What Is Estimate at Completion & How Is It Calculated?
Accurately forecast project costs with Estimate at Completion (EAC). Learn its calculation methods, practical application, and what influences your final budget.
Estimate at Completion (EAC) is the anticipated total cost of a project upon completion. It’s a dynamic forecasting tool, providing a current outlook on final expenditures. EAC integrates incurred costs with estimated costs for remaining work, offering a comprehensive financial picture. Project teams use it to assess financial health, accounting for real-world performance. It helps stakeholders understand the likely final financial outcome, enabling proactive adjustments.
Key Components for Estimate at Completion
EAC calculation relies on foundational metrics from earned value management. Each component provides distinct financial or performance information.
Budget at Completion (BAC) is the total planned budget for the project. It’s the original financial baseline, encompassing all estimated costs.
Actual Cost (AC) is the total monetary amount spent on the project to date. This includes all direct and indirect expenses incurred for work performed.
Earned Value (EV) quantifies the value of completed work, expressed in budget terms. It represents the budgeted cost for work performed, measuring physical progress.
The Cost Performance Index (CPI) measures cost efficiency (CPI = EV / AC). A CPI greater than 1.0 indicates the project is under budget; less than 1.0 means it’s over budget.
The Schedule Performance Index (SPI) measures schedule efficiency (SPI = EV / PV). An SPI greater than 1.0 indicates the project is ahead of schedule; less than 1.0 means it’s behind. It’s sometimes incorporated into EAC calculations when delays impact costs.
Methods for Calculating Estimate at Completion
Project managers use various formulas for EAC, chosen based on current performance and assumptions. Each offers a distinct perspective on the likely final cost. Selecting the appropriate calculation is crucial for accurate financial forecasting.
One common method assumes future cost performance continues at the current rate, applied when current cost efficiency is stable. The formula is EAC = BAC / CPI.
Another method is used when remaining work is expected to be completed at a new, specified cost, based on a revised plan. This adds actual costs to an independent Estimate to Complete (ETC). The formula is EAC = AC + ETC. This approach is useful when unforeseen events require a new forecast for remaining work.
A third approach is suitable when past cost overruns are one-time events, and remaining work is expected to be completed at the original budgeted rate. This assumes the project reverts to baseline performance. The calculation is EAC = AC + (BAC – EV).
A more comprehensive formula incorporates both cost and schedule performance, recognizing intertwined inefficiencies. This method is applied to complex projects. The formula is EAC = AC + [(BAC – EV) / (CPI × SPI)]. This calculation adjusts the estimate based on the combined impact of CPI and SPI.
Understanding and Applying Estimate at Completion
Once calculated, EAC’s interpretation and application are central to project and financial management. The figure provides insights for strategic decisions and proactive adjustments. Understanding its significance relative to the original budget is paramount.
Interpreting EAC involves comparing it against the original Budget at Completion (BAC). If EAC is greater than BAC, the project is projected to be over budget. If less, it’s anticipated to finish under budget. This indicates the project’s financial trajectory.
EAC is a vital tool for decision-making. It informs re-forecasting project costs, allowing management to adjust spending plans based on current performance. The metric helps evaluate project viability and guides resource allocation. EAC also facilitates transparent communication of financial status to stakeholders.
EAC is a dynamic, evolving forecast, regularly updated as the project progresses. It’s a live projection reflecting latest actual costs and performance trends. This continuous reassessment allows project teams to identify corrective actions early, such as re-planning or implementing cost-saving measures.
Factors Affecting Estimate at Completion
EAC is a dynamic projection, influenced by internal and external factors throughout a project. These necessitate regular recalculation to maintain an accurate financial forecast. The interplay of variables ensures EAC remains a responsive measure of total project cost.
Changes in project scope directly impact EAC. Additions to deliverables typically increase EAC, while reductions can lower it.
Deviations in performance, especially cost efficiency, alter EAC. A decline in CPI due to unexpected expenses or inefficient resource use will cause EAC to rise. Changes in SPI, leading to extended durations, can also impact EAC.
Fluctuations in resource availability or cost influence EAC. Increases in labor rates, material prices, or equipment rental costs contribute to higher expenditures. Supply chain disruptions or changes in resource productivity can also lead to increased costs.
Unforeseen external factors can also affect EAC. These include shifts in market conditions, new regulatory requirements, or unexpected environmental challenges. Such events can introduce additional costs or necessitate project plan changes.
Management actions and decisions proactively shape EAC. Strategic choices like process improvements, contract re-negotiations, or adjusting resource allocation can mitigate cost increases or reduce projected total cost.