Estimate at completion

What Is Estimate at Completion?

Estimate at Completion (EAC) is a financial projection within project management that represents the anticipated total cost of a project when all work is completed. It is a key metric used in Earned Value Management (EVM), a methodology that integrates project scope, schedule, and resources to objectively measure project performance and progress. EAC falls under the broader umbrella of financial forecasting in the context of project control, providing stakeholders with an updated outlook on a project's final financial outlay based on current performance. This estimate is crucial for decision-making, allowing management to anticipate potential cost overruns or underruns and adjust budgeting and resource allocation accordingly.

History and Origin

The concepts behind Earned Value Management (EVM), from which Estimate at Completion (EAC) derives, originated in the early 20th century with industrial manufacturing. However, its formal adoption and widespread recognition began during World War II when the U.S. government sought better methods to track large defense contracts. By the 1960s, the U.S. Department of Defense further developed and mandated EVM for major acquisition programs to gain better visibility into project performance. This led to the development of standardized metrics, including EAC, to provide clear, objective indicators of project health. The U.S. Government Accountability Office (GAO) has since published extensive guidance, such as its "Cost Estimating and Assessment Guide," which provides best practices for developing and managing program costs, reinforcing the use of EVM and its associated forecasts like EAC across federal agencies.⁴, ⁵ These practices have since been adopted by various industries globally as a standard for robust performance measurement.

Key Takeaways

• Estimate at Completion (EAC) projects the total cost expected for a project upon its completion, based on current performance.
• EAC is a vital component of Earned Value Management, helping assess project financial health.
• It aids project managers in making informed decisions regarding potential budget adjustments and risk management.
• Multiple formulas for EAC exist, allowing for different assumptions about future performance.
• A higher EAC than the original budget at completion indicates potential cost overruns.

Formula and Calculation

The Estimate at Completion (EAC) can be calculated using several formulas, depending on the assumptions made about future project performance. Each formula incorporates key EVM metrics:

• Actual Cost (AC): The total costs incurred for the work completed to date.
• Budget at Completion (BAC): The total planned budget for the project.
• Earned Value (EV): The value of the work actually performed, expressed in terms of the budget.
• Cost Performance Index (CPI): A measure of cost efficiency, calculated as (\frac{EV}{AC}).
• Estimate to Complete (ETC): The expected cost to finish all remaining project work.

Here are the most common EAC formulas:

1. EAC assuming future performance will be at the planned rate:
   This formula is used when it's believed that past cost variances were anomalous and future work will proceed as originally budgeted.
   $EAC = AC + (BAC - EV)$

2. EAC assuming future performance will be at the same cost efficiency as past performance:
   This is the most common and generally most reliable formula, assuming current cost efficiency will continue for the remaining work.
   $EAC = AC + \frac{(BAC - EV)}{CPI} \quad \text{or} \quad EAC = \frac{BAC}{CPI}$

3. EAC when the original estimate is flawed or changes are significant, and a new Estimate to Complete (ETC) is determined:
   This formula is used when previous performance is considered irrelevant, and a fresh estimate is made for the remaining work.
   $EAC = AC + ETC$

Interpreting the Estimate at Completion

Interpreting the Estimate at Completion (EAC) involves comparing it against the original budget at completion (BAC) and continuously monitoring its trend. If the EAC is higher than the BAC, it indicates that the project is currently forecasted to exceed its original budget, signaling a potential cost overrun. Conversely, if the EAC is lower than the BAC, it suggests that the project is expected to finish under budget.

Project managers use EAC as a critical performance measurement tool to assess the financial health of a project and to anticipate future funding needs. A steadily increasing EAC trend, for example, would alert stakeholders to deteriorating cost performance, requiring immediate investigation and corrective actions. Conversely, a stable or decreasing EAC indicates effective cost control and efficient progress. This metric is especially valuable for reporting project status to senior management and clients, providing a clear, forward-looking view of the project's financial trajectory. It helps in managing expectations and can trigger discussions about scope adjustments or additional funding if the EAC becomes unacceptably high.

Hypothetical Example

Consider a software development project with an original budget at completion (BAC) of $1,000,000.

Mid-project, at the 50% completion mark (based on planned value), the team has recorded:

• Actual Cost (AC) = $600,000
• Earned Value (EV) = $450,000 (meaning $450,000 worth of work is completed, though it cost $600,000)

First, calculate the Cost Performance Index (CPI):
$CPI = \frac{EV}{AC} = \frac{\$450,000}{\$600,000} = 0.75$
A CPI of 0.75 indicates that for every $1 spent, only $0.75 worth of work has been completed.

