Estimate at Completion (EAC) – A Project Forecasting Tool

Estimate At Completion - EAC

We are all aware of forecasting, it helps us predict future events!

Forecasting is used in every part of the world, and people use many subjective criteria to predict it. Some people use the movement of moon or stars to predict the future and others use palm lines to predict it.

In project management, we also use forecasting to come up with a future performance or result, but here forecasting is based on objective evidence.

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:

  1. Estimate at Completion (EAC)
  2. Estimate to Complete (ETC)
  3. To Complete Performance Index (TCPI)

In this blog post, I am going to discuss the Estimate at Completion.

For the other two techniques, you can refer my blog posts on ETC and TCPI.

Okay let’s get started.

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 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.

However, from a PMP Certification exam point of view, the first method is more important than the rest.

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.

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 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.

In this blog post I am going to explain to you the four most commonly used formulas to calculate the EAC.

However, for the PMP exam, Case-I is the most important of all, and there is less chance that you will see questions based on the other cases.

Anyway, I’m going to explain all formulas mentioned in the PMBOK Guide, so no worries for you.

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.

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 USD.

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)

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 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.

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 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

Now, you 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 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.

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 USD.

Estimate To Complete (ETC)

Estimate to Complete is the amount of money to complete the remaining work (the work that is left after a certain period).

Visit: Estimate to Complete

To Complete Performance Index (TCPI)

In simple words, the To Complete Performance Index tells you how fast you have to move to achieve the target.

It is the estimate of the future cost performance that you may need to complete the project within the approved budget.

This budget may be your initial approved budget (BAC), or a new approved budget, i.e. the Estimate at Completion (EAC).

Visit: To Complete Performance Index

Here is where this blog post on EAC ends. If you have something to say, share it through the comments section.

Now you can move on to my next blog post on Estimate to Complete.

This topic is very important for the PMP exam. You may see a few questions from this topic on your exam.

image credit => nuchylee / FreeDigitalPhotos.net

Comments

  1. Hannah says

    PMBok Guide has 2 other formulas for EAC:

    EAC=AC+BAC-EV
    EAC=AC+(BAC-EV)/(CPI x SPI)

    Could you please explain these 2 formulas?

    • Fahad Usmani says

      Hello Hannah,

      Sorry to replying you late as I was busy with celebrating Eid Holidays with my family.

      I have updated this blog post. Now it explains all EAC formulas mentioned in the PMBOK Guide.

      Hope this answers your query.

          • Santosh says

            How we can decide which formula should be used? e,g Instead of using BAC / CPI if I use AC + BAC – EV to calculate the EAC I get different answer for the same example which you have mentioned above. With first option, answer is $149,253.73 and with second option answer is $1,20,00 ($60,000 + $1,00,000 – $40,000 = $1,20,00).

  2. Paul Evans says

    Found your site today in my PMP study time and wanted to say I really like your logical and simplifed approach.
    Regards…Paul.

  3. Karen Noakes says

    Have a mock PMP question asking what the formula for forecasting EAC using remaning budget is and correct answer was EAC=ACC+BAC-EV.

    Please explain as I cannot find this as an option in any of the 3 books I have nor can I find the ACC acronym stands for.

    • Fahad Usmani says

      There is a typing error in your formula given by you.

      Here is the correct formula:

      EAC = AC + BAC – EV

      • ala'a says

        Hi Fahad
        just wandering in the EVM ,
        we have the EAC=AC+ETC , then we have the EAC = AC+ (BAC- EV)
        Finally e have the EAC = AC+ (BAC-EV)/CPI
        How was that driven?!
        thanks much indeed for your support

        Ala’a

  4. ken says

    Thanks Fahad, it s cant get any simpler that how you explained the 4 different types of EAC. You gave me a very clear explanation and I am confident that I understand when and how to use each formula. Thanks.

  5. Mohamad says

    Thank you for explanation, but the scenario of using SPI and CPI together is not clear, how SPI*CPI means that you’ll be on schedule?!

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