How to Solve for EAC
EAC stands for Estimate at Completion. It is the expected spending cost of the project when everything is finished. The project manager should religiously update the sponsor on the EAC updates so that the sponsor can know the requirements to keep the project going.
The EAC is expected money spent, but it can be gauged by understanding
1) The actual costs spent (ACWP – actual costs of work performed)
2) The planned budgeted value (PV or BCWS – budgeted cost of work scheduled)
3) The earned value (EV or BCWP - budgeted cost of work performed)
There are many ways to perform an EAC. Every EAC is different.
As a program gets closer to the finish date, an EAC will become progressively easier to compute. An EAC is the sum of the cost from the past (AC or ACWP – actual cost of work performed) and the sum of the cost that it will take in the future (ETC – estimate to complete). The past costs for work should be accumulated and known, but there should not be actual costs for future work not yet performed (unknown). Therefore, as the program progresses, ACWP becomes larger and ETC becomes smaller. The best practice in performing an EAC is using as many known figures as possible and measuring the unknowns to the extent feasible to the constraints given.
We have established the formula: EAC = ACWP + ETC
Since the ETC portion of this formula is what bars the EAC from accuracy, a more granular view should be taken. The total budgeted cost of what is expected to be worked on (BAC – budget at completion) identifies the expectations of cost spent. BAC can be used, then, if we know how much of it there is left. By subtracting the work performed (EV) from the BAC, the remaining budget can be identified.
We have established the formula: EAC = ACWP + (BAC – EV)
The above formula will work if the budget was built exactly on par with how the costs will be spent. The question is if that will happen. A good judge of character will be to look at the past costs (ACWP) and compare them with the work that was performed in the past (EV). This is done by creating an index called CPI (Cost Performance Index). By dividing (EV/ACWP), a ratio can be determined how close costs have come in to the budgeted work performed. Using this index as an estimated trend going forward should be a more sophisticated way to gauge remaining costs than by using the remaining budgeted baseline, alone.
We have established the formula: EAC = ACWP + (BAC – EV)/CPI
CPI tells a good story, but sometimes CPI doesn’t tell the whole story. What if the project was doing fine by cost but drastically running behind? In the future, the project manager may need to crash the schedule – add more workers or have people work overtime to catch up to expectations of finishing the project on time. That costs more money. A way to incorporate this aspect is to infuse a schedule index (SPI – Schedule Performance Index). SPI is attained by dividing EV and PV (planned value or budgeted cost of work scheduled). SPI is an index that measures the amount of work performed compared to the budgeted work scheduled to date. Usually, I view CPI as a heavier relationship to EAC than SPI. If this is the case, then weight the CPI heavier than SPI in the formula. Below, as a rough estimate example, CPI is used as 80% of the trend and SPI is used as 20% of the trend.
We have established the formula: EAC = ACWP + (BAC – EV)/(.8*CPI + .2*SPI) – optional
This above formula may be the most accurate thus far. However, a little bit more knowledge can be applied. For example, the CPI applied above is in regards to everything worked on to date. What if the first year of work performed went better than expected, but due to some transitions the last 4months of CPI data is a more accurate representation of how work will be spent. In this case, use the CPI for the last 4 months, instead.
The number just computed would probably be the lowest cost that should be expected. The main reason is that when the budgets were done, the most accurate budgeting would be for what happens the soonest. Further, as time goes on, people want rate increases, material usually gets more expensive, there are turnover costs, and there are unexpected life events that occur before the program finishes. An EAC range is the best way to convey expectations. Start with the number you can compute as the low cost and depending on how much of the project is left (and how risky it is), add a percentage total.
These are some best practices that I have found for calculating EAC. By using some of these methods, EAC can be measured accurately.
Author - Gregory Morrow