Project forecasting provides useful insights on the final cost. As such, along the way, as you periodically progress the project, you’ll want to know and re-assess the Estimate at Completion. It gives all a glimpse of the possible outcome that boils down to the project’s probability of a successful outcome or failure. I know of no singular formula to calculate EAC because there were several of them.
Being a risk manager himself/herself, a project management professional’s task is to improve the project's predictability, enabling the project to make an accurate forecast whenever needed. In this, high quality inputs, recording vital information, data monitoring, administrative controls, and analysis are critical to achieve a successful forecast from which informed decision can emanate. Project cost projection (EAC) has to be based more on facts than assumptions to be useful! One must avoid the temptation of even thinking that forecasting as just a good guess, a gut feel, and/or a number exercise!
We must be aware that an overall project execution plan is still a puzzle at an early stage. It is looking for the right information to replace fuzzy data, seeking to fill in missing information. Major data points are still more of constraints and assumptions. Even the strategy revolves around certain objectives that are more political in nature than logic-based; fondly called economic dates and targets, backed by feasibility studies that are based mostly on accepted truths without proof nor proper management logic. In these early stages, the project’s EAC, like the base estimate, can change significantly, the accuracy of which closely hinges on the estimate class and the stage it belongs. This goes to show that the more meaningful EAC is upon final approval of the execution plan (Frago, R., 2015/2017.Plan to Schedule, Schedule to Plan.ISBN 978-0-9947608-2-1.Canada)
When assumptions (fill-in information) and constraints are at it its peak, data maturity, and reliability are at their lowest. Estimate at Completion calculation closely follow this same principle. The rule of thumb to follow: “Projects should not be sanctioned when the unknowns far exceed the knowns.”
It is important to note that an EAC calculation has a direct bearing to the type of contract in play. For example, comparing between a cost-plus contract (time and materials or cost reimbursable) and Lump Sum contract. The two calls for two different formula approach. The typical nature of a cost-plus contract is that the contractor bills for its labour and materials plus an agreed markup. In this agreement, the owner shoulder most of the cost increases with some limitations. These limits is best precisely stated in the same contract to be readily enforceable and controllable. On the other hand, a lump-sum contract can use the more simplified EAC formula because in theory, the requested work is already well-defined and construction drawings are completed before execution. This particular agreement has owner risk considerably reduced compared to the former.
The basic formula is shown below.
EAC = AC + ETC
Here are some of the formula derivatives I’ve worked with and/or came across in the last 20 years.
1) EAC ($, Low) = IC + Pending Trends + [(BAC - EV) / CPI]
2) EAC ($, High) = IC + Pending Trends + [(BAC - EV) / (CPI * SPI)]
3) EAC ($, Low) = AC + Pending Trends + [(BAC - EV) / CPI]
4) EAC ($, High) = AC + Pending Trends + [(BAC - EV) / (CPI * SPI)]
5) EAC ($, Low) = IC + AC + Pending Trends + [(BAC - EV) / CPI]
6) EAC ($, High) = IC + AC + Pending Trends + [(BAC - EV) / (CPI * SPI)]
7) EAC ($, Low) = AC + (BAC - EV)
8) EAC ($, Low) = AC + Fixed Cost Remaining + Variable Cost Remaining
EAC = Estimate at Completion
ETC = Estimate to Complete
AC = Actual Cost
IC = Incurred Cost
ETC = Estimate to Complete
BAC = Budget at Completion
EV = Earned Value
SPI = Schedule Performance Index
CPI = Cost Performance Index
In your experience as a Cost Manager, Business Cost Advisor/Analyst, an Estimating Specialist, a Project Controls/Project Management Professional, or an Earned Value Specialist,
1) What was your pet cost formula in calculating Estimate at Completion (EAC)?
2) What other calculation formula derivatives, techniques, and tips can you share that you’ve used, coming up with what you believe is the more accurate EAC, a value that proponents and stakeholders can confidently count on? Please also share the rationale behind your calculation approach.
3) Should schedule cost contingency be included in calculating EAC?
Read related article by clicking the PMSP hyperlink below.
About the Author:
Rufran C. Frago is the Founder of PM Solution Pro, a Calgary consulting, product, and training services firm focusing on project and business management solutions. He is passionate providing advice, mentorship, education and training through consultation, collaboration, and what he uniquely calls, student-led training.
BOOKS AUTHORED BY RUFRAN FRAGO
- Risk-based Management in the World of Threats and Opportunities: A Project Controls Perspective.ISBN 978-0-9947608-0-7.Canada
- Plan to Schedule, Schedule to Plan.ISBN 978-0-9947608-2-1.Canada
- How to Create a Good Quality P50 Risk-based Baseline Schedule.ISBN 978-0-9947608-1-4.Canada
- Schedule Quantitative Risk Analysis (Traditional Method).ISBN 978-0-9947608-3-8.Canada