The EAC Formula: PMP Questions & Insights into Project Budgets

The Project Management Institute (PMI)’s Project Management Professional (PMP)® certification exam may include questions about, or be driven by, the Estimate at Completion (EAC) formula. Often referred to informally as “EAC Formula PMP,” in fact the tool is more than just a reference point for PMP® exam questions. It is a calculation that incorporates actual costs and remaining costs to provide insights into the status and future of a project budget. The EAC calculation provides “a more dynamic picture of the project budget” for project managers with projects in progress.

Understanding EAC, ETC, and AC for Project Management

The PMI®’s A Guide to Project Management Body of Knowledge (PMBOK® Guide) includes the control cost processes which enable forecasting of the project’s completion from a budgetary lens. The Actual Cost (AC), Estimate at Completion (EAC), and Estimate to Completion (ETC) are terms and formulas addressed in the PMBOK® Guide, 6th edition, p. 263-265 within the cost control processes.

Formulas in PMP

Actual Cost (AC): What money has spent on the project so far.

Estimate at Completion (EAC): An updated total cost forecast based on the current level of progress made on the project; the estimated time/money required to complete the project based on the current progress.

Estimate to Completion (ETC): Expected costs remaining (now until the end); how much time/money is needed to finish the project.

Actual Cost (AC)

Actual Cost, the amount spent on the project to date, should be inclusive of all costs at that moment in time. It is a value used to calculate the Cost Performance Index, Schedule Performance Index, Earned Value, Estimate at Completion, and Estimate to Completion.

Actual Cost

Estimate at Completion (EAC)

EAC, and EAC PMP specifically, is a calculation that incorporates the actual costs of work completed on a project with estimated cost to complete. According to the PMBOK® Guide, Estimate at Completion, it provides “a more dynamic picture of the project budget” for those engaged in ongoing projects. EAC can be calculated manually or by using spreadsheet software (e.g., Microsoft`

There are many variables in even the most detailed project plan. Depending on your industry, changes in the global supply chain, weather events, or union issues can impact the progress of project work. To that end, the EAC formula to use depends on the situation. In calculating EAC, separate labor and material costs as there are different budgets and management tools for each.

Estimate at Completion (EAC) Formulas

Initial estimates wrong or obsoleteMajority of budget accurate despite some changesSteady progress aligned to the original estimateConsider cost and schedule for an updated budget forecast
AC + ETC AC + BAC – EV BAC / CPI AC + (BAC-EV) / (CPI x SPI)
A new estimate is producedFuture performance will be based on the budgeted costFuture performance will be the same as past performanceFuture cost performance will be influenced by past schedule performance
AC = Actual Cost, ETC = Estimate to Complete, BAC = Budget at Completion,
EV = Earned Value, CPI = Cost Performance Index, SPI = Schedule performance Index

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Estimate to Completion (ETC)

Estimate to Complete is the cost to complete the project’s remaining work. It is a forecasting technique. The formula is straightforward mathematically. As with all cost formulas, including both ETC and EAC, the accuracy of the data used in the calculation has a direct impact on the accuracy of the result.

Estimate to Completion Cost

Example of EAC Calculation

The project manager has done the EAC calculation monthly and knows the project is has experienced some unexpected material costs that delayed work somewhat. To see what impact the changes made since the last EAC work, the Project Manager completes the EAC formula with this information:

  • Budget at Completion       BAC      $90,000
  • Earned Value                       EV         $40,000
  • Actual Cost                           AC         $60,000
  • Cost Performance Index   CPI        .533

So far, the project has had some changes, but the budget has been pretty close. Thus the [AC + BAC – EV] formula is used, for future performance based on budgeted cost.

EAC Formula PMP

At this time, the project manager knows the costs are steadily increasing over budget.  Additional changes are needed and other EAC formulas should be used to forecast the estimated cost at completion.

EAC and ETC in Project Management

The EAC and ETC are so impactful in project management, that some refer to the tools as “EAC calculation PMP,” “EAC formula PMP,” or sometimes “EAC PMP.” These unofficial names speak to the inclusion of the formulas, and the importance of knowing their use, for the PMP® certification exam. In terms of practicing project management, EAC and ETC provide insights into the project’s status at a cost and schedule level so that, if done early and done frequently, changes can be made to manage both. One does not need to have a PMP® certification to know a project being over budget and/or behind schedule has problems. Using control processes and tools can prevent that situation.

Need to Know for the PMP® Certification Exam

Preparing for the PMP® certification exam is more than reciting formulas. The foundational concepts of cost management and cost control processes need to be known in terms of how the tool is:

  • defined
  • abbreviated
  • shown as a formula
  • interpreted from calculations
  • applied to cost activities
  • applied to schedule activities
  • used to determine changes
  • communicated to stakeholders

Within the testing context, there may not be an “Estimate at Completion PMP” question in which the exact EAC formula for a given situation will be given. A deep understanding of the concept is required to know which EAC formula to use when and if there is enough information to calculate it.

Sample EAC topic PMP® Certification Exam Questions

QuestionABCD
You are a project manager responsible for multiple facilities-based projects with a large telecommunications company. One of your projects has a BAC of $250,000. You have calculated your CPI to be .91 and your AC to be $175,000. Assuming the variances are likely to continue, what is the EAC of the project?$25,000$15,750$265,000$274,725
You are managing a project where AC = $25,100, ETC = $67,000, VAC = -$2,600, BAC = $90,000 and EAC = $92,100. Your sponsor asks you to forecast how much money you expect to spend on the remainder of the project. Your variance is atypical, and your SPI = 1.2. Which of the following numbers should you provide?$67,000$87,400$90,000$92,100

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Answers

  1. D. Since there is only enough information to calculate for the cost variances, the correct equation would be BAC/CPI, or 250,000 / 0.91 = $274,725.
  2. A. Sometimes you don’t need to do any calculations when you run across a question like this. The question asked you which number to use for a forecast of how much money you expect to spend on the remaining project work. That is the definition of ETC. Since you were given the value of ETC, you will just use that number.

Conclusion

Project managers and teams put much effort into the creation of accurate budgets and schedules. And yet, life happens. Actual costs (AC) frequently deviate from the plan, sometimes knowingly to address approved changes and sometimes unexpectedly for unknown changes. Project managers need to use tools like Estimate at Completion (EAC) and Estimate to Completion (ETC) to predict costs throughout the project work and manage accordingly.

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Erin Aldrige
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Erin Aldrige