The PMBOK® Guide clearly states how to calculate Estimate at Completion (EAC) in different situations. I can tell you from my personal experience that the EAC calculation questions you may get during your PMP® examination can be quite confusing. The PMP® exam assesses your ability to understand the concept of EAC, as well as the correct application of EAC in each project, so you need to understand the different ways of calculating EAC.
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Estimate at Completion (EAC)
Estimate at Completion (EAC) is a forecasting method that is used to provide the cost estimate of a project once it's complete. There are different ways to calculate EAC, depending on the factors involved. The four formulas are used for specific scenarios and help measure how much a project may be off-track. By understanding each formula, you can make the most appropriate corrective changes to your project.Estimate at completion is an element of the Earned Value Management (EVM) framework. During the course of a project's life cycle, this word refers to the activity of estimating the budget. To put it another way, how much money will be spent on the project after it is completed? Using this information, you may assess whether or not you've exceeded your initial budget expectations.
In contrast to other techniques of cost estimates, the estimate at completion computation takes into account unforeseen expenditures and understands that original budget forecasts are unlikely to be accurate in the long run. For this reason, it is commonly referred to as a "project forecasting tool."
Estimate at Completion v. Estimate to Complete
Given the similarity between these two terms, they are frequently used interchangeably. Since they're so often misunderstood, it is critical to understand the differences and when to compute for which of the variables.
Total expenditures are predicted by the estimate at completion (EAC), whereas the amount of money required to finish the project is predicted by the estimate to complete (ETC). ETC is a projection of all extra funds that will be necessary to finish a project after it has begun. Amounts previously spent are not taken into consideration.
Why Is EAC important?
Even the most meticulously calculated budgets are not always completely correct. Changes and unforeseen situations, such as increased or reduced expenditures and costs, are commonplace in project management.
To keep track of precisely how a change would affect the entire budget, project managers might use the EAC technique. Making well-informed choices is easier when you know exactly how much money you're talking about.
Parts of the Estimate at Completion Formula
Multiple factors go into determining an estimate at completion, including the budget, cost, and, on occasion, timetable performance. The Earned Value Management (EVM) system includes all of these components, as well. There are multiple ways to look up these phrases, but what precisely are they?
Budget at Completion (BAC): As the name suggests, the Budget at Completion (BAC) is the total money needed to execute a project successfully. To calculate BAC, tally up all of your projected expenditures and spending. Budgets are usually divided into categories. The BAC is the aggregate of all of the individual categories.
Cost Performance Index (CPI): If you want to know how much money you're spending, you may use the Cost Performance Index (CPI). The ratio of Earned Value (EV) of the work completed to the Actual Cost (AC) of doing the work gives the CPI.
Schedule Performance Index (SPI): This index, like CPI, assesses how well time is being utilized. Earned Value (EV) is divided by Planned Value (PV) to get the SPI.
How Project Manager Helps With Cost Estimating and Variance
You must have the most up-to-date information in order to produce accurate predictions. Because the dashboard in ProjectManager is updated in real-time, it is impossible to make future-oriented choices based on outdated facts.
Using a variety of filters, you may tailor the dashboard to your needs and focus on the most important information. Everything you must know about the project is right there in one place.
You may quickly make comparisons like anticipated against real expenses, planned versus actual completion, and more using your dashboard. That means you won't have to go up the calculator or depend on third-party tools to figure out something like your EAC.
EAC Calculation Categories and Formulas
There are four general categories for EAC calculation.
They are as follows:
1. Formula 1
EAC = AC + Bottom-up ETC
This formula is used when the original estimation is fundamentally flawed. It calculates the actual plus new estimate for the remaining work.
2. Formula 2
EAC =BAC/Cumulative CPI
This formula is used when the original estimation is met without any deviation. It signifies that your project is going well: you are maintaining the CPI and SPI as one, and you should continue the project in the same way. It is always good for a project manager if he or she is maintaining the CPI and SPI as 1 or even more than onea.
