A survey by McKinsey found that, on average, projects overrun their budgets and schedules by 30-45%. A deeper look into a study of ‘megaprojects,’ some of which are worth over $1B, finds that cost overruns 79% relative to initial budget estimates.
One of the key reasons why projects are over-budget and late is: inaccurate estimates. Project managers often grapple with this problem and have created various frameworks to address it. The concept of estimate at completion (EAC) is one such.
In this blog post, we understand this project estimating technique, learn how to calculate eac, and explore its uses in business.
Summarize this article for me please⏰ 60-Second Summary
Estimate at Completion (EAC) predicts the total project cost based on actual expenses and remaining work. It is used to prevent budget overruns, improve financial forecasting, and make informed decisions.
The most commonly used formula for calculating EAC is:
EAC = AC + (BAC – EV)
However, depending on the nature of the project, metrics you’re tracking, schedule, and other factors, you might need other formulas.
Steps to calculate EAC
To use the above formula and calculate EAC, follow these steps.
- Get the Budget at Completion (BAC)
- Identify Actual Cost (AC)
- Calculate Earned Value (EV), Cost Performance Index (CPI), Schedule Performance Index (SPI), etc. as needed
- Apply the relevant EAC formula based on the project’s condition
- Calculate the EAC based on these project management KPIs
For more on using these formulas, the benefits of using them, and common mistakes to avoid, keep reading!
How to Calculate Estimate at Completion (EAC) in Projects
Summarize this article for me pleaseWhat is EAC (Estimate at Completion)?
Estimate at Completion (EAC) is a term used to forecast the total cost of a project at its completion. It is an ongoing calculation that monitors for any changes in the estimates during the lifecycle of the project.
Before the project begins, the EAC should be equal to the budget. This means that, at the end of the project, you will have spent what you estimated.
However, during the course of a project, you might face several challenges or external events.
For instance, your construction project might be delayed by the unavailability of raw materials due to supply chain issues. Your software project might run over the initial budget because you had to hire an external consultant for support.
These unexpected expenses add to project costs. The EAC helps forecast the adjusted total cost of the project in real time, accommodating these additional costs.
Summarize this article for me pleaseHow to calculate EAC?
Estimate at Completion (EAC) = Budget at completion (BAC) + [Actual cost (AC) – Earned Value (EV)]
Let’s first define these terms and then see the calculation through an example.
- Budget at completion (BAC): Total amount you plan to spend to complete the entire project, which is also known as your project’s original budget
- Actual cost (AC): Total money you’ve spent on a project so far, i.e., real-world expenses up to the current point
- Earned value (EV): The work you’ve completed in terms of its budgeted value
Let’s say you’ve begun a software development project with a total budget (BAC) of $20,000.
So far, you’ve completed 50% of the work in 40% of the time and have spent $12,000. Earned value in project management is the amount of work you’ve completed in terms of its budgeted value. So, for simplicity of calculation, 50% of the work should have cost you $10,000, which is your earned value.
Therefore, your estimate at completion formula would be 20,000 + (12,000-10,000) = $22,000
Now, if you’re wondering, “how can you be sure that the following parts of the project will not cost more, too?” Well done!
Let’s look at other, more nuanced ways to calculate EAC as well.
Estimate at Completion (EAC) = Budget at Completion (BAC) / Cost Performance Index (CPI)
Cost Performance Index (CPI): The rate of efficiency of your project expenditure. It is calculated by dividing the earned value by the actual cost. If CPI > 1, you’re spending less than planned, and If CPI < 1, you’re overspending.
Extending the previous example, your earned value is $10,000, and your actual cost is $12,000. So, CPI = 10,000/12,000 = 0.83.
So, using this formula, your EAC = 20,000 / 0.83 = $24,390
In this case, you see that the formula assumes that your future expenses will follow the same rate of change as the past.
Estimate at Completion (EAC) = Actual Cost (AC) + [{Budget at Completion (BAC) – Earned Value (EV)} / Cost Performance Index (CPI)]
In the same example, with this formula, EAC = 12,000 + [(20,000 – 10,000)/0.83] = $24,048.
Estimate at Completion (EAC) = Actual Cost (AC) + [{Budget at Completion (BAC) – Earned Value (EV)} / {Cost Performance Index (CPI) x Schedule Performance Index (SPI)}]
There’s another metric here, the Schedule Performance Index. Let’s define that.
Schedule Performance Index (SPI): SPI is the time equivalent of CPI. It measures the efficiency of your progress against estimated time of completion. It is calculated by dividing earned value by planned value. If SPI > 1, you are ahead of schedule. SPI = 1 means you are on schedule. If SPI < 1, you are behind the schedule.
As in the above example, if you’ve completed 50% of your work in 40% of the time, your SPI = (50% of BAC) / (40% of BAC) = 10,000/8,000 = 1.25.
