Preparing for PMP exams requires a level of tact. Even after purchasing all the recommended PMP books, there are certain concepts that you must have at your fingertips. Remember, the familiar you are with these, the higher your chances of doing well.
In this article, we take a look at some of the commonly tested areas- cost estimation. We will delve deeper into the estimate at completion and estimate to complete to help you learn a thing or two before your exams.
We find it worth mentioning that these two are forecasting techniques used to assess whether the project costs are on track. To go about these, we will tackle these concepts separately, furnishing you with all the information you need. Let’s get started.
Estimate at Completion
Every project has a budget, which refers to the money allocated for its execution. This is usually prepared at the beginning of the project, specifically in the planning stage. However, as we mentioned in our previous articles, the project budget is not fixed. As new information keeps trickling in, the project manager and stakeholders may be forced to alter the budget allocation.
Due to such occurrences, the estimate at completion, also known as EAC, forecasts the total amount of money at the end of the project. Remember, this happens when the project is in progress. It is part of earned value management, just like budget at completion.
However, unlike budget at completion, the Estimate at completion considers variables such as early, obsolete estimates and unplanned costs that may pop up as the project progresses. It keeps track of the project’s current actual cost and estimates the remaining total costs to be incurred until its completion, giving project members and stakeholders a more detailed picture of the project budget.
To help you understand this, here is an example worth looking at. Suppose the estimated budget at completion of a project was set at $20000, but during its life cycle, it experienced some delays and licensing problems that drove up the costs; the estimate at completion creates a new budget forecast based on this information.
Therefore, it is not a one-time thing but a regular update based on the projects’ incurred and pending costs as determined by occurrences and events.
How to Come up with the Estimate at Completion
The proper formula to use is dependent on the given situation and facts. There are four different methods of arriving at the estimate at completion. Let’s take a look at these and the suitable instances.
1. EAC= AC + TC [EAC= Actual cost + Estimate to Complete]
This is the best formula to use after establishing that the initial estimates erred and are now obsolete. Remember, one cannot use them for accurate forecasting under such circumstances. To arrive at the estimate at completion, you add the actual cost to the estimate to complete, which we will cover in the second part of the article.
For example, if the actual cost is AB and the estimate to complete is CD, the estimate at completion= AB + CD.
2. EAC= BAC/CPI [EAC= Budget at completion/Cost Performance Index]
Unlike the first formula, this one is used when the project performance is steady and no sharp variations from the initial estimate have been experienced. Under this formula, you should divide the budget by the Cost Performance Index to arrive at the estimate at completion.
For example, is the budget at completion is XX, and the cost performance index Y, the estimate at completion will be XX/Y.
3. EAC = AC + (BAC-EV) [EAC = Actual cost + (Budget at completion -Earned Value)]
The third formula is used when the project has experienced a one-time issue or obstacle in the course of its progress, which is not expected to affect the rest of the original budget. Here, you will subtract the earned value from the project’s actual cost to get the estimate at completion.
For example, assume our budget was $20000, and at 50% completion, it is somewhere near $12000 instead of the intended $10000. Therefore, using this formula, our estimate at completion will be 12000+(20000-10000), which is $ 22,000.
4. EAC= AC+(BAC-EV) / SPI+ CPI [EAC= Actual Cost + (Budget at completion -Earned value) / (Schedule Performance Index + Cost performance Index)
This last formula is quite complicated. However, you will still have a hang of it. It is used to account for the project’s cost and schedule to get an updated budget forecast. Here, you will add the actual costs and the budget of completion and then subtract earned value before dividing by the schedule performance index and the cost performance index.
For example, if the actual cost is YY, the budget at completion TT, the earned value EV, the schedule performance index SP and the cost performance CP, the estimate at completion will be YY+ (TT-EV)/ (SP+CP)
Disadvantages of Estimate at Completion
Despite this being an important forecasting tool for projects, it has its fair share of disadvantages. Let’s take a look at these:
- Uncertainty and Assumption
This is by far the most significant disadvantage that estimates at completion face. The uncertainty can come from the project itself or the assumptions made when coming up with the estimate at completion.
Remember, these estimates can be performed at any percentile mark. One performed at the 10th or 20th percentile uses fewer available data than one performed on the 50th or 60th percentile mark. Reliance on the early estimates when the project is still taking up shape can be pretty misleading.
One of the biggest problems of these estimates is that they do not consider some past issues, as all the formulas do not take these into account. Also, it is impossible to make accurate estimates in projects with multiple teams since one group’s performance does not spill over to the other team. Therefore, using their data to come up with the estimate at completion will be unfair to other well-performing teams.
- Loss of time
Project managers understand that estimates at completion carry a level of uncertainty, and therefore, most of them come up with three estimates. Even though this can help bridge some uncertainty, it requires lots of time, which may be disadvantageous.
These three estimates capture the project’s best case, worse case, and expected scenarios. Therefore, the project manager must be invested in the forecast, which may make him unavailable to the project team members, thus slowing down the project progress.
