How to use Estimate at Completion (EAC) for smarter project management
December 17, 2021
We’ve all been there: setting off on a journey we’ve planned down to the smallest detail. A month of meticulous planning, preparations, and organizing. But everything goes wrong as soon as we step foot on the road. Traffic is heavy; the freeway slows to a crawl. We pull over for gas only to find that there aren’t any empty stations along our route. It’s enough to drive (pun intended) a person mad. This is exactly how the project manager feels when a project starts to fall apart.
When this happens, PMs need a fast way to calculate the effect of these changes on the project. Luckily, there’s a formula to help you keep the project on track.
Estimate at Completion (EAC) is a metric for measuring what a task will actually cost once it’s completed. The goal is to eliminate the guesswork as much as possible, so we highly recommend learning to use it.
What is an Estimate at Completion?
Estimate at Completion (EAC) is a projection of what a task actually costs on completion. In most cases, this estimate occurs when tasks are already in progress and the project requires more time and resources than initially forecast. The changes delay the end date for the entire project, which creates a domino effect that pushes back other tasks as well. This is terrible news, especially when your customer is breathing down your neck.
The EAC calculation is meant to help you predict how much work will be left once the project concludes. You can use the formula to better manage time and resources (i.e., planned value vs. earned value) by determining any future milestones you must reach to successfully complete the task.
Why is Estimate at Completion critical?
The EAC shows us the expected cost of future activities, rather than an estimated duration. And this allows you to plan future work with more confidence. The formula compares new estimates to previous ones so that overall performance is more measurable. At the same time, it still gives you enough flexibility to properly manage the unexpected.
Our advice? Don’t underestimate the importance of EAC. When done well, this calculation helps measure the project’s success and serves as a basis for future estimates. Without an EAC in place, project managers would have no way of knowing if the added costs on one task will impact other jobs.
Budgets, deadlines, and estimates…
Estimating at completion can also be beneficial when it comes to budget management. For example, if a project manager has used up most of their allotted funds on an unfinished project, they may need to request more funding or make cuts to avoid running out of money. EAC can also inform managers of whether or not it’s necessary to bring on additional team members.
Overall, EAC gives project managers the ability to quickly assess current data and decide how to keep a project on track.
Since the EAC is part of a project manager’s job, they may be held personally accountable for any mistakes in the estimate. If managers use a faulty EAC and fail to meet deadlines or budget restrictions, this reflects poorly on them, even if it isn’t entirely their fault.
Some managers use optimistic or pessimistic estimates to set more realistic expectations for a project. But more often than not, EACs are neutral figures that provide a snapshot of where a project stands today, rather than hinting at future outcomes.
Estimate at Completion vs. Estimate to Complete: what’s the difference?
Two similar-sounding terms. What’s the difference?
Estimate at Completion is part of cost accounting and refers to the total cost of finishing a project. It considers changes in the budget as the project progresses, including expenses such as direct labor, materials, subcontracting costs, and equipment rental.
Estimate to Complete (ETC) forecasts the amount of money you still need to complete a project. It doesn’t factor in what you’ve already spent and only looks at the projection of the remaining cost.
Estimate at Completion vs. To Complete Performance Index (TCPI)
According to the PMBOK Guide, To Complete Performance Index (TCPI) evaluates the level of cost efficiency you must achieve to produce the desired results. The performance index is calculated by dividing the Estimate at Completion (EAC) by the Actual Costs (AC). TCPI can be expressed as a value between 0 and 1.
An activity with a TCPI of 1 should be finished in the exact amount of time allotted.
Take an example of building a house. After breaking ground, contractors might determine it will take 10 weeks, plus or minus two weeks, to complete construction. However, they may only have two estimates available before construction — one based on average conditions and one with a worst-case scenario of 18 weeks.
Therefore: EAC = 10 +-2 and TCP
The project’s TCPI is the ratio of the difference between total costs for completion (TCP) and the cost already incurred, divided by the amount of money already spent.