So, your EAC = 12,000 + [(20,000 – 10,000) / (0.83 x 1.25)] = $22,375
Estimate at Completion (EAC) = Actual Cost (AC) + Bottom-Up ETC
Bottom-up Estimate to Completion refers to the revised estimates for all the remaining tasks. This is often done manually.
If you’re confused by five different formulas for the same calculation, we’ve brought help.
💡Did you know? You can also use other analogous estimating in project management to make your EAC calculations.
Summarize this article for me pleaseWhen to Use Each EAC Formula
The purpose of these formulas is the same. i.e., to find the EAC. However, the formula you use to calculate your EAC depends on context, including the nature of the project, impacting events, and their cost implications. Let’s explore a few scenarios.
Cost performance is stable + past trends will follow
EAC = BAC / CPI
If you find that your project has some inefficiency or budget overrun and expect it will continue at the same rate, use the above formula.
This method assumes that any variances in cost are systemic and will persist uniformly across the remaining project scope. It is applicable to stable, well-managed projects with little variability in performance.
Cost variances exist + current efficiency trend will follow
EAC = AC + [(BAC – EV) / CPI]
If you’ve experienced cost variances but expect them to follow current performance trends, use the above formula. This approach is practical in projects where variances are expected to stabilize, reflecting the ongoing cost efficiency.
Using this method, you account for past discrepancies while projecting future costs based on current productivity levels, making it suitable for dynamic but manageable projects.
Cost variances are anomalies + future will match original estimates
EAC = AC + (BAC – EV)
If cost variances are isolated incidents and you believe the project will progress at the original budgeted rate for the remaining work.
This method is appropriate when one-time events, such as unexpected initial setup costs or early inefficiencies, cause variances that the project team doesn’t expect to recur.
Cost variance + schedule variance
EAC = AC + [(BAC – EV) / (CPI × SPI)]
If the schedule is a significant factor for forecasting total cost, the above formula is best. It adjusts the remaining work’s cost forecast by factoring in schedule delays alongside cost efficiency. This method is particularly useful for projects that are both over budget and behind schedule.
Cost trends are unpredictable
EAC = AC + Bottom-Up Estimate
If your project’s performance has been unpredictable or cost trends are no longer reliable indicators of future performance, use the above formula.
Instead of relying on formulas based on CPI or SPI, this method involves reestimating the remaining work from scratch and adding it to the actual costs incurred so far, making it more accurate.
If you’re still a little confused about calculating EAC, here’s a short primer.
Summarize this article for me pleaseSteps to Calculate EAC
Top-down EAC approach
Four of the five formulas above take the top-down approach. This means that they rely on already existing budgets and past performance.
To use the above formula and calculate EAC, follow these steps.
- Get the Budget at Completion (BAC)
- Identify Actual Cost (AC)
- Calculate Earned Value (EV), Cost Performance Index (CPI), Schedule Performance Index (SPI), etc. as needed
- Apply the relevant EAC formula based on the project’s condition
- Calculate the EAC based on these project management KPIs
Bottom-up EAC approach
The bottom-up approach involves recalculating the cost of all remaining work from scratch and adding it to the actual cost incurred so far. This method provides the most accurate and detailed estimate, as it considers the project’s current conditions and any changes in scope.
- Review the completed work
- Calculate the AC so far
- Break down the remaining project work into detailed tasks or components
- Estimate the cost of completing each task, factoring in current conditions
- Add the estimated remaining cost to the actual cost incurred
In fact, a good tool can make this all much easier.
Summarize this article for me pleaseTools for EAC Calculation
The calculation is simple; it’s basic arithmetic. So, if you have all the data in place, a calculator will do the job. Let’s begin with the simplest of tools to calculate EAC.
Spreadsheets for calculating EAC
With formula fields, you can automate the calculation of EAC. For instance, you might track all costs in one tab, with a cell for the total. You might track project progress in another tab with a cell to monitor variance.
Based on these, you can calculate the earned value with this data.
While widely popular and easy to use, spreadsheets are also entirely manual. You’ll have to enter all the data into the spreadsheets yourself. This is error-prone and can become tedious. You can do better with a tool like ClickUp for finance teams.
Leveraging EAC with ClickUp
Using a comprehensive project management platform like ClickUp ensures that all of the data you need to make EAC calculations is already available for you.
Project cost management: You can integrate any external tool you’re using for expense tracking to automatically calculate AC within ClickUp.
Progress tracking: As a project management tool, ClickUp allows you to have a real-time view of your progress. Based on the tasks you’ve set up, it automatically calculates the amount of work completed.
Schedule monitoring: With start dates, end dates, and custom date fields, you can track the timelines of your project in granular detail. This helps you calculate schedule variances, which you need to measure EAC.
Resource costing: If you’re billing a project on the time and materials (T&M) model, you need every team member to track the time they’ve worked. With ClickUp Tasks, your teams can track time from any device, add notes, assign labels, and mark time as billable (or not). It also enables time rollup across tasks and subtasks.