It is common knowledge that several project managers underestimate the severity of issues in the estimate of completion. This causes a misrepresentation in project progress as some managers also fear that an honest review may lead to project cancellation.
Even though people are advised to use project management software to improve the accountability of this process, organizations and project managers should proceed with caution. The software’s information can be misinterpreted due to complexity or a lag in updates, making the project suffer more than anticipated.
Estimate to Complete
The Estimate to Complete is an essential concept that you should master before stepping into the PMP exam room. You will likely encounter a few questions on this topic. Let us help you understand what this is all about.
As the project progresses, it is expected that costs may change, irking the client’s interest in the price of the remaining tasks. The Estimate to Complete is a proven technique that will help you develop the proper estimation to present to the clients.
This forecasting technique used together with the estimate at completion gives you the approximate cost required to complete the remaining work. It is an estimate that shows the amount of money to be spent to complete the remaining part of a project.
How to Come Up with the Estimate to Complete
Unlike our first estimate, the estimate to complete is calculated using two main methods. These are:
1. Bottom-up cost estimation
In bottom-up estimation, one calculates all the costs to be incurred in the remaining work and adds them to get the total estimate to complete. However, unlike the estimate at completion, this method does not have a definite formula. To come up with the forecast, you have to do lots of calculations.
To help you understand this, let’s take a look at an example.
Example 1: Using the Bottom-up cost estimation
Suppose you were contracted to build a community hall for 200,000 USD and have spent $50,000 till now but then realized that you made an error in your cost estimation; you need to recalculate the budget for the remaining part of the project.
By doing this, you will be re-estimating the cost of the remaining work. Let’s say the new estimate will be 75,000 USD for construction, $60,000 for plumbing, $50, 000 for painting and $20,000 for extra expenditures.
Here is a breakdown of the figures used in the question:
BAC= 200,000 USD
AC= 50,000 USD
Construction Cost= 75,000 USD
Plumbing Cost= 60,000 USD
Painting= $ 50,000
Extra expenditure= $20,000
The bottom-up cost estimate dictates that you calculate each work package’s cost and add them to get a final figure.
In this case, the estimate to complete will the sum value of the cost of construction, plumbing cost, painting cost, and the extra expenditure. Our final sum will be:
75,000+ 60,000 + 50,000 + 20000= 205000 USD
2. ETC= EAC-AC
This is one of the most straightforward formulas to use when calculating the estimate to complete. It dictates that you should calculate the estimate at completion and then subtract the actual cost from it. Here is a breakdown of what we mean:
ETC= Estimate a Completion- AC. You can use any of the means that we provided when tackling estimates at completion. Here is an example to help you master what we are talking about:
Example 2: Using ETC= EAC-AC
You are contracted to undertake a one-year project whose budget at completion is USD 500,000. However, you realize that you have used $300,000 after six months but completed only 40% of the work. Here is a clear breakdown:
Budget at Completion= 500,000 USD
Actual Cost= 300,000 USD
Planned value= 50% of 500,000 USD= 250000 USD.
Earned Value= 40% of 500,000 USD= 200,000 USD.
Here is how you determine the EAC based on these figures:
To calculate the cost performance index, divide the earned value with the actual cost. This will be 200,000/250000= 0.8. Finding the estimate at completion is easier now that you have the Cost Performance Index. Using the formula EAC=BAC/CPI, the estimate at completion will be 500,000/0.8= USD 600,000.
The estimate to complete will be the estimate at completion minus the actual cost.
This is USD 600,000- 300,000, which is USD 300,000.
As we wind up on the estimate to complete, we wish to recap that this is the expected cost of completing the remainder of the project. It comes in handy when the initial estimate cannot be relied on in light of events that may have messed up the project cost.
Therefore, it is a helpful tool when you experience a deviation in the cost baseline and would like to communicate to the stakeholders to get your new budget approved or request extra funding. Remember, stakeholders find it hard to revise budgets; you have to come up with a way of convincing them.
Differences Between Estimate at Completion and Estimate to Complete
The main difference between these two forecasting tools is that the estimate at completion projects the total cost to be incurred by the end of the project, whereas the estimate to complete forecasts the cost required to finish the remaining work at different points of the project.
At the beginning of the project, the Estimate at completion equals the estimate to complete. However, as the project progresses, the estimate to complete reduces and falls to 0 at the end of the project.
You should have a grasp of both the estimate at completion and the estimate to complete. Even though the project budget is generally defined in several projects, the actual progress may reveal deviations from the pre-determined budget at completion. These concepts, therefore, help in forecasting out the total anticipated funding required in the project, which is essential as the project progresses.
It is worth noting that the project manager plays a vital role in coming up with these two estimates. He/she comes up with the anticipated costs by relying on the current project state, including the budget and schedule overruns. They also use their years of experience to better their projections.
As we conclude, remember to master all the terms and calculations that we have covered in our article, as these will come in handy when tackling most of the questions in the PMP exams related to these two concepts.