Mastering the Art of Estimating Project Completion
Project management is akin to navigating a ship through unpredictable seas. As a project manager, you are the captain, charting a course to deliver your cargo—your project—on time and within budget. A crucial tool in your navigational arsenal is the Estimate at Completion (EAC), a financial forecast that helps you predict the total cost of the project by its end. Understanding how to calculate EAC is essential for keeping your project on a steady financial keel.
Understanding Estimate at Completion (EAC)
Before we dive into the calculations, let’s understand what EAC is. EAC is the forecasted cost of a project as it progresses. It’s an ongoing prediction that takes into account the work performed to date and any changes in the project scope or execution plan. EAC is not a static figure; it evolves with your project, offering a financial snapshot at any given point in time.
Calculating EAC: The Four Formulas
There are four primary methods to calculate EAC, each suited to different project scenarios. Let’s explore each one.
1. EAC with a Fixed Budget
When your project has a set budget that cannot be exceeded, the EAC is straightforward:
EAC = Budget at Completion (BAC)
This formula assumes that the project will not spend more than the budgeted amount, regardless of the performance to date.
2. EAC for Projects at Typical Performance
If your project’s past performance is expected to continue, use the following formula:
EAC = Actual Cost (AC) + (BAC - Earned Value (EV)) / Cost Performance Index (CPI)
This method takes into account the actual costs incurred and the earned value to forecast the EAC based on current cost performance.
3. EAC for Projects with Changing Conditions
When future project conditions are expected to differ from past performance, you’ll need to adjust your EAC calculation:
EAC = AC + Bottom-up Estimate to Complete (ETC)
This approach requires a new estimate of the remaining work, reflecting the changed conditions.
4. EAC for Projects with Both Schedule and Cost Variances
If your project is experiencing variances in both schedule and cost, you’ll need a more comprehensive formula:
EAC = AC + (BAC - EV) / (CPI * Schedule Performance Index (SPI))
This calculation considers both cost and schedule performance to date to forecast the EAC.
Applying EAC Formulas: A Step-by-Step Guide
Now that we’ve outlined the formulas, let’s walk through the steps to calculate EAC using a practical example.
Step 1: Gather Your Data
First, collect the necessary data points:
- Actual Cost (AC): The actual funds spent on the project to date.
- Planned Value (PV): The budgeted cost of work scheduled.
- Earned Value (EV): The budgeted cost of work performed.
- Budget at Completion (BAC): The total budget for the project.
Step 2: Calculate Performance Indices
Next, calculate the Cost Performance Index (CPI) and Schedule Performance Index (SPI):
CPI = EV / AC
SPI = EV / PV
Step 3: Choose the Appropriate EAC Formula
Based on your project’s circumstances, select the EAC formula that fits best.
Step 4: Perform the Calculation
Using the selected formula, calculate the EAC. For example, if you’re using the second formula:
EAC = AC + (BAC - EV) / CPI
Plug in your data points and compute the EAC.
Real-World Examples and Case Studies
Let’s consider a case study to illustrate the EAC calculation. Imagine a construction project with a BAC of $1,000,000. Six months into the project, the AC is $600,000, and the EV is $500,000. The project is over budget and behind schedule. To calculate the EAC:
- First, calculate the CPI and SPI:
CPI = $500,000 / $600,000 = 0.83 SPI = $500,000 / $650,000 (PV at this point) = 0.77 - Next, choose the fourth formula since there are both cost and schedule variances.
EAC = $600,000 + ($1,000,000 - $500,000) / (0.83 * 0.77) - Finally, calculate the EAC:
EAC = $600,000 + $500,000 / 0.6391 ≈ $1,382,000
This EAC suggests that the project will exceed its budget by approximately $382,000 if current trends continue.
FAQ Section
What is the difference between EAC and ETC?
EAC is the expected total cost of the project at completion, while ETC is an estimate of the cost required to complete the remaining work.
Can EAC be less than BAC?
Yes, if a project is performing under budget, the EAC may be less than the original BAC.
How often should EAC be calculated?
EAC should be recalculated when significant variances in cost or schedule occur, or at regular intervals as determined by the project’s complexity and duration.
Is EAC applicable to all types of projects?
EAC is most applicable to projects where cost and schedule monitoring are critical, such as construction or software development projects. However, the principles can be adapted to various project types.
References
For further reading and a deeper understanding of EAC calculations and project management financial principles, consider exploring the following resources:
- Project Management Institute. (2017). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Sixth Edition.
- Kerzner, H. (2017). Project Management: A Systems Approach to Planning, Scheduling, and Controlling.
- Vargas, R. V. (2018). Earned Value Management in Easy Steps.
