The beginning of a project is always surrounded by expectations, and many ideas seem perfect when they’re still on paper. Planning every detail, setting goals, and working diligently is often the way to reach the pot of gold at the end of the rainbow. But to get there, it’s also necessary to prepare for the unforeseen, especially when costs are involved.
The good news is that there’s a powerful metric to guide stakeholders down this path of numbers and changes. EAC, short for Estimate at Completion, is a formula used to calculate the total cost of a project that’s faced with uncertainty. Its application is essential for understanding the impacts of unforeseen events on the future costs of a project, helping to mitigate losses and reallocate resources. In this article, we’ll explain how this formula works and how to apply it in your projects. We’ll also show you how monday.com tools can help you calculate EAC in real-time, enabling confident decision-making about the future of the project.
What is EAC?
Estimate at Completion is the current expectation of the total costs of a project once completed. The calculation is the sum of the amount invested at the time of measurement and the costs necessary to complete the work. When unforeseen events crop up, such as delays or unplanned expenses, managers use an EAC to reassess the total costs required to complete the project. In this context, an EAC helps stakeholders measure the impacts of changes more accurately and better manage available resources.
Since it reflects the expectation of the final cost of a project that’s still in progress, running EACs periodically is a smart move.
A fundamental observation needs to be made: don’t confuse Estimate at Completion with Estimate to Completion, short for ETC. While the former is a calculation of accrued and expected costs, the latter only refers to the expected costs to complete the project. With that said, it’s important to be aware of the relationship between an EAC and a BAC, otherwise known as Budget at Completion.
“Estimate at completion” is a part of our Project Management Glossary — check out the full list of terms and definitions!
EAC vs. Budget at Completion (BAC)
Both EAC and BAC are cost calculations, though for different project periods. While EAC deals with the final cost forecast of a project that’s already underway, BAC deals with the cost that was authorized at the beginning of the project — the original budget. In practice, the EAC evolves, as it takes unforeseen circumstances and financial variations into account and is calculated at various moments throughout the project life cycle. BAC, on the other hand, is static, used as a parameter to define the earned value, or EV, of the project.
An example: a team calculates $100,000 as the BAC for a 1-year project. After 3 months, scheduling delays impact the project and the team needs more resources to complete everything on time. With the added costs, a new budget is made and the project cost estimate is $160,000. In this case, it’ll be necessary to spend $60,000 more than initially anticipated, making the EAC larger than the BAC. Keep in mind, in this example, there are still 9 months to complete the project and other unforeseen events may occur, necessitating a new EAC. In such cases, the project manager’s challenge is to mitigate the impact of actionable expenses, reallocate resources, and increase the team’s performance.
EAC and tracking a project’s performance
So far, we have seen how EAC is necessary to realistically guide a project through uncertain scenarios. If you want the best chance of success in the face of uncertainty, EAC is an excellent tool for monitoring project performance. Because EAC is a calculation that forecasts the final cost based on the information available at the time, it’s not enough to use it reactively. You should also use EAC proactively.
When you periodically estimate project costs with EAC and compare the results over time, you can track project costs much more accurately.
Another strategy is to analyze the EAC together with other important KPIs, such as the BAC — mentioned before — and the CPI, short for the Cost Performance Index. The CPI calculates the difference between the EV and the actual cost, or AC, at the present moment. The CPI, which should also be calculated regularly, shows how efficiently the budget is being spent. By tracking these metrics, stakeholders know how well teams are performing and can reallocate resources to the tasks and activities that need them at that moment. These methods and calculations also help identify potential roadblocks that can seriously impact project success, which are only a few of their many benefits.
Benefits of an evolving EAC model
There’s no single method of calculating the Estimate at Completion. But for a reliable result, it’s important to use the formula most compatible with your finances. At the same time, you may need to refine your calculations during the project life cycle, which is referred to as an “evolving EAC model.” Agility in the way you calculate EAC has several benefits:
- Helps ensure earned value: Calculating the EAC along with other indicators enables the development of new strategies that offset and prevent the accumulation of negative impacts on the EV of the project.