3. Formula 3
EAC = AC + (BAC - EV)
This formula is used when the current deviation with the original estimation is thought to be different in the future. It is generally AC plus the remaining value of the work to perform.
4. Formula 4
EAC = AC + [BAC - EV / (Cumulative CPI x Cumulative SPI)]
This formula is used to calculate actual to date plus the remaining budget changed based on the performance. It is used when we believe the current ratio is typical as planned. In other words, we have to meet the schedule earlier than originally determined, and we calculate the EAC accordingly to meet that schedule.
Formula 1 Example:
Abraham is the project manager for an ITES project. Suddenly, there is a scope change request from the customer, and upper management asked for a new estimate of the total cost of the project with this new implemented scope on the project. The project has already incurred an amount of $250,000 and has a CPI of 1.08. The project manager discussed with the team and all the stakeholders and decided on some future investments, such as admin costs of $60,000, quality control costs at $25,000, and miscellaneous costs as $11,000. What is the estimate at completion in this case?
How do you calculate this?
In this example, the original estimates are poor because they are based on a flawed approach. Therefore, you should calculate EAC using the formula from condition 1 here: Estimate at Completion = Actual Cost + Bottom-up Estimate to Complete By using the abovementioned formula, you can calculate: $250,000 + ($60,000 + $25,000 + $11,000) = $346,000.
Formula 2 Example:
Kate is a project manager who is managing a large and complex project. Midway through the project, upper management asked her for an updated estimate of the total cost of the project. At the beginning of the project, the costs of the project were estimated at $150,000 for development, $170,000 for design costs, and $120,000 for quality control. The Cost Performance Index of the project is 1.04. What is the Estimate at Completion at this stage?
How do you calculate estimates at completion?
In this example, the CPI is not considered abnormal, so the formula using CPI (condition 2) will be in use:
Estimate at Completion = Budget at Completion / Cost Performance Index
By using the above-mentioned formula, you can calculate: ($150,000 + $170,000 + $120,000) / 1.04 = $423,076.92.
Formula 3 Example:
Dave is the project manager for a software company. He and his team are working on a project to develop software for their customer. During execution, the project manager realized that mistakes were made while collecting the project requirements. Dave has fixed the mistakes and put a mitigation plan in place. At the start of the project, the costs of the project were estimated at $200,000 for design, $300,000 for development, and $200,000 for quality control. The project has spent $400,000 so far. The value of the work completed is $500,000. What is the Estimate at Completion?
How do you calculate estimates at completion?
In this example, the CPI is considered abnormal. So you can calculate Estimate at Completion using the formula from condition 3:
Estimate at Completion = Actual Cost + (Budget at Completion – Earned Value)
By using the above-mentioned formula: $400,000 + ($700,000 – $500,000) = $600,000
Formula 4 Example:
Lisa is working on a project. The CEO has told the shareholders that the new system will be in place in six months, without discussing this first with the PMO. At the start of the project, the costs of the project were estimated at $150,000 for design, $700,000 for development, and $225,000 for quality assurance. The project has spent $450,000 so far. The CPI for the project is 0.9, and the SPI is 0.8. The value of the work completed is $375,000. What is the Estimate at Completion?
How do you calculate estimate at completion?
In this example, the CPI is considered abnormal. So you can calculate Estimate at Completion using the formula from condition 4:
Estimate at Completion = Actual Cost + [(Budget at Completion - Earned Value) / (Cost Performance Index x Schedule Performance Index)]
By using the above-mentioned formula: = $450,000 + [($1,075,000 - $375,000) / (0.9 x 0.8)] = $450,000 + [$700,000 / 0.72] = $450,000 + $972,222.23 = $1,422,222.23
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Conclusion
Now that you have a better understanding of the different ways to calculate the Estimate at Completion, you’re well on your way to attaining the PMP® certification. Want more project management training? Simplilearn offers everything you need to train for your PMP® exam and pass it on the first try.
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