estimate-at-completion-eac

Monitoring and controlling the budget is vital in project management, as stakeholders are concerned about cost overruns. Estimate at Completion (EAC) is a forecasting tool to help achieve this objective. 

Today, we will discuss this forecasting tool in detail with its mathematical formula and examples of calculations.

Let us delve in.

What is the Estimate at Completion (EAC)?

According to the PMBOK Guide, estimate at completion (EAC) is “the expected total cost of completing all work expressed as the sum of the actual cost to date and the estimate to complete.”

Put simply, it predicts the total cost of a project once it’s finished. It considers the project’s current performance and adjusts the initial cost estimate based on actual performance. EAC helps project managers guess if they can complete the project within budget or if extra funding is required.

Mathematically, EAC is the spent cost plus the expected cost required to complete the remaining project work. This metric helps project sponsors or management adjust the budget on time to avoid delays and risks.

EAC helps stakeholders manage budgets efficiently according to current conditions. It is a projection of the total cost a project is expected to incur upon completion.

Apart from EAC, you have two more project forecasting techniques:

  1. Estimate to Complete (ETC)
  2. To Complete Performance Index (TCPI)

Importance of Estimate at Completion

Effective project management depends on accurate budget planning and expenditure, and EAC plays a key role in this endeavor. EAC allows project managers to allocate resources correctly and make informed decisions that align with budgetary expectations by providing a realistic projection of the total cost to complete a project. 

According to a survey (PMI’s Pulse of the Profession 2022) conducted by the PMI, 71% of projects that exceeded their budget listed “inadequate cost estimation” as one of the leading causes. Using an estimate at completion helps mitigate such risks and ensures that the project stays within its limits.

Impact of Estimate at Completion on Projects

A study by the International Journal of Project Management found that organizations using EAC practices experienced a 20% reduction in cost overruns. This shows the tangible benefits of using EAC in project management and its correlation with cost control success.

Examples of EAC

You can calculate the estimate at completion using four different scenarios.

Case #1: EAC = BAC / CPI

You assume that the project will continue to perform, to the end, as it has been performing in this scenario.

In other words, your future performance will be the same as your past performance. Therefore, the CPI will remain unchanged until the project ends.

Formula for Estimate at Completion

You can calculate the estimate at completion by dividing the budget at completion (BAC) by the cost performance index (CPI).

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

Or,

EAC = BAC / CPI

  • If the CPI = 1, then EAC = BAC. This means you can complete your project with your approved budget analysis.
  • The estimate at completion will be equal to the budget at completion at the start of the project (i.e., EAC = BAC).

Example #1

You have a project to be completed in 12 months, and the cost is 100,000 USD. Six months have passed, and 60,000 USD has been spent, but upon closer review, you find that only 40% of the work has been completed.

Find the estimate at completion (EAC) for this project, given the question:

Budget at completion (BAC) = 100,000 USD 

Actual Cost (AC) = 60,000 USD

Planned Value (PV) = 50% of 100,000

= 50,000 USD

The question did not say that the Planned Value was 50%. However, it says that the duration is 12 months, and 6 months have passed. In this case, you can safely assume that the PV was 50% unless it is given in the question.

Earned Value (EV) = 40% of 100,000

= 40,000 USD

First, you have to calculate the cost performance index to calculate the EAC:

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.

In other words, if the project continues with CPI = 0.67 until the end, then you must spend 149,253.73 USD to complete it.

The estimate at completion (EAC) provides the amount of money that the project will cost.

The estimate at completion can be determined by four methods, depending on how the project performs. However, from a PMP certification exam standpoint, the first method is the most important. There is a smaller chance that you will see questions based on the others.

Case #2: EAC = AC + (BAC – EV)

You have deviated from your budget estimate, but you can complete the remaining work as planned.

Unforeseen circumstances or one-time incidents can cause this and increase costs. However, it will not happen again, and you can complete the remaining work as planned.

In this formula, you add the money spent to date to the budgeted cost of the remaining work.

Formula for Estimate at Completion

The formula to calculate the estimate at completion in this case, is:

Estimate at Completion = Money Spent to Date + Budgeted Cost for the Remaining Work

EAC = AC + (BAC – EV)

Example #2

You have a project with a budget of 500,000 USD. An incident during the execution phase costs 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).

You will use this formula because the cost increase is temporary, and you can complete the rest of the project as planned.

Estimate at Completion = Money Spent to Date + (Budgeted Cost for the Remaining Work – Earned Value)

EAC = AC + (BAC – EV)

Given the question:

Actual Cost (AC) = 200,000 USD

Budget at Completion (BAC) = 500,000

Earned Value (EV) = 175,000

Therefore:

EAC = 200,000 + (500,000 – 175,000)

= 200,000 + 325,000

= 525,000 USD

Therefore, the Estimate at Completion is 525,000 USD.

Case #3: EAC = AC + [(BAC – EV) / (CPI * SPI)]

You are over budget, behind schedule, and the client insists you complete the project on time. The cost and schedule performance must be taken into consideration.