Automatic calculations: Like the simplicity of spreadsheets to set up formulas? You can do that with ClickUp! Use numerical data from your tasks and projects to calculate EAC automatically, updated in real-time.
Real-time reporting: EAC is a metric for the future; it’s a forecast. However, to ensure that you don’t overshoot budgets or timelines, you need to make adjustments in the present. ClickUp Dashboards can help you with that.
Continuous monitoring of actual expenditures against the planned budget allows you to quickly identify cost overruns and take corrective action. It helps prevent budget surprises and ensures stakeholders remain informed about the project’s financial health.
The role of quality tools and techniques in project success
A calculator or even a paper and a pen can calculate EAC. However, quality tools and techniques can make the process more accurate and efficient. Here’s how.
Data quality: The tools you use decide the quality of data. A tool like ClickUp that already collects project-related information ensures quality of data, like an evolving schedule, time estimates, expenses, etc.
Integrations: A comprehensive tool gathers data from external sources as well. For instance, if you track time using an external tool, you can import that to ClickUp with APIs.
Automations: Calculating metrics like EAC can take up significant bandwidth of the project manager. To make that easier, automation tools can help. It can also make it easy to forecast better with trend analysis and Monte Carlo simulations.
Replicability: The right tools also provide the frameworks, cost benefit analysis templates, and estimate templates to calculate and track project metrics.
ClickUp’s Project Cost Analysis Template is a ready-to-use, fully customizable, beginner-friendly framework for project analysis. The automatic calculation column can give a detailed cost breakdown structure, making computations easier.
Summarize this article for me pleaseBenefits of EAC in Project Management
If all these calculations feel like a bit much, let’s weigh them against the benefits they offer.
✅ Cost savings: You can’t save what you don’t see. EAC enables you to observe and measure budget overruns, which you can control with mitigation strategies.
✅ Risk detection: By analyzing trends in performance, you can identify potential inefficiencies and project cost risks before they escalate into significant issues.
✅ Stakeholder communication: EAC provides concrete data to inform stakeholders about the project’s financial health. Regular updates build confidence among stakeholders and demonstrate accountability.
✅ Decision-making: EAC equips teams with actionable insights to make informed decisions when unforeseen changes arise. You can reallocate resources, adjust project scope, or implement cost-cutting measures based on accurate and up-to-date data.
✅ Performance tracking: EAC helps you monitor the project’s performance relative to its planned cost and schedule. You can use this data for giving feedback to the teams, managing project budgets, planning schedule extensions, etc.
✅ Budget forecasting: You gain a precise and ongoing estimate of your total cost, enabling you to track how well you adhere to your project budget. This can be a great input for future budgeting, planning, and project controls.
To reap these benefits, there are some common mistakes you need to avoid.
Summarize this article for me pleaseCommon Mistakes to Avoid When Calculating EAC
As simple as it sounds, small mistakes can lead to bad insights, ineffective decisions, and turn counterproductive. Here are some common mistakes and how you can avoid them.
Using the wrong formula: Calculating EAC as BAC / CPI in a project with significant schedule delays ignores the impact of time inefficiencies, resulting in an overly optimistic estimate.
Consider all factors and choose the most appropriate formula.
Making wrong assumptions: Assuming past performance perfectly reflects future performance can skew EAC calculations.
For example, if a one-time expense caused a temporary cost spike, using EAC = AC + (BAC – EV) might ignore the fact that future work will likely follow the original budget rate.
Make reasonable assumptions grounded in facts.
Overlooking AC or EV: EAC calculations depend heavily on accurate actual cost and earned value calculations. If you miss out on a few expenses or inaccurately calculate the earned value, you can end up with misleading projections.
Focus on making sure your data is accurate.
Ignoring schedule delays: Failing to include schedule delays in EAC calculations often underestimates total costs. For example, a project delayed by months due to resource shortages will likely incur higher costs in salaries, equipment rentals, or penalties.
To eliminate this, always include the impact of delays on cost.
Using outdated EAC: EAC isn’t a one-time calculation. It is a dynamic metric that evolves with each passing day. If the scope changes, the cost performance index fluctuates, or schedule slippage occurs, the original EAC will no longer represent the project’s reality.
Therefore, it is recommended you calculate EAC on a regular basis to accurately reflect the current situation.
Summarize this article for me pleaseStay on Top of Your Project Metrics with ClickUp
In a world where cost overruns are so common, you can create a massive differentiator by simply delivering on time within budget. The only way to achieve this is to track costs and schedules against budgets at regular intervals.
ClickUp’s powerful project management platform makes this a breeze. It automatically captures data, enables calculations, and provides real-time visibility into project health.
Its real-time dashboards, customizable cost fields, timeline tracking, and workload management provide an efficient way to calculate and monitor EAC effortlessly.
Everything you need to stay organized and get work done.
