How to Create Quality Estimates at Completion (EACs) for Project Improvement

By David Moore, Director, Business Services, PrimePM

Why is a credible project estimate at completion (EAC) important to both project managers and business managers? It’s about the company’s bottom line. The EAC provides an indication of whether the company is going to make a profit or take a loss on a project. Should the most likely EAC exceed contract limits, there may also be implications. Depending on the contract type, the company may be responsible for an overrun or a percentage of the overrun.

Maintaining useful EACs is one of the process areas where contractors frequently have difficulties. When the Defense Contract Management Agency (DCMA) compiled their compliance review results for the government fiscal year 2017, the EIA-748 EVMS Standard Guideline 27, Maintain Estimates at Completion, accounted for 25% of their noncompliance findings.

Understanding EAC, EVM and ETC

With the right process in place and earn value management (EVM) cost toolsets, like Deltek’s Cobra, to assist with the process, maintaining the underlying estimates to complete (ETC) doesn’t have to be hard or complicated. The benefit? Increased schedule, cost, risk/opportunity, and resource visibility so project personnel can be proactive in managing the remaining work. This helps control account managers (CAMs) communicate their control account EAC to the project manager. Their EAC forecasts are supported with current data and are traceable from the work package level with the time phased resource details for the remaining work. Timely, reliable and fact-based estimates enhance the project manager’s ability to respond appropriately to project issues and to more accurately forecast the project’s best case, most likely, and worst case EACs required for formal government performance reports.

In the previous blog Finding the “Just Right” Actual Cost Level of Detail for EVM, I discussed how the level of actual cost data directly impacts the data available for performance analysis and maintaining the ETC. As a reminder, the EAC is calculated by adding the ETC to the actual costs incurred to date. A best practice is to maintain the ETCs at the activity or work package level where resources are identified. It is at the same level as the budget and earned value data regardless of whether the actual cost data is at the work package or control account level. Why is this important? Assuming the baseline schedule resource loaded activities were used to produce the time phased budget baseline, the current schedule status is the basis for claiming earned value and maintaining the ETC.

What are the benefits? The ETC always reflects the real-time progress, realized risks and current plan to complete the remaining work. When CAMs actively maintain their budget and ETC data every month, it becomes much easier to provide realistic, bottom-up data the project manager can use for their project level EAC forecasts.

With Deltek Cobra, it is easy for the CAMs to generate their ETC data from the start. When the budget baseline is set at the beginning of the project, they simply copy their budget data, and a cost class in Cobra to a forecast cost class. As work progresses, the CAM maintains this forecast cost class to reflect project performance, risk handling and other factors impacting the remaining work. They can create additional forecast cost classes to do a what-if analysis. This analysis can be used as the basis for producing baseline change requests. They have the backup data they need in Cobra to substantiate baseline changes and their current ETC.

Tips for Producing Credible EACs

• Avoid using “gate month” actual costs to control the EAC calculation because it calls into question the validity of the EAC. Use the actual costs for each reporting period to generate the work package or control account EACs. The EAC for work-in-progress work packages and control accounts will change every month. This is to be expected. However, you want to watch for any EACs that change significantly from month to month. You may want to identify thresholds that help you define what is considered to be “significant.”
• Do not game the ETCs. The Integrated Program Management Report (IPMR) Data Item Description (DID) requires contractors to provide time phased ETC data as one of the electronic deliverables. It quickly becomes obvious there is a data credibility issue when the customer finds negative ETC numbers in future periods to control the EAC result in the IPMR Format 1.
• Perform data quality checks as part of your routine monthly status and analysis cycle. Use a data quality checklist to identify and resolve common errors, such as earned value and no actual costs, actual costs and no earned value, or the cumulative to-date actual costs being greater than the EAC.
• Use statistical EAC calculations to independently assess the control account and project level EACs. This can be useful to confirm assumptions or identify specific work elements that need attention. Is a CAM being too optimistic? Do you need to change how you intend to accomplish future work effort? Reconciling the project manager’s top-down assessment with the CAM’s bottom-up assessment helps to ensure the project’s EAC is credible and management has confidence in the data for financial reporting.

Make the effort to actively maintain your ETC data. Leverage tools such as Deltek Cobra to support your monthly status and analysis cycle so it is easy for CAMs to review the control account work status and update their estimate to complete the remaining work. That way, you have confidence in the underlying data to produce useful EACs for the project manager and corporate management. And, you won’t be one of the DCMA noncompliance statistics for Guideline 27.