TCPI = Budget at Completion (BAC) – Earned Value (EV) / (BAC – Actual Cost)
In this formula, Earned Value (EV) measures the percentage of a project that is finished multiplied by the total budget. A TCPI ratio of less than 1 indicates that more money is necessary to complete the project. A TCPI greater than 1 indicates efficient spending. It could also mean you’re ahead of schedule, and your organization will see a return sooner if you continue at the current staffing levels. This indicator is helpful in managing the budgeting process within an entire organization.
When you should consider EAC
Estimate at Completion will help you work out how much a project will cost once it’s finished. But to calculate this, you need to know the cost performance index (CPI). This means you can only calculate it once the project has begun.
So, how often should you do it?
You should calculate EAC regularly — at the very least every time the CPI changes. This will help you stay up to date with your budget. If you find yourself getting behind schedule or overspending, you can take steps to bring the project back on track.
Monitor your project in this way to determine how much it’s costing as you go along. Once you know how much it will cost when completed, you can include this in your business case before it begins. Anyone leading a similar project in the future can learn from your project forecasting and plan accordingly.
How do you calculate Estimate at Completion?
To determine this estimation, we use the following formula:
Estimate at Completion = Budget at Completion / Cost Performance Index (CPI)
There are other ways to calculate EAC, depending on what you’re trying to measure. If you have a high Cost Performance Index, your Cost at Completion will be very close to your Budget at Completion. In this case, the formula is as follows:
Estimate at Completion = Budget at Completion / Actual Costs
In both cases, when EAC is less than the original budget, the project is under budget. When it’s higher than the original estimate, there could be an issue with how much time and/or money is required for the project.
What is Estimate At Completion used for?
Once we have an accurate picture of project performance, we can determine the EAC using one of the formulas above (or any other variation that suits your needs). At that point, we can assess whether or not the project is likely to be profitable.
If the EAC is lower than the BAC, it means the project is less expensive than we originally planned. This might be great news if you’re doing an internal business project and you want to use those profits elsewhere. But if you’re running a company and don’t have extra cash lying around, then overshooting the budget could spell trouble down the road.
The same thing goes for a higher EAC compared with a lower BAC. You’ve spent more money completing this project than you projected from the beginning. Because of those additional expenses, you don’t have enough money to continue running the business. In this case, the project is complete, but you can’t consider it a success because it caused lasting financial harm.
Companies need to realize that projects are not always black and white. Project managers encounter many gray areas along the way. Since there’s usually room for error regarding cost and time projections, organizations must remain flexible by understanding what could go wrong. Knowing the proper steps to take when something does go wrong will help the company navigate challenges in the long run.
Predicting EAC is a little more complicated than predicting BAC because of all the unknowns involved in completing a project. Market conditions change, office decisions affect contract negotiations, and subcontractors vary in performance.
Estimate at Completion: a real-world example
Here’s a real-world example of EAC in action. Let’s say a construction company started a new project with an estimated cost of $1 million over six months (this is their BAC). The company loses a crucial subcontractor who is now too busy for the job and is forced to delay the project. Not only does this push back the EAC, but the subcontractor’s quoted expenses could also change.
Using the formula EAC = BAC / CPI, the estimate at completion would be $1.6 million (the BAC = $1 million, and the CPI * 6 months = 1.2). The company has to increase its original budget by 20 percent to account for construction delays. So, at this moment in time, the project is estimated to cost $1.6 million to complete (EAC).
How project management software can help
The EAC calculation is a critical element of project management, and it’s an excellent way for your team to track their progress. By setting a realistic baseline BAC, you can proactively manage the budget on your project before things get out of hand.
If the thought of adding up every single cost in your project plan manually fills you with dread, don’t panic.
Fortunately for everyone involved, there’s no need to make complicated calculations or additional spreadsheets. An all-in-one project management software can take on this task. Every time you create new tasks (or revise existing ones), the EAC will update automatically.
Use it to calculate cost estimations and variance and determine whether or not you’re ahead of or behind schedule. Simply enter your current BAC and the expected percentage complete to get a real-time EAC estimate. And if your project management tool is integrated with the rest of your business software, you can easily set up alerts when you’re in danger of going over budget or schedule.