Estimate at Completion (EAC) – A Project Forecasting Tool

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In project management, forecasting provides us with the visibility of future progress of the project and gives stakeholders an early idea of what may go wrong.

There are three techniques commonly used for forecasting. These techniques are as follows:

1.      Estimate at Completion (EAC)

2.      Estimate to Complete (ETC)

3.      To Complete Performance Index (TCPI)

I will discuss the Estimate at Completion. And the other two techniques will be discussed in next blog.

Estimate at Completion (EAC)

Projects are executed in the real world, and in the real world activities do not always go as planned. There are situations that may deviate our project from its planned path, which might lead to a change in the project.

As a project manager we must keep track of these changes and evaluate their impact on the project parameters.

Now, the question is: how to evaluate the impact of these changes?

Well we do this with the help of project forecasting tools, such as the Estimate at Completion.

The Estimate at Completion (EAC) gives us the forecasted value of the project when it is complete. It tells us how much we may have to spend to complete the project.

In other words, we can say that it is the amount of the money that the project will cost at the end.

The Estimate at Completion can be determined by four methods depending on the way the project is performing.

Method – 1: EAC = BAC/CPI

In this scenario we assume that the project will continue to perform to the end as it was performing up until now.

In other words; future performance will be same as the past performance; i.e. the CPI will remain the same for the rest of the project.

Below is the formula to calculate the Estimate at Completion

Estimate at Completion = (Budget at Completion) / (Cost Performance Index)

Or,

EAC = BAC/CPI

Please note that:

If the CPI = 1, then EAC = BAC. This means we can complete the project with 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.

Let us see the four most commonly used formulas to calculate the EAC.

Example:

You have a project to be completed in 12 months, and the total cost of the project is 100,000 RS. Six months have passed and 60,000 RS 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.

Given in the question:

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

To calculate the EAC, first you have to calculate the Cost Performance Index

Cost Performance Index (CPI) = EV / AC = 40,000 / 60,000 = 0.67 =>Cost Performance Index (CPI) = 0.67

Now,

Estimate at Completion (EAC) = BAC/CPI = 100,000/0.67 = 149,253.73

Hence, the Estimate at Completion (EAC) is 149,253.73 RS.

It means if the project continues to progress with CPI = 0.67 until the end, we have to spend 149,253.73 RS to complete the project.

Method – 2: EAC = AC + (BAC – EV)

In this scenario we assume that until now we have deviated from our budget estimate; however, from now onwards we can complete the remaining work as planned.

Usually this happens when due to some unforeseen conditions, any incident happens and cost elevates; however we are sure that this will not happen again and we can continue with the planned cost estimate.

That is why in this formula, to calculate the EAC we 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)

Example:

You have a project with a budget of 500,000 RS. 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 RS, and the value of the completed work is 175,000 RS.

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 we will use the formula:

EAC = AC + (BAC – EV)

Given in the question,

Actual Cost (AC) = 200,000

Budget at Completion (BAC) = 500,000

Earned Value (EV) = 175,000

Hence,

EAC = 200,000 + (500,000 – 175,000) = 200,000 + 325,000 = 525,000

Hence, the Estimate at Completion is 525,000 RS.

Method – 3: EAC = AC + (BAC – EV)/(CPI*SPI)

In this scenario we assume that we are over budget, behind schedule, and client is insisting 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, we can say that if our cost performance is poor, we are also behind schedule and we must complete project on time, so we will use the below formula.

Formula to Calculate the Estimate at Completion

EAC = AC + (BAC – EV)/(CPI*SPI)

Example:

You have a fixed deadline project with a budgeted cost of 500,000 RS. So far you have spent 200,000 RS and the value of the completed work is 175,000 RS. However, as per the schedule you should have earned 225,000 RS to date.

Calculate the Estimate at Completion (EAC).

Given in the question:

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 we 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

Now, we can use the formula

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 RS.

Method – 4: EAC = AC + Bottom up Estimate to Complete

In this scenario we assume that our cost estimate was flawed, and we need to calculate the new cost estimate for the remaining work for the project.

Here we 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.

Example:

You have a project to build a government’s department building with a worth of 500,000 RS. To date you have spent 200,000 RS and the value of the completed work is 175,000 RS. 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 RS to complete the remaining part of the project.

Calculate the Estimate at Completion (EAC).

Given in the question:

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 RS.