Sunday, October 21, 2018

Estimate at Completion (EAC) – A Project Forecasting Tool

In project management, we use forecasting to predict the future performance of projects. However, here the forecasting is based on past performance and objective data, which provides fact-based future progress estimates and give an early indication if anything may go wrong.
We commonly use three techniques in project management for forecasting:
  1. Estimate at Completion (EAC)
  2. Estimate to Complete (ETC)
  3. To Complete Performance Index (TCPI)
Forecasting Technique #1: Estimate at Completion (EAC)
We know that real world situations do not always go as planned. There are many circumstances beyond your control that may alter your expected path and require a change in your planning.
As a project manager, it will be your responsibility to manage these changes and evaluate their impact on the project objectives.
Now, the question is: how will you evaluate the impact of these changes?
You will evaluate it with the help of project forecasting tools, such as the Estimate at Completion (EAC).
The Estimate at Completion (EAC) gives you the forecasted value of the project when it is completed. With this data, it can forecast how much you may have to spend to complete the project. In other words, it is the amount of money the project will cost.
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, and there is less chance you will see questions based on the other cases.

Case 1: EAC = BAC / CPI

In this scenario, you assume that the project will continue to perform to the end as it was performing until now. Simply put, your future performance will be the same as past performance; i.e. the CPI will remain the same for the rest of the project.
Formula for the Estimate at Completion
In this case, the Estimate at Completion can be calculated by dividing the budget at completion by cost performance index.
Estimate at Completion = (Budget at Completion) / (Cost Performance Index)
Or,
EAC = BAC / CPI
From the above formula, you can conclude that:
  • If the CPI = 1, then EAC = BAC. This means you can complete your project with your approved budget, 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.
Example of the Estimate at Completion (Case 1)
You have a project to be completed in 12 months, and the 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 has been completed so far.
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
Earned Value (EV) = 40% of 100,000
= 40,000 USD
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.
In other words, 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 2: EAC = AC + (BAC – EV)

In Case 2, you have deviated from your budget estimate; however, from now on you can complete the remaining work as planned.
Usually, this happens when, due to some unforeseen, or one time conditions costs increased. However, you are sure 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 the money spent to date (i.e. AC) to the budgeted cost for the remaining work.
Formula for the Estimate at Completion
The formula to calculate the Estimate at Completion in case-II is as follows:
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. During the 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 increase is temporary in nature and the rest of the project can be completed as planned you will use the formula:
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. In this case, both the cost and the schedule need to be taken into consideration.
Formula for the Estimate at Completion
The following formula can be used to calculate the Estimate at Completion in case-III:
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 of the Estimate at Completion (Case 3)
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 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

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 project’s work.
Here you will go to the activity level, find the cost of each activity, and sum them to get the total cost of the remaining work.
Example of the Estimate at Completion (Case 4)
You have a project to construct a government’s 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, during your project execution, you noticed 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 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 USD
Actual Cost (AC) = 200,000 USD
Earned Value (EV) = 175,000 USD
Bottom-up Estimate to Complete = 400,000 USD
In this case, 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 which is used along with Estimate at Completion. It is the amount of money needed to complete the remaining work.

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 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).

Summary

The Estimate at Completion is an excellent forecasting tool which gives you a mid-project estimation of the total cost that your project may take to complete. Please note that after you calculate the Estimate at Completion, you will need to initiate a change request to approve it. Once it is approved, this will be your new budget.

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