How to Effectively Estimate Your Project’s Budget

Upward Financial Trends ChartsProject sponsors typically want to keep a close eye on their budget. They want to know what’s been spent and what the expected total will be at completion. When you’re trying to estimate budget costs , you have two ways to look into the future: Estimate at Completion (EAC) and Estimate to Completion (ETC).

So what do these really mean and how do you effectively use them?

EAC is simply the forecasted cost of the project. There are a few ways to calculate the numbers, but the most common is adding actual costs (AC) to your projected remaining spending, or  ETC. This is a bottom-up approach that’s typically used when the original estimate is flawed, or the project possibly completed before all the information has been gathered.

  • Simple Calculation: EAC = AC + ETC
  • If the project has encountered a rare occurrence, leveraging the budget at completion and earned value will bring you closer to the right number:  EAC = AC + budget at completion (BAC) – earned value (EV)
  • If a variance has occured and is expected to reoccur, leverage the cost performance index (CPI) number in the calculation:  EAC = BAC ÷ CPI

ETC is an estimate of how much more money you’ll need to complete the project from its current state. It can be determined either by building a bottom-up estimate, usually by asking team members for revised estimates, or by deducting the AC from the EAC.

  • Calculation:  ETC = new estimates
  • Calculation: ETC = EAC – AC

Comments

  1. BY PM Hut says:

    Hi Cathlynn,

    I don’t think the post is really about how to estimate the the project’s costs, but it is more on how to monitor the project’s health during its execution using EVM (Earned Value Management).

    We have published an excellent introduction to EVM here: http://www.pmhut.com/basic-earned-value-management-evm . Note that EVM creates some managerial overhead on the project despite the fact that it consists of simple formulas.

Post a Comment

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>