TOPIC: Need One important clarification on EAC

Hi guys,

While working on the wonderful math problems of the 105_Questions_for_the_PMP_Formula_Study_Guide5 one question came into my mind .I would like to pick your brain on the following scenarios.

I am calculating EAC for the following scenarios:

Scenario 1:Question states that the "only" constraint of the project is to meet budget.

should we use the following formula

EAC= AC +((BAC-EV)/CPI)?

OR

EAC= AC +((BAC-EV)/CPI*SPI))?

Scenario 2:Question states that the "only" constraint of the project is to meet schedule deadline.

EAC= AC +((BAC-EV)/SPI)?

OR

EAC= AC +((BAC-EV)/CPI*SPI))?


Scenario 3:Question states that the "primary" constraint of the project is to meet schedule deadline.


EAC= AC +((BAC-EV)/SPI)?

OR

EAC= AC +((BAC-EV)/CPI*SPI))?

Scenario 4:Question states that the primary constraint of the project is to meet budget.

EAC= AC +((BAC-EV)/CPI)?

OR

EAC= AC +((BAC-EV)/CPI*SPI))?


My understanding is

Scenario 1: EAC= AC +((BAC-EV)/CPI)? Reason : "only"

Scenario 2: EAC= AC +((BAC-EV)/SPI)? Reason : "only"

Scenario 3: EAC= AC +((BAC-EV)/CPI*SPI)? Reason : "primary" keyword is not same as only

Scenario 4: EAC= AC +((BAC-EV)/CPI*SPI)? Reason : "primary" keyword is not same as only



Your Honest inputs and explanation is much appreciated.

Thank you so much

HI Abhirup,

Your logic on most of the scenarios looks good, but I have to disagree on your answer for Scenario 2. Keep in mind that EAC is an estimate of how much money the project will have consumed at completion. SPI is a measurement the rate at which you are completing the project with respect to your baseline. SPI does not explicitly translate into whether you will be over budget or under budget.

If CPI is 0.80, you are only gettting $0.80 worth of value (EV) out of every dollar that you spend on the project.
And if SPI is 0.80, you are completing work at 80% of the planned rate. You might be on budget or even under budget -- you would need to look at other measurements to know.

So I find that I have to disagree with stating the formula as "EAC = AC + (BAC-EV)/SPI", since it neglects to consider cost performance in general. Did you find this form of the equation documented somewhere?

Even if schedule is the "only" factor that leadership cares about, estimating the cost requires that you include consideration of the CPI. So for scenario 2, I would use the form "EAC = AC + (BAC-EV)/(CPI*SPI)". This is the form that you need to use when you are trying to hit a target schedule. If schedule doesn't matter, you can drop SPI from the equation and only inlcude CPI.


Regards,
Steve

Even if schedule is the "only" factor that leadership cares about, estimating the cost requires that you include consideration of the CPI. So for scenario 2, I would use the form "EAC = AC + (BAC-EV)/(CPI*SPI)". This is the form that you need to use when you are trying to hit a target schedule. If schedule doesn't matter, you can drop SPI from the equation and only inlcude CPI.

Very very nice. Thank you so much. Great satisfying burger for my brain. Really appreciate it.

I now understand, "Even if schedule is the "only" factor that leadership cares about, estimating the cost requires that you include consideration of the CPI".

Response for Scenario 1:
Well, if the question states that the project “MUST” meet the budget, then we shouldn’t be talking about the EAC in the first place. EAC comes into play when we think that we are not going to hit the budget and we need an estimate of the final costs. So I would say such a question would be ambiguous. If meeting the budget is the requirement, we should be considering TCPI as the project’s most important KPI.

We must learn two basic concepts of EAC here: First, we only talk about EAC when we have a feeling that we are not going to hit the budget. Second, we must always remember the EAC “base” formula:

EAC = AC (cost history) + ETC (future costs forecast)

AC is history, you can’t change it, it’s done! ETC is an estimate to complete the rest of the project. Now the question is, how to calculate the ETC? The selection of the formula depends on the situation of the project:

a) If we know things have slipped away in the past (we have spent more than budgeted) but now we are confident that we can meet the budget for the remaining of the activities, we will use the following formula: ETC = BAC – EV; hence EAC = AC + (BAC - EV)

b) If we know that things have slipped away in the past and the slippage is likely to continue at the current cost performance rate, we will use the formula:
EAC = BAC / CPI
Or
EAC = AC + [(BAC – EV)/CPI] …. This formula is not given in PMBOK but it is correct and both formulas will give the exact same results. It can also be proven that one can be derived from the other.

c) If we think project is behind schedule and we need more time to complete the project and due to this delay it will further increase the costs and the CPI is not the only influencing factor, then we use the following formula: EAC = AC + [(BAC-EV) / (CPI * SPI)] …. (This formula is rarely used)


d) Lastly, if we know that our initial estimates were all wrong and there is no way we can predict the final costs based on current performance and budget, we need to work up ETC again from scratch using the bottom up approach.



Response for Scenario 2:
Please don’t be confused that using either CPI or SPI in the EAC calculations helps you achieve any deadline. As I have said earlier, you calculate EAC when you know you are not going to hit the budget and want a new estimate. CPI is brought into the equation when you think that the future costs will be influence by the current performance rate. Similarly SPI will be brought in when you think that the delayed activities will cost you even more since they will now start later and the costs by that time will go up further.

Further, EAC= AC +((BAC-EV)/SPI) is not a valid formula

Response for Scenario 3:
EAC= AC +((BAC-EV)/SPI) is not a valid formula.

Scenario 4:
I covered that in the first explanation.


Final Feedback:
Your following understanding is incorrect!
Reason: The basic concept is not clear to you.

Scenario 1: EAC= AC +((BAC-EV)/CPI)? Reason : "only"

Scenario 2: EAC= AC +((BAC-EV)/SPI)? Reason : "only"

Scenario 3: EAC= AC +((BAC-EV)/CPI*SPI)? Reason : "primary" keyword is not same as only

Scenario 4: EAC= AC +((BAC-EV)/CPI*SPI)? Reason : "primary" keyword is not same as only

Please let us know if our explanations above have helped you overcome your confusion.