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PMP® Prep: Calculating EAC and ETC for Forecasting

Image of "forecasting stone"In PMI®’s Project Management Professional (PMP)® exam, you’ll find a number of questions on earned value management (EVM). Along with EVM, the concept of “forecasting” is also important to understand. Forecasting has been used as one of the tools and techniques in the “control costs” process under the “project cost management” knowledge area. If you’re pursuing your PMP® credential, I’ll share some insights about those topics in this article that would be good for you to study.

In forecasting, the two primary metrics used are estimate to complete (ETC) and estimate at completion (EAC). ETC is the expected cost to finish the remaining work of the project, whereas EAC is the expected total cost of completing all work for the project. As EAC considers the total expected cost, it is the sum of actual cost incurred so far for the project (AC) and ETC. Putting it into an equation, you get:

Estimate at completion = Actual cost + Estimate to complete
or
EAC = AC + ETC

This is the main formula for EAC, which is derived from AC and EAC.

However, you may come across sources that are confused about EAC. A number of books, articles and journals mention that EAC changes based on certain assumptions. In fact, EAC doesn’t change directly at all on various assumptions. However, ETC does. And as ETC changes, it in turn changes EAC.

How and why? You’ll see shortly.

ETC is the cost needed to complete the remaining work. It’s driven by a performance factor or performance index. Putting it into an equation, you get:

ETC = Work remaining / Performance factor
or
ETC = (Budget at Completion – Earned Value) / Performance factor
or
ETC = (BAC – EV) / Performance factor

The performance factor could be the cost performance factor or the cost performance index (CPI). It can also be combination of CPI and schedule performance index (SPI) or a weighted combination of CPI and SPI.

So why use earned value for ETC calculation? Why not actual cost? Because we’re talking about remaining work — not remaining cost — while calculating ETC. Had it been remaining cost, the formula would have been “BAC – AC.” But for remaining work ETC will equal “BAC – EV”.

Abbreviation table

Now, let’s review assumptions based on which the performance factor changes. You’ll see that as the performance factor changes ETC, EAC will also change.

Assumption #1: Future Performance Will Be the Same as Past Performance

ETC = Work remaining / Performance factor
or
ETC = Work remaining / Cost performance factor
or
ETC = (BAC – EV) / CPI

Why are we taking the CPI by default and not SPI? Because here the calculation is primarily focused on cost and not schedule. Our main formula for EAC, as noted above, is:

EAC = AC + ETC

Now, replacing the just-calculated value of ETC on the previous equation, the modified equation becomes:

EAC = AC + [(BAC – EV) / CPI]
or
EAC = AC + [(BAC / CPI)] – [(EV / CPI)]
or
EAC = AC + [(BAC / CPI)] – [(EV) / (EV / AC)]
or
EAC = AC + [(BAC / CPI)] – AC
or
EAC = BAC / CPI

This is what you would mostly see in almost all the reference material for the PMP® exam — the formula for “Estimate for Completion is EAC = BAC / CPI.” It’s mentioned as the default formula in many books and plainly written as BAC / CPI, but hardly ever is it explained clearly. As we just saw, this formula is simply derived by ETC.

Assumption #2: Future Performance Will Be the Same as Planned Rate or Budgeted Rate

When you first plan and baseline, it’s assumed that the performance factor will be “one” or going forward EV and AC will be same. In others words, your CPI will be 1. ETC, as we have already seen, is:

ETC = Work remaining / Performance factor
or
ETC = Work remaining / Cost performance factor
or
ETC = (BAC – EV) / CPI

Using the CPI value 1, ETC becomes:

ETC = (BAC – EV) / 1
or
ETC = BAC – EV

Our main formula for EAC is:

EAC = AC + ETC

Replacing, the value of ETC calculated in this assumption, the equation for EAC becomes:

EAC = AC + (BAC – EV)

Here again you’ll see that ETC is driving the formula for EAC based on an assumption.

Assumption #3: Future Performance Will Be Influenced by Both Cost Performance and Schedule Performance

In this example, note that we’re talking not only about cost performance but also schedule performance. Why? Imagine that your project is doing well with respect to schedule but not cost. In such a case it’s possible that your final ETC might be less if you consider both SPI and CPI, rather than only CPI.

Applying this to the formula of ETC, we get:

ETC = Work remaining / Performance factor
or
ETC = Work remaining / (Cost performance factor * Schedule performance factor)
or
ETC = (BAC – EV) / (CPI * SPI)

For the performance factor in the previous equation, we have considered both SPI and CPI.

Again, our equation for EAC is: EAC = AC + ETC.

