of the project tasks will finish on time? Is the total project going to achieve its scheduled completion date?

Your project schedule is a critical document that helps keep you on track to meet your deadlines. You’ll work out what tasks are needed, what order to do them in and how long they’ll each take. This helps you arrive at your project completion date. As the project progresses, you’ll monitor how each task is tracking against the plan, forecast the likely result, and adjust as needed to resolve any issues that arise.

Money: which of the costs are tracking on budget? Which are over? Is the project going to achieve its original budget estimate?

Your performance against the budget forecast ultimately determines whether your project is a success. There’s a lot riding on this one. When you develop your budget, you’ll estimate all the labour, material, and operating costs associated with every project activity. During the project, you’ll need to track and monitor the actual spend against the budget and forecast the end result. This will help you quickly identify any issues and pull the project back on track before it’s too late.

Resource: what resources have been used? How much more do we need to complete the project? Could we reallocate people to other projects?

Making sure you have all the resources you need to complete your project is essential. When building your budget, consider all the resources you need to create the deliverables and forecast the number of staff, equipment, and supplies. Once the project is underway, you’ll need to constantly monitor the resource usage and forecast and timeline remaining hours, materials, and equipment to ensure you’re still tracking well. Being over or under-resourced creates problems, so it’s important to keep reviewing and adjusting to keep the project on track.

Quality: are the deliverables meeting the desired quality levels? Is the project on track to meet its original objectives?

Typically, projects are approved based on their business case and the commitment by the project team to deliver an outcome. It can be a trap to focus on just ticking off the tasks. Ensure each team member knows their role not just in completing the tasks but completing them well. If you don’t, you risk ending the project with a disappointing result that doesn’t achieve the performance or quality promised. This is no good for the business, team morale or your career. So, ensure you’re monitoring performance and check that you’re tracking for the result you need.

Managing expectations when forecasting

It’s a good idea to communicate uncertainty in your forecast, to manage expectations on the reliability of the outcome you’re predicting.

When you forecast, it’s ok to make statements such as:

• We are 95% confident that we can complete the project for under $800K
• We are 80% confident that we can complete the project for under $700K

This gives decision-makers some context to the variability that is always involved in forecasting.

There are some helpful online tools available to create probabilistic estimates, or your finance team may be able to assist.

Project forecasting techniques

Forecasts are essentially trying to predict the final result of projects. There are several techniques that you can use alone or in combination to establish your forecasts:

Use data

• Trend analysis: this technique involves studying past data patterns to predict future needs. The point is to identify trends and decide if you think they might continue. It’s sometimes called “straight-line” forecasting because it takes current project spending and applies that rate of spending until the end of the project. It provides a rough estimate but doesn’t take into account that spending doesn’t always happen evenly over the course of a project.
• Time series analysis: involves breaking down historical data into its various components, including seasonal trends, plus regular and random variations. When the components are separated, the driving forces can be identified, and projections become more accurate.
• What-if scenarios: a powerful technique for alerting management and stakeholders to possible outcomes. It’s especially useful for understanding how changes in one thing affect another. A simple example is looking at how many products you think you would sell depending on the price you are charging. In project management, you might look at what-if scenarios based on time overruns, budget shortfalls, or changes in technology.
• EVM or earned value management: EVM values each output at the amount of funds budgeted to complete it. It then analyses the planned value (the budget for the work scheduled to be completed by a set date) versus the earned value (the budget for work actually completed) and the actual costs. It’s useful for checking variances and rectifying issues before they get out of hand.

Consult with others

It’s a good idea to collaborate when forecasting. Actively check progress with the project team members because they are closest to the day to day issues they are encountering. Check with suppliers, as they might be able to see future issues with supply well before you can.

There are a couple of different approaches to forecasting as a team:

• Delphi technique: relies on the idea that structured groups of people make better forecasts than unstructured groups. Therefore, some organisations create a panel of Subject Matter Experts (SMEs) or otherwise qualified people to make forecasts for the whole company.
• Nominal technique: this is where people are asked to come up with their own ideas independently, then a facilitator collates all the suggestions. The group then analyses each of the ideas and comes up with a collective decision.

Use project forecasting software

Forecasting capability in project management software is growing in popularity and there’s no shortage of options to choose from. Different platforms have their strengths and weaknesses, so do your due diligence if you’re going down this path.

How to do project forecasting: 9 steps to effective forecasting

5 expert tips for better project forecasting

Some advice from senior project professionals on taking your forecasting to the next level:

1. Automate your forecasting wherever possible, but make sure you still do the thinking to have confidence in its real-world application.
2. Use real-time data whenever possible so you can be responsive and fluid in your approach.
3. Ensure you have enough information to realistically forecast performance. Trying to adjust your forecast a week into the project probably isn’t worth it, but once you’re around 25% in, you’ve got some actual figures to check against.
4. Build a direct line of communication with your key stakeholders to help you forecast accurately and manage expectations across the board.
5. When forecasting, don’t expect a linear trend. There’s almost always a budget jump at the end of projects. People work at different rates on different tasks. Understand your trends and prepare accordingly. It’s particularly important to communicate with your finance department so your funds aren’t shifted away without you knowing.

A final word on project forecasting

Forecasting is an essential skill for project managers. It’s all about being able to set expectations about how the project is going to turn out. Knowing how you’re tracking will give you confidence that you’re headed for post-project high-fives, plus you’ll have the chance to resolve issues before they are out of control.

As you progress through your project management career, it’s important to hone your skills and keep learning. Membership with a peak industry body, such as the Australian Institute of Project Management, is a great way to access resources, connect with other project professionals, and improve your career prospects.