EAC stands for Estimate at Completion. It is the probable spending cost of the project when all is finished. The project manager should faithfully update the sponsor on the EAC updates so that the guarantor can know the requirements to keep the project going.
The EAC is predictable money spent, but it can be gauged by understanding
1) The actual costs spent (ACWP – actual costs of work done)
2) The strategic budgeted value (PV or BCWS – the budgeted cost of work scheduled)
3) The earned value (EV or BCWP – the budgeted cost of work done)
There are many ways to do an EAC. Every EAC is different.
As a program gets closer to the finish date, an EAC will become increasingly easier to compute. An EAC is the sum of the cost from the past (AC or ACWP – actual cost of work performed) and the sum of the cost that it will take in the future (ETC – approximation to complete). The past costs for work should be accrued and known, but there should not be actual costs for future work not yet done (unknown). Therefore, as the program improvements, ACWP becomes larger, ETC becomes smaller. The best practice in performing an EAC is using as many known figures as likely and measuring the unknowns to the extent feasible to the constraints given.
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We have recognized the formula: EAC = ACWP + ETC
Since the ETC helping of this formula is what bars the EAC from accuracy, a more granular view should be taken. The total budgeted cost of what is predicted to be worked on (BAC – budget at completion) identifies the prospects of cost spent. BAC can be used, then, if we know how much of it is left. By subtracting the work performed (EV) from the BAC, the enduring budget can be identified.
We have recognized the formula: EAC = ACWP + (BAC – EV)
The above formula will work if the budget was built precisely on par with how the costs will be spent. The question is if that will occur. A good judge of character will be to look at the past costs (ACWP) and relate them with the work that was performed in the past (EV). This is done by making an index called CPI (Cost Performance Index). By dividing (EV/ACWP), a ratio can be strong-minded how close costs have come into the budgeted work performed. Using this file as an estimated trend going forward should be a more sophisticated way to gauge outstanding costs than by using the remaining budgeted starting point, alone.
We have established the formula: EAC = ACWP + (BAC – EV)/CPI
CPI tells a good story, but occasionally CPI doesn’t tell the whole story. What if the project was doing fine by cost but extremely running behind? In the future, the project manager may need to crash the schedule – add more workers or have people work actively to catch up to expectations of finishing the project on time. That costs more money. A way to include this aspect is to infuse a scheduled index (SPI – Schedule Performance Index). SPI is reached by dividing EV and PV (planned value or budgeted cost of work scheduled). SPI is an index that measures the amount of work performed associated with the budgeted work planned to date. Generally, I view CPI as a heavier relationship to EAC than SPI. If this is the case, then weight the CPI heavier than SPI in the formula. Below, as a rough approximation example, CPI is used as 80% of the tendency and SPI is used as 20% of the trend.
We have recognized the formula: EAC = ACWP + (BAC – EV)/(.8*CPI + .2*SPI) – optional
This above formula may be the most precise thus far. However, a little bit more knowledge can be applied. For example, the CPI applied above is in respects to everything worked on to date. What if the first year of work performed went better than predicted, but due to some transitions, the last 4months of CPI data is a more exact representation of how work will be spent. In this case, use the CPI for the last 4 months, in its place.
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The number just computed would perhaps be the lowest cost that should be predictable. The main reason is that when the budgets were done, the most correct budgeting would be for what happens the soonest. Additional, as time goes on, people want rate increases, a material frequently gets more expensive, there are turnover costs, and there are unforeseen life events that occur before the program finishes. An EAC range is the best way to take expectations. Start with the number you can calculate as the low cost and dependent on how much of the project is left (and how risky it is), add a percentage total.
These are some top practices that I have to establish for calculating EAC. By using some of these approaches, EAC can be measured precisely.