Estimate at Completion (EAC) – A Project Forecasting Tool
We are all aware of forecasting, it helps us predict future events! Forecasting provides us with the visibility of future progress of the project and gives project sponsors an early idea of what may go wrong.
In project management, three techniques are most commonly used for forecasting. These techniques are as follows:
Estimate at Completion (EAC)
Estimate to Complete (ETC)
To Complete Performance Index (TCPI)
Projects are executed in the real world, and in the real world activities do not always go as planned. There are many circumstances beyond your control that may deviate your project from its planned path, which might lead to a change in your project.
As a project manager you must keep track of these changes and evaluate their impact on the project parameters. Now, the question is: how will you evaluate the impact of these changes? You will do this with the help of project forecasting tools, such as the Estimate at Completion.
The Estimate at Completion (EAC) gives you the forecasted value of the project when it is complete. It tells you how much you may have to spend to complete the project. In other words, you can say that it is the amount of the money that the project will cost you at the end.
The Estimate at Completion can be determined by four methods depending on the way the project is performing.
Case-I: EAC = BAC/CPI
In this scenario you assume that the project will continue to perform to the end as it was performing up until now. Simply put, your future performance will be same as the past performance; i.e. the CPI will remain the same for the rest of the project.EAC = BAC/CPI
Please note that: If the CPI = 1, then EAC = BAC. This means you can complete your project with your approved budget (BAC), and there is no need to use forecasting analysis. At the start of the project, the Estimate at Completion will be equal to the Budget at Completion, i.e. EAC = BAC.
A mathematical example of Estimate at Completion (Case-I)
You have a project to be completed in 12 months, and the total cost of the project is $100,000 USD. Six months have passed and $60,000 USD has been spent, but on closer review you find that only 40% of the work is completed so far.
Find the Estimate at Completion (EAC) for this project.
Budget at Completion (BAC) = $100,000
Actual Cost (AC) = $60,000
Planned Value (PV) = 50% of $100,000 = $50,000
Earned Value (EV) = 40% of $100,000 = $40,000
Cost Performance Index (CPI) = EV / AC = $40,000 / $60,000 = 0.67
Estimate at Completion (EAC) = BAC/CPI = $100,000/0.67 = $149,253.73
It means if the project continues to progress with CPI = 0.67 until the end, you will have to spend $149,253.73 USD to complete the project.
Case-II: EAC = AC + (BAC – EV)
Here, you say that until now you have deviated from your budget estimate; however, from now onwards you can complete the remaining work as planned. Usually this happens when due to some unforeseen conditions, any incident happens and your cost elevates; however you are sure that this will not happen again and you can continue with the planned cost estimate. That is why in this formula, to calculate the EAC you will simply add money spent to date (i.e. AC) to the budgeted cost for remaining work.
Formula to Calculate the Estimate at Completion EAC = AC + (BAC – EV)
A mathematical example of Estimate at Completion (Case-II)You have a project with a budget of $500,000 USD. During execution phase, an incident happens which costs you a lot of money. However, you are sure that this will not happen again, and you can continue with your calculated performance for the rest of the project.
To date you have spent $200,000 USD, and the value of the completed work is $175,000 USD.
Calculate the Estimate at Completion (EAC).
Since the cost elevation is temporary in nature and the rest of the project can be completed as planned, in this case you will use the formula: EAC = AC + (BAC – EV)
Actual Cost (AC) = $200,000
Budget at Completion (BAC) = $500,000
Earned Value (EV) = $175,000
EAC = 200,000 + (500,000 – 175,000) = 200,000 + 325,000 = 525,000
Hence, the Estimate at Completion is $525,000 USD.
Case-III: EAC = AC + (BAC – EV)/(CPI*SPI)
You are over budget, behind schedule, and client is insisting you to complete the project on time.In this case, not only the cost but the schedule also has to be taken into consideration.
In other words, you can say that if your cost performance is poor, you are also behind schedule and you must complete your project on time, so you will use the formula for Case-III.
Formula to Calculate the Estimate at Completion
EAC = AC + (BAC – EV)/(CPI*SPI)
A mathematical example of Estimate at Completion (Case-III)
You have a fixed deadline project with a budgeted cost of $500,000 USD. So far you have spent $200,000 USD and the value of the completed work is $175,000 USD. However, as per the schedule you should have earned $225,000 USD to date.
Budget at Completion (BAC) = $500,000
Actual Cost (AC) = $200,000
Earned Value (EV) = $175,000
Planned Value (PV) = $225,000
To calculate the EAC, first you have to calculate the CPI and SPI.
SPI = EV/PV = 175,000/225,000 = 0.78
CPI = EV/AC = 175,000/200,000 = 0.88
EAC = AC + (BAC – EV)/(CPI*SPI)
= 200,000 + (500,000 – 175,000)/(0.88*0.78)
= 200,000 + 325,000/0.69
= 200,000 + 471,000
= 671,000
Hence, the Estimate at Completion is $671,000 USD.
Case-IV: EAC = AC + Bottom up Estimate to Complete
This is the case when you find out that your cost estimate was flawed, and you need to calculate the new cost estimate for the remaining work for the project. Here you will go to the activity level, find the cost of each activity and sum them up to get the total cost of the remaining work.A mathematical example of Estimate at Completion (Case-IV)
You have a project to build a government’s department building with a worth of $500,000 USD. To date you have spent $200,000 USD and the value of the completed work is $175,000 USD. However, during your project execution you noticed that your cost estimation was flawed and you need to calculate your budget again for the remaining part of the project.
You sit down with your team members and re-estimate the cost of the remaining work. Your new estimate says that it will take $400,000 USD to complete the remaining part of the project.
Budget at Completion (BAC) = $500,000
Actual Cost (AC) = $200,000
Earned Value (EV) = $175,000
Bottom Up Estimate to Complete = $400,000
In this case you will use the formula:
EAC = AC + Bottom up Estimate to Complete
= 200,000 + 400,000
= 600,000
Hence, the Estimate at Completion is $600,000 USD.
