How to Solve for EAC
How to Solve for EAC
EAC stands for Estimate At Completion. It is the estimated spending cost of the project after everything is completed. To ensure that the sponsor is aware of the requirements to keep the project moving forward, the project manager must regularly update the sponsor about the EAC updates.
The EAC is expected spending money, but it can be measured by understanding
1) Actual costs (ACWP – actual costs of work performed).
2) The budgeted value (PV, BCWS – scheduled cost of work)
3) The earned value (EV, BCWP – cost of work performed as per budget)
There are many ways to do an EAC. Every EAC is unique.
An EAC will become easier to calculate as a program nears its completion date. An EAC is the sum (AC or ACWP-actual cost of work performed) and future costs (ETC-estimate to complete). While past work costs should be accumulated and known, future work costs should not be unknown. As the program progresses, ACWP will become larger and ETC will decrease. It is best to use as many figures as possible when performing an EAC. Also, it is important to measure the unknowns as much as possible within the constraints.
We have established the following formula: EAC = ACWP+ ETC
The ETC portion of the formula is what prevents the EAC from being accurate. Therefore, it is important to take a more detailed view. The expected cost of the work (BAC – budget to completion) is the total budgeted cost. If we know how much of the BAC is left, then BAC can be used. The remaining budget can be identified by subtracting the work done (EV) from BAC.
We have created the following formula: EAC = ACWP+ (BAC – EEV)
If the budget is exactly equal to how the costs will be spent, the above formula will work. It is not clear if this will happen. It is important to compare the past costs (ACWP), with the work done in the past (EV) to judge character. This is done using an index called CPI (Cost Performance Index). Divide (EV/ACWP) to get a ratio that shows how close costs are to the budgeted work. This index can be used to estimate future trends. It is a better way than using the budgeted baseline alone.
We have created the following formula: EAC = ACWP+ (BAC -EV)/CPI
CPI can tell a good story but it doesn’t always tell the whole story. What if the project was running behind on time but cost was good? The project manager might need to change the schedule to make sure the project is completed on time. This can cost more. This aspect can be incorporated by infusing a schedule index (SPI- Schedule Performance Index). SPI is achieved by dividing PV and EV (planned value or budgeted costs of work scheduled). SPI is an indicator that measures the work done compared to the work scheduled. CPI is usually viewed as having a stronger relationship to EAC than SPI. If this is true, then weight CPI higher than SPI in your formula. As an example, CPI is used to represent 80% of the trend, while SPI represents 20%.
We have created the following formula: EAC = BAC + (EV )/(.8*CPI+.2*SPI)
This formula may be the most accurate. But, there are some things you can do to improve your understanding. The CPI above refers to all work done to date. Even if the first year of work was more productive than expected, the CPI for the last 4 months is still a good representation of how work will be spent. Instead, use the CPI data for the last four months.
The cost of the sho would be the lowest that could be computed.