estimate-at-completion-eac

Estimate at Completion (EAC) is a forecasting tool in project management.

Forecasting helps predict the future performance of projects. It is based on the past performance of the project and objective data. With this information in hand, you can guess future progress and find early indications of a deviation.

We have three forecasting techniques in project management:

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

In this blog post we will discuss Estimate at Completion (EAC) in detail and the other two techniques briefly.

What is Estimate at Completion (EAC)?

According to the PMBOK Guide, Estimate at Completion is “The expected total cost of completing all work expressed as the sum of the actual cost to date and the estimate to complete.”

Just in case the definition above doesn’t give you a complete picture, let me give you a simple example.

Let’s say you are somewhere in your project. The client comes and asks you how much they have to spend to complete the project and your project has deviated from the cost baseline.

Therefore, you will estimate the new budget and give this number to the client. This is the 

Estimate at Completion (EAC). Estimate at Completion allows the project manager to see the final project cost estimate.

Project work does not always go as planned. There are many circumstances beyond your control that may require a change in your plan. Funding requirements keep on changing from the moment the project starts.

It is your responsibility as a project manager to influence the factors that cause changes. However, if alterations occur, you have to manage them.

You will evaluate the impact of each change on the project’s objectives and take action as needed.

You can calculate the Estimate at Completion in three 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.

The Formula for the Estimate at Completion

You can calculate Estimate at Completion by dividing the Budget at Completion by the Cost Performance Index.

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 of the Estimate at Completion (Case 1)

You have a project to be completed in 12 months and the cost is 100,000 USD. 6 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 in 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, you will have to spend 149,253.73 USD to complete it.

The Estimate at Completion (EAC) gives the amount of money the project will cost at the end.

The Estimate at Completion can be determined by four methods, depending on how the project is performing. However, from a PMP certification exam point of view, the first method is the most important. There is a smaller chance you will see questions based on the others.

Case 2: EAC = AC + (BAC – EV)

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

Unforeseen circumstances or one-time incidents can cause this to happen and will 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.

The Formula for the 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 of the Estimate at Completion (Case 2)

You have a project with a budget of 500,000 USD. An incident during the execution phase costs you a lot of money. However, you are sure that this will not happen again, and that 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 in the question:

Actual Cost (AC) = 200,000 USD

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 USD

Hence, 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 is insisting you complete the project on time. The cost and schedule performance must be taken into consideration.

The Formula for the Estimate at Completion

Estimate at Completion = Money spent to date + (Budgeted cost for the remaining work – Earned Value) / (Cost Performance Index * Schedule Performance Index)

EAC = AC + [(BAC – EV) / (CPI * SPI)]

Example the Estimate at Completion (Case 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 in 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 and add them and get the cost of the remaining work.

Example of the Estimate at Completion (Case 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 noticed 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 would take 400,000 USD to complete the remainder of the project.

Calculate the Estimate at Completion (EAC).

Given in 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

Hence, the Estimate at Completion is 600,000 USD.

Forecasting Technique #2: Estimate to Complete (ETC)

Estimate to Complete is the second forecasting technique. It is the cost of completing the remaining work.

Estimate to Complete = Estimate at Completion – Actual Cost

ETC = EAC – AC

Forecasting Technique #3: To Complete Performance Index (TCPI)

The To Complete Performance Index estimates how fast you have to move to achieve the target.

It is the estimate of the future cost that you may need to complete the project within the approved budget. This budget may be the BAC or an updated budget, i.e., Estimate at Completion (EAC).

TCPI = (Remaining Work) / (Remaining Funds)

TCPI = (BAC – EV) / (BAC – AC)

Or

TCPI = (BAC – EV) / (EAC – AC)

Summary

The 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 overall cost that your project may take 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. Estimate at Completion should be revised periodically or as defined in the project management plan.

How often do you use Estimate at Completion (EAC) during your projects? Please share your experience in the comments section.

This blog post is the fifth in a series of seven 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: