Calculate the Estimate at Completion (EAC) in Different Ways

Businesses are profit-driven. An organization can only care about its policies, human resources, customers, communities, cultures, and values if it is earning a considerable amount of profit. There are more than thousands of companies starting every hour. To survive in a competitive environment, a business must ensure that it is profitable at the end of the day, which in our case would be projected today. Survival of the fittest is the order of the day.

Estimate At Completion Cost and its Benefits

The EAC is calculated for a project at the end of a month or quarter to see if the project is still profitable. If the project is not profitable, it is the duty of the stakeholders to learn about the cause and take corrective action.

EAC is a very important key performance indicator for a project's performance. It is critically used for project monitoring purposes. It also provides the team with financial and performance trends. Thus helping with making financial decisions for project recovery before it is too late.

EAC variance is the difference between EAC and BAC (budget cost at completion). Once the EAC exceeds the total budgeted cost, it is too late to recover. Hence, the calculation of EAC and its variance is very critical for the companies. EAC is a very realistic approach because it understands that the budgeted cost at the initial stage is unlikely to be realistic in the long run. It takes into account the different unforeseen and unavoidable expenses.

EAC Can Be Calculated in a Variety of Ways

Manual calculation of EAC becomes too burdensome for the employees, and there are chances to miss out on entries, write the digits incorrectly, or make mistakes. Hence, manual calculation of EAC is not recommended for businesses. For the automated calculation of EAC, a business has to ensure that all its financial and operational activities are integrated and updated regularly.

The Four Common Methods

EAC and Estimate to Complete (ETC)

EAC = actual cost incurred up to this point + bottom-up ETC.

In layman's terms, "estimated to complete" refers to the amount of money needed to complete the project. Amounts previously spent are not taken into consideration in ETC. In EAC, we take past expenses into consideration.

This method is generally used when the initial estimation seems to be flawed. The actual cost incurred to date exceeds the estimate, or the project's scope has changed unexpectedly. In this case, certain strategies need to be built up to recover and calculate a flawless BAC.

For example, if the client expects a change in the scope of the project, the cost incurred till now is Rs 125000; the new cost for better future work is Rs 25000 for the admin team, Rs 25000 for new technology in the market, and Rs 15000 for the quality team. The EAC is now equal to Rs (125000 + 25000 + 25000 + 15000).

When CPI is normal

EAC = BAC / CPI Cumulative

BAC stands for Budget at Completion; it is the total amount that was budgeted for the project during the initial planning stage. BAC is generally divided into categories for ease of understanding and better reporting. Different segments of BAC make up the total BAC cost.

CPI stands for Cost Performance Index. This tells us how much money the company is spending. Earned Value (EV) / Actual Cost of Doing the Work = CPI. This formula is generally used when there are zero or negligible differences between the actual costs incurred so far and the budgeted costs for that time period. It is always profitable for the project team to have a CPI of 1. CPI as 1 indicates that the work is done at the same pace and through the same strategies.

For example, if the upper management is asking the project team to send the revised EAC as per the current status of the project, the team will be using the above formula. In this case, the team has spent Rs. 25000 on technology procurement, Rs. 50000 on procuring different human resources, and Rs. 40000 on raw material procurement. The CPI is calculated to be 1.05, which is not abnormal.

EAC = Rs (50000 + 25000 + 40000) / 1.05

When the estimated value of a project has been given

AC + (BAC - EV) = EAC.

EAC is calculated using this formula when the organization understands that there is going to be a difference in the current deviation from the original estimation.

For example, if the project head realizes that there were certain mistakes while collecting the project requirement data from the client, the estimates for completing the software project were Rs 50000 in design, Rs 40000 in quality control activities, and Rs 10000 in development. Till now, Rs 40000 has been incurred, and the estimated value of the work done is Rs 30000. In this case,

EAC = Rs 40000 - (50000 + 40000 + 10000 - 30000)

When CPI is abnormal

AC + BAC - EV/(cumulative CPI - cumulative SPI) = EAC

SPI is also known as the Schedule Performance Index. This index tells us how well the time is being utilized by the project management team. Earned Value (EV) / Planned Value (PV) = SPI. EAC is calculated using this formula when the project teams need to complete the project before the deadline. The actual cost incurred in this case matches the budgeted cost that should be incurred. All is well, and the company just wants to outperform its estimates. It helps us understand the adjusted date and the extra cost that is going to be incurred (EAC) for delivering the project on time.

For example, if the CEO of the company has asked the PMO to complete the project before the set deadline because of the different competitors in the market trying to capture their clients, In this case, extra cost has to be incurred for completion. The estimates for completing the software project were Rs 150000 in design, Rs 70000 in quality control activities, and Rs 225000 in development. Till now, Rs 450000 have been incurred, and the estimated value of the work done is Rs 375000. The CPI is calculated to be 0.9 and the SPI 0.8.

EAC = Rs 450000 + (1075000 – 375000) / (0.9 * 0.8)

EAC helps a company a lot in determining the cost that will be required for the completion of the project. It assists businesses in determining the cost roadmap for the project at any point in time and in various scenarios.