Now, using the value of ETC listed above, the equation for EAC is:

EAC = AC + [(BAC – EV) / (CPI * SPI)]

Assumption #4: Future Performance Will Be Influenced by Some Proportion of Schedule as well as Cost Performance

This is a variant of assumption #3. In this instance, weighting is given to CPI as well as SPI while calculating ETC. Giving an 80 percent weighting to CPI and a 20 percent weighting to SPI, the equation for ETC is:

ETC = Work remaining / Performance factor
or
ETC = Work remaining / [(0.8 * Cost performance factor) + (0.2 * Schedule performance factor)]
or
ETC = (BAC – EV) / [(0.8 * CPI) + (0.2 * SPI)]

Our formula for EAC is:

EAC = AC + ETC

Replacing ETC, which we calculated for this assumption, the equation for EAC is:

EAC = AC + (BAC – EV) / [(0.8 * CPI) + (0.2 * SPI)]

Other variations in weighting are also possible, such as 50 percent for CPI and 50 percent for SPI. This will be in accordance with the judgment of the project manager.

Assumption # 5: The Initial Plan Is No Longer Valid

In this case, you have to recalculate ETC using a bottom-up approach. This is called “Bottom-up ETC.” Hence, for this assumption the equation for EAC will become:

EAC = AC + Bottom-up ETC

You can view EAC and ETC graphically as S-curves in the figure below.

Satya Narayan Dash figure 1

As you prepare for your PMP® exam, you’ll be ready to calculate various formulas related to EAC and ETC by remembering:

  • Don’t assume that EAC changes based on certain assumptions. ETC is what actually changes. You need to focus on ETC and how ETC is calculated based on various assumptions;
  • The formula for EAC is “AC + ETC,” and therefore it is EAC which is changing based on ETC because EAC is derived from ETC. It’s not the other way around. ETC doesn’t change based on EAC; and

By focusing on ETC and understanding ETC as the division of work remaining with a performance factor, and it is ETC that drives EAC, a PMP® aspirant can easily calculate various formulae related to EAC and ETC.

Image resized and cropped. Courtesy of Tom Richardson and licensed for reuse under a Creative Commons Licence (CC BY-SA 2.0).


Related Content

Webinars (watch for free now!):
“EVM” – Earned Value Management – Not Just Another 3 Letter Acronym!
Resource Planning with Microsoft Project

Articles:
Manually Entering Task Costs — How Is This Even Possible?
Tracking Methods in Microsoft Project Online and Project Server


 

Satya Narayan Dash
Written by Satya Narayan Dash

Satya Narayan Dash is a management professional, coach, and author of multiple books: I Want To Be a PMP, I Want To Be a RMP, and I Want To Be An ACP, as well as his latest one, I Want To Be A CAPM. With his leadership and guidance, over 1500 aspirants have successfully cracked PMP, ACP, RMP, and CAPM examinations – in fact, there are 80 documented success stories in detail on these certifications. Satya’s course “PMP Live Lessons – Guaranteed Pass or Your Money Back” has made many successful PMPs, and he has created new management paradigms, including Practical PMP, Practical RMP, Agile PMP, hands-on Agile-related courses, and his recently launched “CAPM Live Lessons – Guaranteed Pass or Your Money Back.” His web presence is at https://managementyogi.com, and he can be contacted via email at managementyogi@gmail.com.

 

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14 Comments
  1. very good, the differents assumptions are usefull but in my experience only the 1st is asked in the exam

    Reply
  2. Satya has simplified the forecasting formulas. Now all we need to do is remember one formula EAC=AC+ETC which is very logical and easy to remember.

    Reply
  3. Satya Narayan Dash

    Thank you Prashanth.

    Reply
  4. Very useful and easy way to understand. .. thanks Satya..

    Reply
  5. Excelent. Thank you Prashanth.

    Reply
  6. Excellent.

    Reply
  7. Thank you so much for describing these complex concepts in such a clear way. For months, I’ve been searching PMP articles trying to understand how to differentiate between EAC and ETC at this level of detail and clarity. Until Satya’s explanation, my searches had been unsuccessful. Satya’s blog adds immense value, not just for those wanting to pass the PMP exam, but also for those who want to understand and use these concepts professionally.

    Reply
  8. excellent, easy to understand explanation of complex terms.

    Reply
  9. Thank you for providing the information with such clarity!

    Reply
  10. Thank you for providing the information with such clarity. Well done!

    Reply
  11. Nice information, it was very useful, Thanks
    Can P6 be interfaced to an Asset Management system & will it prepare the optimum project scheduling with accessible time, budget and resources???

    Reply
  12. Excellent one,Easy to understand

    Reply
  13. Thank you — very well done.

    Reply
  14. Nice work Prashant!
    Very useful.

    Reply

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