Mastering Earned Value Calcuations for PMP Exam - Part-3 (EAC, ETC and VAC)

In Part-2 of “Mastering the Earned Value Calculations for PMP Exam”, we have studied about the Project Performance calculations like Cost Variance (CV), Schedule Variance (SV), Cost Performance Index (CPI) and Schedule Performance Index (SPI). In this part, we will master the calculations related to Project Forecast mostly Estimate at Completion (EAC). There are other things to be known like Budget at Completion (BAC), Variance at Completion (VAC).

The important thing to be noted here is EAC formula change with the difference scenarios. It means, if the exam is asking to calculate any of the above, we need to check for scenario given. So results of the calculation will be different based on the scenario or situation given. So let’s move forward now.

 

Estimate at Completion (EAC)

 

It is very much clear from the term itself that it is the estimated cost when the project will complete.

So, what is the big deal?

 

There is one more term BAC (Budget at Completion). BAC you decide at the start of the project. It is basically the planned budget (costs)

But the actual costs changes when the project completes. You need to keep estimating these cost throughout the project and that is basically EAC i.e. the estimated cost (you need to estimate in advance), when the project will complete.

 

Come on… I cannot explain better than this.

 

Now we need to learn the different scenarios and corresponding EAC.

1. Original Estimate is fundamentally flawed i.e. Original estimate is no more valid:
    
   There is actually no formula to calculate EAC in this case. You just need a little understanding.
   Let’s say you need an estimate at completion today. So you have already done some work and you have some left. Means you know the AC for the work you have done. So what will be the Estimated Cost at Completion.
    
   It should be the Actual Cost of the work + Remaining Cost.
    
   Now you don’t know about the remaining cost because your original estimates are no more valid, so you need to estimate this remaining cost. The best way to estimate is Bottom up Estimation (you remember or forgot). So you need to estimate the cost of remaining work that is also called Estimate to Complete (How much you need now to complete the remaining work)
    
   So what will be formula?
    
   Estimate at Completion = Actual Costs of work done + Remaining cost estimated by Bottom-up technique.
    
   So
    
                     EAC = AC + Bottom Up ETC
    
   If you understand the above theory, nobody can stop you remembering the fundamentals behind this formula.
   We didn’t memorize here, we just understood the things, right?
    
   Example: Shampi is the project manager on a project for developing and E-Commerce portal. The project is expected to last 12 months. During the middle of the project, she and her team has faced some issue with the project and they decided not to go with the current approach. They need to redesign the portal. The total Budget for the project is $200000 and the current CPI is 1.2.  Till date she has spent $90000. With the new approach she estimated that she will need $40000 for design, $30000 for testing and $80000 to pay her team? What will be the Estimate at Completion for this project?
   Answer: Did you notice, original estimates are flawed in the example. AC is given and data is there to estimate the cost to complete (ETC).
    
   So
                     EAC = AC + Bottom Up ETC
    
                     EAC = 90000 + 40000+30000+80000 = $250,000
    
   I hope it was easy.
    
2. Cost Performance of the project will be same throughout the project i.e. CPI will stay same:
    

You know about CPI.

Just take an example: If it is > 1 project is under budget what does it mean? It means your Estimate at Completion should be less than your original budget, right?

So how is this possible mathematically?

Means BAC is being divided by something greater than one (>1) so that we can have EAC < BAC and in our case what is greater than 1. It is CPI.

So how we can calculate our EAC

                  EAC = BAC / CPI  (makes sense or not)

Let’s modify the above example to match the case here.

Example: Shampi is the project manager on a project for developing and E-Commerce portal. The project is expected to last 12 months. Management has asked her to provide the EAC for the project. Current CPI is 1.2.  In start of the project she estimated that she will need $40000 for design, $30000 for testing and $80000 to pay her team? What will be the Estimate at Completion (EAC) for this project?

Answer: Did you notice, there is no symptom or statement in the question that original estimates were flawed i.e. CPI will not vary at all. So, we will calculate the EAC with the help of CPI.

 Calculate first, what the budget was estimated.

