Question

How would you explain to management how EAC and ETC forecasts work and how they are calculated?

If EV is higher than AC, what does this signify? What is likely to happen to the forecasted cost at completion compared to the approved budget?

Why bother to analyze very positive variances?

Answer 1

Estimate at Completion (EAC) is part of earned value management analysis and it is defined as the forecasted cost of the project that is on hand. It can be equal to, more than or less than the budgeted cost of the project. It tells the management regarding the resources required so that project is completed on time.

EAC is calculated by the following formula.

EAC = AC + BAC – EV

Here,

Ac = Actual cost

BAC = budget at completion

EV = Earned value

If earned value is equal to the BAC, then it means that EAC is equal to AA and there is no need to bring in more resources.

In comparison to EAC, estimate to complete (ETC) is calculated by the following formula:

ETC = BAC – EV

If BAC = EV

Then,

ETC = 0

It means that ETC tells that how much more money is required to complete the project if project gets delayed or EV is less than the BAC.

Besides, there is a relationship between EAC and ETC as follows:

EAC = AC + ETC

If EV is greater than AC, then EAC will be decreased and project will be completed at a cost that is less than the approved budgeted cost.

The positive variance should also be analysed, because it tells the lacklustre planning or relaxed valuation of the expenses or the project cost. It brings additional commitment of resources to the project and other projects may suffer. Hence, positive variance should also be evaluated to prevent the poor planning if any.