Estimate at Completion (EAC) A Project Forecasting Tool

By Fahad Usmani

Forecasting
helps try to future events, and it has been used in every part of the world since recorded history.

People from different cultures use different methods to forecast. Some people use the movement
of the moon or stars to predict the future, and others, palm lines.

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)

In this blog post, Im going to discuss the Estimate at Completion in detail, and I will follow up
in further blogs for the other two.

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.

1
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 that 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 that you will see questions based on the
other cases.

Anyway, Im going to explain all formulas mentioned in the PMBOK Guide, so dont worry.

Case-I: 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-I)

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.

2
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-II: EAC = AC + (BAC EV)

In Case-II, 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 that this will not happen again and you can continue with the planned cost
estimate.

3
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-II)

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

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

4
Case-III: 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-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 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

5
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 projects 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-IV)

You have a project to construct a governments 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 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 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:

6
EAC = AC + Bottom-up Estimate to Complete

= 200,000 + 400,000

= 600,000

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.

Visit: Estimate to Complete

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).

Visit: To Complete Performance Index

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.

Here is where this blog post on the Estimate at Completion (EAC) ends. If you have something
to say, share it through the comments section, and now you can move on to my next blog post on
the Estimate to Complete.

If you are interested in learning all the mathematical formulas for the PMP exam, you can try my
PMP Formula Guide. You can also try my PMP Question Bank to practice 400 PMP exam
sample questions.

Source: https://pmstudycircle.com/2012/05/estimate-at-completion-eac-a-project-forecasting-tool/