Project management involves careful planning, monitoring, and controlling various project aspects, including scope, schedule, cost, quality, and risk. Two critical metrics that aid project managers in assessing project performance and progress are budget at completion (BAC) and estimate at completion (EAC). This article delves into the concepts of BAC and EAC, exploring their significance, calculation methods, and practical applications in project management.
Key Facts
- BAC (Budget at Completion): BAC refers to the total planned budget for a project. It represents the authorized budget at the beginning of the project and remains static throughout the project life cycle. BAC is used as a parameter to define the earned value (EV) of the project.
- EAC (Estimate at Completion): EAC is the projected final cost of the project based on the current status and performance. It is the current expectation of the total costs of the project once completed. EAC takes into account unforeseen events, delays, and unplanned expenses that may impact the project’s cost. EAC is calculated at various moments throughout the project life cycle and evolves as new information becomes available.
- Calculation of EAC: There are different formulas to calculate EAC, and the choice of formula depends on the project’s circumstances. Some common formulas include:
- EAC = AC + ETC (Actual Cost + Estimate to Complete)
- EAC = BAC / CPI (Budget at Completion divided by Cost Performance Index)
- EAC = AC + BAC – EV / (CPI x SPI) (where SPI is Schedule Performance Index)
- Importance of EAC: EAC helps project managers reassess the total costs required to complete the project when unforeseen events occur. It allows stakeholders to measure the impacts of changes more accurately and better manage available resources. By periodically estimating project costs with EAC and comparing the results over time, project costs can be tracked more accurately. EAC is also used proactively to identify potential roadblocks and allocate resources effectively.
Understanding Budget at Completion (BAC)
BAC stands for budget at completion, representing the total planned budget for a project. It is determined during the planning phase, considering the project’s scope, schedule, and resources. BAC serves as a baseline against which actual project costs are compared to calculate variance and performance index. BAC is calculated by summing up the cost estimates of all work packages or activities in the project.
Understanding Estimate at Completion (EAC)
EAC stands for estimate at completion, representing the projected final cost of a project based on its current status and performance. It is calculated during the monitoring and controlling phase, considering actual costs, earned value, and remaining work. EAC helps project managers forecast the final project cost and adjust the budget and scope accordingly. EAC can be calculated using various methods and formulas, depending on assumptions and factors affecting the project.
Calculating EAC Using Different Formulas
There are several formulas used to calculate EAC, each with its own advantages and applicability. The choice of formula depends on the project’s circumstances, data availability, and the desired level of accuracy. Some commonly used EAC formulas include:
EAC = AC + ETC (Actual Cost + Estimate to Complete)
This formula is suitable when initial estimates are unreliable or when the project has significant changes or deviations from the plan. AC represents the actual cost of completed work, and ETC is the estimated cost to complete the remaining work.
EAC = BAC / CPI (Budget at Completion divided by Cost Performance Index)
This formula is recommended when project performance is relatively stable and consistent with the plan. CPI is calculated by dividing earned value by actual cost. A CPI greater than 1 indicates favorable performance, while a CPI less than 1 indicates unfavorable performance.
EAC = AC + BAC – EV / (CPI x SPI) (where SPI is Schedule Performance Index)
This formula combines the previous two formulas, incorporating both past performance and the budgeted rate. SPI is calculated by dividing earned value by planned value. An SPI greater than 1 indicates favorable schedule performance, while an SPI less than 1 indicates unfavorable schedule performance.
Importance of EAC in Project Management
EAC plays a crucial role in project management by providing valuable insights and enabling proactive decision-making. Its significance lies in the following aspects:
Reassessing Project Costs
EAC helps project managers reassess the total costs required to complete a project when unforeseen events occur. It allows stakeholders to measure the impacts of changes more accurately and better manage available resources.
Tracking Project Costs
By periodically estimating project costs with EAC and comparing the results over time, project costs can be tracked more accurately. EAC helps identify cost overruns or underruns, enabling timely corrective actions.
Identifying Potential Roadblocks
EAC is used proactively to identify potential roadblocks and allocate resources effectively. By analyzing EAC trends and comparing them with BAC and other project metrics, project managers can anticipate challenges and take necessary steps to mitigate risks.
Conclusion
Budget at completion (BAC) and estimate at completion (EAC) are essential metrics in project management that provide valuable insights into project costs and performance. BAC represents the planned budget, while EAC represents the projected final cost based on current status and performance. EAC is calculated using various formulas, considering factors such as actual costs, earned value, and remaining work. EAC helps project managers reassess project costs, track project costs, and identify potential roadblocks, enabling proactive decision-making and effective resource allocation. By leveraging BAC and EAC effectively, project managers can enhance project success and achieve desired outcomes.
References:
- How to Calculate BAC and EAC for Complex Projects: https://www.linkedin.com/advice/1/how-do-you-calculate-bac-eac-complex-projects
- Estimate at Completion (EAC) And Its Use In Project Tracking: https://monday.com/blog/project-management/estimate-at-completion-eac/
- What is Estimate at Completion (EAC) in Project Management?: https://www.wrike.com/project-management-guide/faq/what-is-eac-in-project-management/
FAQs
What is Budget at Completion (BAC)?
Budget at Completion (BAC) is the total planned budget for a project, determined during the planning phase. It represents the authorized budget at the beginning of the project and remains static throughout the project life cycle. BAC is used as a parameter to define the earned value (EV) of the project.
What is Estimate at Completion (EAC)?
Estimate at Completion (EAC) is the projected final cost of a project based on its current status and performance. It is calculated during the monitoring and controlling phase, considering actual costs, earned value, and remaining work. EAC helps project managers forecast the final project cost and adjust the budget and scope accordingly.
How is EAC calculated?
There are different formulas to calculate EAC, depending on the project’s circumstances and data availability. Some common EAC formulas include:
- EAC = AC + ETC (Actual Cost + Estimate to Complete)
- EAC = BAC / CPI (Budget at Completion divided by Cost Performance Index)
- EAC = AC + BAC – EV / (CPI x SPI) (where SPI is Schedule Performance Index)
When should EAC be calculated?
EAC should be calculated periodically throughout the project life cycle, especially when there are significant changes in project scope, schedule, or cost. Regular EAC calculations allow project managers to monitor project performance, identify potential cost overruns or underruns, and take corrective actions as needed.
What is the difference between BAC and EAC?
BAC is the planned budget for a project, while EAC is the projected final cost of the project based on current performance and progress. BAC is static and remains the same throughout the project life cycle, while EAC is dynamic and can change as the project progresses.
Why is EAC important in project management?
EAC is important in project management because it helps project managers:
- Reassess project costs when unforeseen events occur
- Track project costs more accurately
- Identify potential roadblocks and allocate resources effectively
- Make informed decisions about project scope, schedule, and budget
How can EAC be used to improve project outcomes?
EAC can be used to improve project outcomes by:
- Identifying cost overruns or underruns early on, allowing project managers to take corrective actions
- Proactively managing project risks and uncertainties
- Optimizing resource allocation by focusing on activities that contribute most to project success
- Enhancing communication and collaboration among project stakeholders
What are some best practices for calculating EAC?
Some best practices for calculating EAC include:
- Using a reliable and accurate method that is appropriate for the project’s circumstances
- Gathering accurate and timely data on actual costs, earned value, and remaining work
- Involving project stakeholders in the EAC calculation process
- Communicating EAC results clearly and effectively to all relevant stakeholders