- Identify waste: Calculating EAC regularly helps detect areas of overspending, which can impact project progress.
- Better allocate resources: An adaptive EAC model helps stakeholders better understand priorities and identify opportunities for resource allocation whether they be adjusting budgets across teams or making changes to the team structures.
To better understand the benefits involved, let’s explore how an EAC calculation can help a project deal with unexpected expenses.
Using EAC to adapt a project when new expenses arise
Imagine that you’re working at a medium-sized civil engineering company and you’re managing a new venture. The initial timetable forecasts a year of work divided into four quarters. The Budget at Completion is $700,000, including all resource and material costs. The project plan indicates that $400,000 of the budget will be spent during the first quarter with the remaining $300,000 divided evenly over the last three quarters. With high investment power during the first stage, the team starts with a bang. But after a month of progress, a governmental agency hits the company with a fine due to a regulatory oversight related to the project and suspends work for four weeks. In this new reality, the EAC calculation needs to consider these variables:
- How much of the budget was spent so far
- A new timeline accounting for the interruption
- Any additional costs required to complete the first stage
- The costs of the fine
- The cost required to complete the next stages given the changes
- Any other loss of resources due to work interruption, such as employees leaving the company
This example illustrates the importance of the BAC since the overall objective is to keep the EAC lower than the BAC. Therefore, it’s critical to set aside a portion of your project’s budget to account for the unexpected when creating the project management plan. This budget buffering can help you mitigate waste, avoid resource cuts, and better distribute remaining resources.
Great project planning, budgeting, and knowing how and when to use an EAC will help you keep your projects on track and moving toward success. But these activities are only as good as the tools used to perform them.
Capitalizing on an EAC with monday.com
Financial calculations often involve poring over spreadsheets and checking and rechecking data. But there are simpler and more reliable alternatives available. monday.com is designed from the ground up to execute every aspect of your project, from planning and budgeting to creating the reports and forecasts you need to keep everyone aligned. With monday.com’s easily customizable Estimation Model Templates, you can accurately estimate costs, whether you’re planning an extravagant birthday party or need an EAC midway through a complex construction project. The template does all the calculations for you automatically so you can get on with the business at hand. Additionally, because monday.com is made for teams, you won’t have to worry about juggling different versions of a spreadsheet. With shared access to task boards, reports, and a central source of data, you can keep budgets aligned, teams engaged, and all your projects on track from beginning to a successful end.
Frequently asked questions
Knowing how and when to use Estimate at Completion can seem a little hazy. With that in mind, here are answers to a couple of common questions regarding the technique:
How do I calculate EAC?
There are a few different formulas for calculating EAC, and the one you choose depends on the realities of your project. The four most common formulas are:
- EAC = AC + ETC: This formula is the most generic and is often used when BAC is estimated from inaccurate or erroneous data. In this case, the EAC represents the sum of Actual Cost (AC) and Estimate to Completion (ETC).
- EAC = BAC / CPI: This is the most recommended calculation when the project is in progress without interference. To check the EAC, divide the BAC by the Cost Performance Index (CPI).
- EAC = AC + BAC – EV / CPI x SPI: This is the formula used when schedule delays and expenses increase. In this case, it’s necessary to add the Schedule Performance Index (SPI) and the Earned Value (EV) to the equation.
- EAC = AC + (BAC – EV) This formula is used when unforeseen events are overcome, and it’s believed that new interference will not occur until the end of the project.
How do I know if the EAC is correct?
There are endless variables that impact costs in project management and, in turn, the calculations of the EAC. The biggest impact, however, is the initial calculations of the BAC, so it pays (quite literally) to be diligent when tracking and categorizing costs during the project planning stage. With a robust BAC in place, EAC calculations are more accurate and help keep projects on track and within budget.
Project success is the sum of great tools and techniques
Overcoming obstacles and unexpected challenges are part and parcel of project management. Even the greatest planners face unexpected situations that are seemingly insurmountable. But with EAC expertise and a platform to manage your projects seamlessly, even the most critical contingencies are reduced to road bumps.