Now, use the most common EAC formula, assuming future performance will continue at the same cost efficiency (CPI):
$EAC = \frac{BAC}{CPI} = \frac{\$1,000,000}{0.75} = \$1,333,333.33$
Based on current performance, the Estimate at Completion for this project is approximately $1,333,333.33. This indicates a projected cost overrun of $333,333.33 compared to the original $1,000,000 budget. This forecast would prompt the project manager to analyze the causes of the inefficiency and implement corrective actions.

Practical Applications

Estimate at Completion (EAC) is widely applied across various sectors for strategic decision-making and robust portfolio management. In large-scale government contracts, particularly in defense, infrastructure, and technology development, EAC provides critical insights into potential cost overruns, allowing agencies like the U.S. Government Accountability Office (GAO) to monitor project fiscal health. The GAO's "Cost Estimating and Assessment Guide" serves as a benchmark for sound financial oversight in such projects.³

In the private sector, EAC is indispensable for companies managing complex endeavors such as construction projects, new product development, or IT system implementations. For instance, in the renewable energy sector, massive offshore wind farm projects involve extensive planning and significant capital investment. When these projects face unforeseen challenges like supply chain disruptions, rising material costs, or regulatory changes, the EAC becomes a crucial tool to re-evaluate profitability and viability. For example, some major offshore wind projects have been canceled or faced significant delays due to escalating costs, leading developers to re-assess their overall financial exposure using metrics like EAC to determine project feasibility.² This metric helps companies to either reallocate resources, negotiate new terms with contractors, or, in extreme cases, terminate unprofitable ventures to mitigate financial losses. It also informs future investment decisions and helps refine initial project budgeting and planning processes.

Limitations and Criticisms

While Estimate at Completion (EAC) is a powerful financial forecasting tool, it is subject to several limitations and criticisms. A primary concern is that EAC's accuracy heavily relies on the quality and timeliness of the input data, particularly the actual cost and earned value data. Inaccurate or delayed reporting can lead to misleading EAC projections, undermining its utility for decision-making. Furthermore, the choice of EAC formula depends on assumptions about future project performance, which may not always hold true. For instance, assuming past cost efficiency will continue might be inaccurate if the remaining work involves different complexities or risks.

Another criticism points to the potential for "gaming" the numbers, where project teams might manipulate reported progress or costs to present a more favorable EAC, especially when project performance measurement is directly tied to incentives. Some studies and critiques of Earned Value Management (EVM) itself, from which EAC is derived, highlight that while EVM provides objective metrics, it may not fully capture qualitative factors or external influences that significantly impact project completion.¹ For example, an unforeseen regulatory change or a sudden market shift might drastically alter future costs, rendering previous performance metrics and EAC calculations less relevant without manual adjustments or re-baselining. Moreover, focusing solely on EAC might lead project managers to overlook other crucial aspects of project health, such as quality issues or stakeholder satisfaction, if not balanced with other project controls.

Estimate at Completion vs. Estimate to Complete

Estimate at Completion (EAC) and Estimate to Complete (ETC) are two closely related yet distinct financial metrics used in project management, both providing crucial insights into a project's future cost.

The main point of confusion often arises because ETC is a component used to calculate EAC. ETC represents the future spending needed, while EAC represents the total money spent from day one until the project is finalized. Project managers typically calculate ETC first to understand the cost of remaining work, and then add it to the actual cost to arrive at the EAC, which provides the comprehensive end-of-project cost projection.

FAQs

Q1: Why is Estimate at Completion important?
A1: Estimate at Completion (EAC) is important because it provides a realistic, updated forecast of a project's total cost. This allows project stakeholders to make informed decisions about resource allocation, funding adjustments, and potential scope changes to keep the project viable or to mitigate losses. It's a key indicator for financial health.

Q2: How does EAC relate to cost variance?
A2: EAC is directly influenced by cost variance (CV). If a project is experiencing negative cost variance (meaning it's costing more than planned for the work completed), the EAC will likely increase, projecting a higher total cost than originally budgeted. Conversely, positive cost variance would lead to a lower EAC.

Q3: Can EAC change during a project?
A3: Yes, EAC is a dynamic estimate that can and often does change throughout the project lifecycle. As new information becomes available, such as updated actual costs, revised estimates for remaining work, or shifts in project scope, the EAC should be recalculated to reflect the most current financial outlook.

Q4: What is the difference between EAC and Variance at Completion (VAC)?
A4: EAC is the forecasted total cost of the project upon completion. Variance at Completion (VAC), on the other hand, is a forecast of the total budget surplus or deficit at the end of the project. It is calculated as Budget at Completion (BAC) minus EAC ((VAC = BAC - EAC)). VAC tells you how much over or under budget the project is expected to be, while EAC tells you the absolute total cost.