Wednesday, June 18, 2008

The Project Estimate of Completion

The estimate at completion (EAC) is an important output of project cost control. It is a calculated prediction of the total costs of a project at completion, based on performance to date. You might want to calculate the EAC whenever you assess the earned value for a project as a part of your periodic evaluation.

As with other outputs, your periodic assessments of the EAC will form a vital part of the project's history. You may want to track it in a trend analysis. The EAC is useful for the project management team for the following reasons.
  • It shows what the total project is expected to cost.
  • You can estimate the total costs of an activity or group of activities.
  • It is the best estimate of potential profitability of the project.
If the current EAC for any job gives a warning of cost overruns, you may want to assess cost variances to see if they will likely be recurring in the future and check the original cost estimates to see if they were inaccurate and should be revised.

There are four common methods for calculating the EAC. However, before you can calculate the EAC, you will need to know the budget at completion (BAC), which is the planned value (PV). The standard method used for calculating the EAC can be expressed in either of two ways, depending on whether you have the cost performance index (CPI).
  • The standard formula for calculating EAC is as follows: EAC = (AC ÷ EV) x BAC. This formula, which uses the earned value (EV) variable, is based on the project's cost performance to date. Use it when cost variances are typical of future variances.
  • If you have worked out the CPI already, simply divide it into the total budget at completion (or the planned value at completion). The formula is as follows: EAC = BAC ÷ CPI.
The third formula you can use is: EAC = AC + ETC. It combines actual costs to date (AC) and the estimate to complete (ETC), which is the total of all estimated costs of work that has not yet been performed. This approach is most often used when:
  • past variances would have continued to occur
  • original estimates have been revised significantly
  • the revised estimates are deemed accurate.
The fourth formula that can be used to calculate the EAC adds the actual costs to date (AC) to the expected earned value of the work not yet completed. To find this "future earned value," you simply multiply the PV by the percentage of work that has not yet been performed. It is expressed as follows: EAC = AC + (PV x percent of work remaining).

This approach is most often used when the variances to date are seen as atypical, and the project management team expects that similar variances will not occur in the future.

However you choose to arrive at a final estimate, you can use the EAC to calculate the variance at completion for your project. The final variance can be expressed as either a dollar amount or as a percentage. You will more commonly see it as a ratio of the total variance to the budget at completion.

For example, for a project with a BAC of $75,000 and an EAC of $85,000, the variance at completion would be $10,000. Expressed as a percentage, the VAC (variance at completion) would be $10,000 divided by $75,000. This project would be 13 percent over budget.

The estimate at completion is your educated guess regarding the total cost of a project. You have to decide, before calculating EAC, how future cost variances compare to current cost variances, since each of the formulas uses a different assumption about future variances.

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