Use of Estimate at Completion (EAC) in project management may be utilized to generate an accurate estimate of its final cost (EAC). EAC may be calculated using a variety of methods, each with its own set of variables. In each of the four conditions, the four equations are used to determine how far off track a project is. To create optimal modifications to your project, you must comprehend each formula.
The Earned Value Management (EVM) methodology includes an estimation of project completion. This expression refers to the process of estimating the budget for a project at different phases of its life cycle. How much will be invested in the project after it is completed? You can use this information to determine whether you’ve over your budget.
Unlike other cost estimation methods, the estimate at completion computation accounts for unanticipated expenses and recognises that early budget projections are unlikely to be accurate in the long term. As a result, the term “project forecasting tool” is used.
Comparing the Estimated Cost at Completion to the Estimated Cost to Complete
Due to their similarity, the two names are commonly interchanged. Because they are usually misinterpreted, it is crucial to comprehend the distinctions between variables and when to employ them.
The estimate at completion (EAC) estimates the total cost of the project, whereas the estimate to complete (ETC) predicts the amount of money necessary to complete the project (ETC). ETC consists of all additional costs incurred to execute a project after its initiation. It does not account for any earlier expenditures.
What is the importance of the EAC?
- Even the best-planned budgets are not always flawless. In project management, unexpected occurrences, such as increased or decreased expenditures and expenses, are typical.
- Using the EAC method, project managers may monitor how a modification impacts the entire budget. To make educated decisions, it is important to be aware of the amount of money at hand.
Components of the Formula for Completion Cost Estimation
- A final estimate takes budget, cost, and even performance against the deadline into consideration. This is all a component of the Earned Value Management (EVM) system. You may use any number of search engines to determine the precise meaning of these terms.
- The Budget at Completion (BAC) of a project is the entire amount of money necessary for its effective completion. To determine your BAC, add up all of your scheduled expenses and purchases. Frequently, budgets are split into several categories. A person’s blood alcohol content is the total of their individual categories.
- The Cost Performance Index (CPI) might assist you in determining how much you’re spending (CPI). Earned Value (EV) of finished work is divided by Actual Cost to determine the CPI (AC).
- Similar to the Consumer Price Index (CPI), the Schedule Performance Index (SPI) measures the efficiency with which time is utilised. The SPI is calculated by dividing Earned Value by Planned Value (PV).
How Project Managers Can Aid with Estimation and Variance
- Only the most recent data may be utilised for accurate estimations. As a Project Manager’s dashboard is continuously updated, it is difficult to make future-oriented decisions based on obsolete information.
- Utilize a range of filters to zero in on the most crucial information on your dashboard. You will find all project-related information in one convenient location.
- Using your dashboard, you can rapidly compare estimated against actual expenditures, planned versus actual completion, and more. Your EAC, for instance, may be automatically determined by the app, avoiding the need for an external calculator.
EAC Calculation Categories and Formulas
There are four formulas which can be considered for EAC calculation.
They are as follows:
1. Formula 1
EAC = AC + Bottom-up ETC
When the initial estimation is fundamentally wrong, this formula is applied. It computes the new and revised estimates for the remaining work.
2. Formula 2
EAC =BAC/Cumulative CPI
This formula is utilised when the initial estimate is achieved without variation. It indicates that your project is proceeding well: you are keeping the CPI and SPI as a single metric, and you should continue to do so. It is usually advantageous for a project manager to maintain the CPI and SPI as 1 or even multiple times.
3. Formula 3
EAC = AC + (BAC – EV)
This formula is utilised when it is anticipated that the present divergence from the original estimate may change in the future. It is typically AC plus the value of the remaining work to be performed.
4. Formula 4
EAC = AC + [BAC – EV / (Cumulative CPI x Cumulative SPI)]
This formula is used to calculate the current actuals and the amended budget based on the performance of the actuals. We use the current ratio when we believe it to be a typical example of what is anticipated. Due to the earlier than anticipated completion date, we must calculate the EAC to meet the criteria of that date.
The approach known as “Estimate at Completion” is a useful tool for accurately predicting the occurrence of future events. Modifications to the budget may be made by project managers with more precision with the help of this method. A cost projection made at the project’s midpoint provides an estimate of the remaining amount of time needed to complete the project. You will have a whole new budget to operate within after this estimate is accepted and authorized. The composition of the EAC is malleable and subject to alteration as the project moves forward. The estimation of when the project will be finished should be verified periodically or as needed as part of the strategy to managing the project.