Cost-to-Complete and EAC: How to Forecast Where a Job Will Land

The one formula everything hangs on

Estimate at Completion, or EAC, is what you believe a cost code or a whole job will cost when it is finished. The formula never changes:

EAC = Actual Cost to Date + Estimate to Complete (ETC).

Actual cost is a fact you can look up. The entire forecast lives in the ETC — your estimate of the cost remaining. Get the ETC right and your EAC is right. The arguments about forecasting are really arguments about how to build the ETC.

Method 1: simple percent complete (the trap)

The easiest ETC method assumes the rest of the job will cost the same per unit as the budget said it would. If a code is 50 percent complete, you simply assume the remaining 50 percent costs half the budget, and EAC equals the budget.

This is fast and it is what spreadsheets default to. It is also wrong whenever the crew is running off the budgeted rate — which is most of the time. Straight-lining the budget quietly assumes the future will be better than the present has been, even when the present is telling you it will not. It is the single most common reason a fade does not show up until closeout.

Method 2: productivity-based forecast (the honest one)

A productivity-based forecast assumes your remaining work will cost what the work so far has actually cost per unit, not what you hoped it would. You take your real performance to date and project it forward.

The cleanest version uses the performance factor: divide budgeted hours earned by actual hours spent. If you budgeted 1,000 hours to install what you have installed, but it took 1,250 hours, your performance factor is 0.80 — you are running at 80 percent of planned productivity. Assume the rest of the work runs at that same factor and you get an honest ETC.

• •Earned hours = percent complete times budgeted hours for the code.
• •Performance factor = earned hours divided by actual hours.
• •Remaining budgeted hours = budgeted hours minus earned hours.
• •ETC hours = remaining budgeted hours divided by the performance factor.
• •EAC hours = actual hours to date plus ETC hours, then multiply by your burdened labor rate for dollars.

A worked example, both ways

Take a labor code budgeted at 2,000 hours. The work is 50 percent complete, and you have burned 1,250 actual hours.

Straight-line method: 50 percent complete means EAC equals budget, so you forecast 2,000 hours and report no problem. This ignores that you already used 1,250 hours to earn only 1,000.

Productivity method: earned hours are 50 percent of 2,000, or 1,000. Performance factor is 1,000 earned divided by 1,250 actual, or 0.80. Remaining budgeted hours are 1,000. ETC is 1,000 divided by 0.80, or 1,250 hours. EAC is 1,250 actual plus 1,250 ETC, or 2,500 hours.

The two methods disagree by 500 hours — a 25 percent overrun the straight-line view completely hid. At a 60-dollar burdened rate that is a 30,000 dollar fade you would have discovered at closeout instead of at the halfway point. The productivity number is not pessimistic; it is just refusing to assume the crew suddenly gets faster.

When straight-line is acceptable, and when it is not

Tracking earned versus actual hours by hand across dozens of codes is where this discipline usually dies. Field PM ties field hours from the time clock and daily reports to budgeted units, computes the performance factor per code, and rolls a productivity-based EAC into the PM dashboard so the forecast updates as the crew works instead of once a month.

• •Straight-line is fine for codes that have not started or are barely underway, where you have no real performance data yet.
• •Straight-line is fine for fixed-price subcontracts, where the cost is the contract value regardless of the sub's productivity.
• •Use productivity-based forecasting on every active self-perform code with meaningful hours booked — that is where your money is won or lost.
• •Never blend a productivity overrun back to budget late in a job by claiming the crew will catch up. Catch-up almost never happens; honest forecasts beat hopeful ones.