Formula for Estimate at Completion

Estimate at Completion = Money Spent to Date + (Budgeted Cost for Remaining Work – Earned Value) / (Cost Performance Index * Schedule Performance Index)

EAC = AC + [(BAC – EV) / (CPI * SPI)]

Example #3

You have a fixed deadline for a project with a budgeted cost of #500,000 USD. To date, you have spent 200,000 USD, and the value of the completed work is 175,000 USD. However, according to the schedule, you should have earned 225,000 USD by now.

Calculate the estimate at completion (EAC), given the question:

Budget at Completion (BAC) = 500,000 USD

Actual Cost (AC) = 200,000 USD

Earned Value (EV) = 175,000 USD

Planned Value (PV) = 225,000 USD

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 USD

Hence, the estimate at completion is 671,000 USD.

Case #4: EAC = AC + Bottom-Up Estimate to Complete

In this situation, you find out that your cost estimate was flawed, and you must calculate the new cost estimate for the remaining project work.

Here, you will go to the activity level to find each cost, add them, and get the cost of the remaining work.

Example #4

You have a project to construct a government department building for 500,000 USD. To date, you have spent 200,000 USD, and the value of the completed work is 175,000 USD. However, you notice that your cost estimation was flawed. Therefore, you need to calculate your budget again for the remainder of the project.

You gather your team members and re-estimate the cost of the remaining work. Your new estimate shows that it will require 400,000 USD to complete the remainder of the project.

Calculate the estimate at completion (EAC) given the question:

Budget at Completion (BAC) = 500,000 USD

Actual Cost (AC) = 200,000 USD

Earned Value (EV) = 175,000 USD

Bottom-Up Estimate to Complete = 400,000 USD

Here, you will use the formula:

EAC = AC + Bottom-Up Estimate to Complete

= 200,000 + 400,000

= 600,000 USD

Therefore, the estimate at completion is 600,000 USD.

EAC Vs BAC

EAC and BAC are cost estimates. The BAC is determined initially, while the EAC is determined during the project and considers all risks and deviations from cost and schedule baselines. 

EAC is a dynamic projection of the total cost that the project is expected to incur after completion. It considers actual costs incurred and the estimated costs to complete the remaining work. EAC provides a realistic estimate by considering the project’s current performance.

Budget at completion (BAC) is the original baseline budget established at the beginning of the project. It represents the total authorized budget for the entire project.

EAC provides the adjusted estimate based on the project’s actual performance and current conditions, while BAC represents the initial budget set at the project’s outset. EAC is dynamic and adaptable, while BAC is static data.

EAC Vs ETC

Estimate at completion (EAC) is a projection of the total cost a project will incur when it is completed. It considers the actual costs incurred and the estimated costs for completing the remaining work. 

Estimate to Complete (ETC) is a forward-looking estimate of the cost required to complete the remaining project work in a project. It focuses solely on the expected costs for the work yet to be done without considering the actual costs incurred.

ETC is a targeted estimate for the remaining work without considering past performance. EAC gives a comprehensive view of the project’s overall cost status, whereas ETC provides a more focused estimate for future expenses.

Estimate at Completion (EAC) Table

Estimate at completion EAC table

Estimate at Completion (EAC) Graph

estimate at completion eac

Frequently Asked Questions

Q: Why is EAC important for project managers?

EAC helps project managers make informed decisions, adjust resource allocation, and communicate realistic budget expectations to stakeholders.

Q: Can EAC be used for ongoing project monitoring?

EAC is a valuable tool for monitoring project cost performance throughout its lifecycle, allowing for timely adjustments and risk management.

Q: What role does EAC play in risk management?

EAC assists in identifying potential cost overruns or savings in the project, enabling project managers to address risks proactively.

Q: How does EAC contribute to accurate project forecasting?

EAC contributes to accurate forecasting by considering past project performance and estimated future costs, thus providing a realistic projection.

Q: Can EAC be adjusted during the project lifecycle?

EAC is designed to be a dynamic measure that can be adjusted as the project progresses, incorporating scope, schedule, and cost changes.

Q: How does EAC support effective cost control?

EAC helps identify variances between the original budget and the projected cost, facilitating effective cost-control measures to keep the project within budget constraints.

Summary

Estimate at completion is an excellent forecasting tool. It allows project managers to make realistic budget revisions. It gives you a mid-project estimation of the costs that your project may require to complete. Once this estimate is approved, this will be your new budget. The EAC is not fixed; it may change as the project progresses. The estimate at completion should be revised periodically or as defined in the project-management plan.

This topic is important from a PMP exam point of view.

This blog post is the fifth in eleven series on Earned Value Management and project forecasting. Please read through my previous posts before reading this post if you’re coming here from a search engine or a referral.

The following are the links for other blog posts:

Fahad Usmani, PMP

I am Mohammad Fahad Usmani, B.E. PMP, PMI-RMP. I have been blogging on project management topics since 2011. To date, thousands of professionals have passed the PMP exam using my resources.