By: Scott Duehlmeier
To be considered successful, a project needs to meet these three goals: time, budget, and quality. And while lots of project managers have a firm grasp on managing timelines and producing high-quality products, many don’t come from financial or accounting backgrounds. Managing a budget can be intimidating, but it doesn’t have to be difficult!
One simple way to keep your finger on the pulse of your project’s budget is to regularly calculate your estimate at completion (EAC). Instead of getting to the end of your project and finding out that you’ve gone way over budget, you can spot overspending earlier and find ways to correct it.
See "Understanding Project Cost Management" for more tips on keeping your budget in check.
Here are three ways to calculate estimate at completion; the method you choose will depend on how the project is progressing and what kind of change you’re accounting for.
How to Calculate EAC When There are no Variances
To calculate EAC at any time during the project, use the following equation:
For example, you’re 21 days through a 30-day project, and you want to know if you’re running over your $5,000 budget. After looking at your expense reports, you find that your team has used $3,000 so far.
You talk to your team members and consult with other departments working on this project, and you set the estimate to complete at $2,500. Using the equation your EAC is:
$3,000 + $2,500 = $5,500
At this point, you’re running a little bit over budget. Now that you know this, you can try to find out where you’re over budget and look for a solution.
How to Calculate EAC with a One-Time Variance
A common problem in project management is unexpected, one-time costs, like a contractor charging more than their estimate or having to pay for one-time access to a report.
To calculate your EAC when you encounter a one-time variance, use the following equation:
Here’s an example of how you might use this:
You’re working on a project that has a budget of $2,500. The project is 10 days long, and on day six, one of your team members is unexpectedly transferred to another team.
You decide to outsource the large task they were working on to a contractor for $500.
Once you’ve cleared the expense with your stakeholders and paid the contractor, your expenses on day six—including the $500 you paid the contractor—are $1,750.
When you calculate the earned value of the work done so far, you realize your team has been tearing through their tasks much faster than you thought, and the earned value of their work so far is $2,000. Your equation will look like this:
$1,750 + ($2,500 - $2,000) = $2,250
In this example, even with the unexpected cost of hiring the contractor, your EAC is less than your budget because of how quickly your team is doing their work.
How to Calculate EAC with Ongoing Variances
While in the last section we accounted for a single variance, in this section we’ll show you how to account for a recurring variance that’s going to affect your project until it’s finished.
To account for a recurring variance in the EAC, use the following equation:
Budget at completion (BAC) ÷ cost performance index (CPI) = EAC
To see how this works, let’s say you’re working on a six-month project with a budget of $10,000. In the second month, you approve a monthly expense for a software service to complete their portion of the project totalling $250 a month. Paying for this subscription for five months means an extra $1,250 in the budget.
To find out how this will affect your budget, first, you calculate the cost performance index and find it’s at .9. Ideally, this would be at 1 or higher, but .9 isn’t a disaster quite yet.
You then divide the new estimated budget, including the software subscription, by the cost performance index.
$11,250 ÷ .9 = $12,500
With the cost of the new software, and with your team running slightly behind, you’re over budget by $2,500. You can see from working this out that you’re going to need to make significant adjustments to the way your team is working or get approval for a higher budget.
Budget overruns happen frequently, but they don’t have to. In a study published by Harvard Business Review, in the 1,471 projects they studied, the average overrun was 27%. And one in six projects overspent by at least 200%. Not coincidentally, many of these projects also had schedule overruns of at least 70%.
If you’re not carefully tracking and managing your budget, you’re more likely to spend more than you should, or more than you even need to. Consistently calculating your EAC helps you keep track of how much you’re spending, how much you still need to spend, and what you might need to adjust to stay on budget.
See our SlideShare "How to Create a Budget: 9 Steps for Content Managers" for a step-by-step guide to setting up a budget.