BAC = 40000+30000+80000 = 150000

CPI = 1.2

So EAC = 150000/1.2 = $125000

So see according to the CPI project is doing well and under budget and if it remains same ideally the project should be completed under budget and that is happening here. Why because EAC is less than the actual budget.

c. Current CPI is no more valid or is abnormal or flawed:

What does it mean? Say, you have some damaged in project and you used some money to fix that damage. But there is no proof that your original estimates are flawed. Means your original estimates are still good, but the CPI you calculated is abnormal, why, due to the cost in fixing the damage being part of CPI, but in future there will no such damage.

So how you will calculate the EAC now? One this is for sure, you have to ignore the CPI because it is not normal.

Of course, you will do something like this.

 EAC = Actual Cost + ETC

But now ETC is not Bottom Up ETC as in Case a) because your original estimates are still valid. So how you will calculate this? You know two things now

1. AC and ii) BAC (Budget planned for project

So what is remaining budget BAC-AC…. No, No..

Assuming this means, everything is going well. But this is not the case.

We have one more parameter which can help here. You got it right.. It is Earned Value (EV)

So what is the cost remaining?

Budget – Earned Value, right (What was the original budget and you need to subtract what we have earned till now in terms of dollar value)

 

So,

                  EAC = AC + (BAC – EV)

I hope, after that much of explanation, it should not be difficult for you.

Let’s modify the above example again:

Example: Shampi is the project manager on a project for developing and E-Commerce portal. The project is expected to last 12 months. Management has asked her to provide the EAC for the project. Current CPI is 1.2. But team has realized that they have made some mistakes in past which need to be fixed and they cannot execute the project in future with the same great CPI.  In start of the project she estimated that she will need $40000 for design, $30000 for testing and $80000 to pay her team? It has been 3 months to the project and team has completed a work of worth $20000 by spending $15000. What will be the Estimate at Completion (EAC) for this project?

Answer: Did you notice that team has to fix some mistakes and their current CPI will not be maintained. So we will not use CPI here. So we will see what project has earned. It is very clear from the above question that Earned Value (EV) is $20000. We also know the original budget (BAC) which is 40000+30000+80000 = 150000. So what is the deal? Actual Cost is also given.

                  EAC = AC + (BAC – EV) = 15000 + (150000-20000)= 145000.

d. A project deadline is to be met

Deadline is to be met. What does it mean? It means we need to consider something related to schedule. And what is that which represents the schedule performance, SPI, right? And since we are talking about cost, we also need to consider CPI.

So the formula used in Case c) will be changed to (by considering SPI and CPI)

 

EAC = AC + [(BAC – EV)/(SPI x CPI)]

Too many similar examples, let’s take a new one here.

Example: Balaji is working on a project for developing Simulators for power plants in Pittsburgh, US. It was informed to Balaji that this project is to be delivered in 8 months. At the start of the project, the costs of the project were estimated as $150,000 for Engineering, $700,000 for Testing, $150,000 for various Quality activities. The project has spent $150,000 so far. As of today, CPI for the project is 0.75 and the SPI is 0.8. The value of the work completed is $300,000. What is the Estimate at Completion?

Answer: You may need to note here that a deadline has been given. So we need to consider both SPI and CPI and these are given in the question. EV ($300000) is also given. We can calculate the original budget BAC also.

Let’s solve this.

BAC = 150000+700000+150000 = $1000000

AC = $150000, EV = $300000, CPI = 0.75, SPI=0.8

We know now

EAC = AC + [(BAC – EV)/(SPI x CPI)]

                  =150000 + [(1000000-300000)/(0.8x0.75)

                  =150000+ (700000/0.6) = 150000+1166666.67 = 1366666.67

So EAC > BAC it means when the project will be completed, it will be overbudget.

 

Variance at Completion (VAC)

Here no need for big calculation. It represents what will be the cost variance when the project will be completed. What did you understand? It is the difference of what was actually planned and what will be the final estimated cost. Yes, you got it right.

VAC = BAC – EAC.

Negative VAC is not good as in that case EAC is greater than BAC which means project will go over budget as of today.

In the above example VAC is 1366666.67 – 1000000 = $366666.67

 

This concludes the Part-3 of “Mastering the Earned Value Calculations for PMP Exam”, where we have studied about the Project Estimations mostly EAC which keeps changing as the scenario changes.

In Part-4 of we will study one very important index of project performance which is To Complete Performance Index (TCPI) which also changes with the scenario. We will master all the scenarios related to that. Hold on for a while and Chill…..