EAC is the expected spend where BAC (budget at completion) is the authorized spend on a project. Comparing EAC against BAC yields the projected variance. EAC completion may in turn be used for revenue recognition, earned value analysis, progress billing and more.
EAC is arguably the single most critical component of the financial month-end process for project businesses. It is also the most important project monitoring and control KPIs used in project management. This reforecasting of the project arms managers and executives with critical information about the ongoing project in order to make data-driven decisions. One of the fundamental objectives of evaluating EAC throughout the project lifecycle is to detect variations and emerging financial trends early, thereby providing stakeholders time and opportunity to take corrective action.
Unfortunately, many companies lack the proper tools to efficiently evaluate EAC and end up only detecting variances once actual cost exceeds the total project budget. At this point it is generally too late to implement mitigating measures.
The manual process of consolidating data from multiple systems into a spreadsheet to calculate EAC, simply becomes to burdensome. Therefore, most companies abandon the practice of calculating EAC or do it so infrequently that it doesn’t enable them to actively manage their projects with it. It simply becomes a report they get once a month or a quarter.
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There are many ways in which EAC can be calculated. Here are a couple of methods:
The most common way to determine EAC is a “bottoms-up” formula where the actual costs (AC) are added to the forecasted remaining spend, or the estimate to complete (ETC), sometimes called cost to complete (CTC).
EAC = actual costs (AC) + estimate to complete (ETC)
If the project has encountered a one-time (atypical) variance, the following formula may be used:
EAC = actual costs (AC) + budget at completion (BAC) – earned value (EV)
There are other effective ways as well. For more details on calculating EAC, see the FAQ Estimate at Completion Formula – How to Calculate EAC
There are many ways in which EAC can be adjusted, manually as well as automatically. Manual adjustments are usually committed by the controller in the costing sheet and automatic adjustments to EAC are based on posted actual costs and recorded committed costs. EAC adjustments can also be based on completed quantities and remaining work estimates from the work breakdown structure (WBS) in a completely integrated system like Adeaca PBA.
Estimate at Completion Example
For a simple example of EAC, let’s use the bottoms-up approach.
Assume you have an office building project for $10,000,000 that will take 12 months.
After 3 months you have spent $3,500,000 and the remaining work estimate and your cost to complete is $7,200,000.
Using the calculation EAC = actual costs (AC) + estimate to complete (ETC) EAC = $3,500,000+$7,200,000 = $10,700,000
This is of course a very simple example, but it shows the principle in general.
EAC and Earned Value
EAC is a central component of earned value management and analysis. Earned Value Analysis or EVA is the act of measuring a project based on the progress achieved compared to the planned progress and therefore the value provided or “earned” at any point in time.
There are different ways to calculate your earned value, but one of the main principles is EAC. For example, comparing EAC against BAC yields the projected variance.
To effectively manage EAC you need to break down the project budget into manageable pieces, in Adeaca PBA this is done against the Cost Breakdown Structure (CBS). The CBS enables us to isolate budget positions making it possible to re-estimate the project with confidence and giving budget overruns nowhere to hide.
In Adeaca PBA, EAC is generally adjusted daily or weekly. At the end of each month, the full EAC dataset is committed and stored for future reference and trend analysis. This is possible because both the CBS and the full EAC process are completely embedded in the ERP application. This means that no manual data extracting, mapping, or consolidation is required. All costing data is available on demand replying on real-time data with full audit trail and drill back capabilities.
EcoSys by Hexagon is a comprehensive Enterprise Project Performance (EPP) platform designed to provide control, efficiency, and profitability of projects.
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