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You probably noticed that costs change all the time during a project. Knowing the cost of the tasks remaining in your project is important because it helps you to keep tabs on its profitability.
If you’re in charge of controlling a project, you need to know two things:
- How much work has been performed vs. work planned
- How the actual cost of the project develops vs. its set budget
To estimate all of that correctly, you need a solid cost estimation method. And this is where Estimate to Complete or Estimated (ETC) comes in.
Keep on reading to learn all the key essentials of Estimate to Complete and keep your project costs in check.
What is Estimate to Complete (ETC) in project management?
The Estimate To Complete (usually abbreviated ETC) is the financial performance index and project management measure that shows you the remaining cost you expect to pay in order to complete a project. Together with schedule variance, it can show you the progress of your project.
Note that ETC isn’t the final overall expected project budget - this is called Estimate at Completion (EAC).
Instead, Estimate to Complete refers to the costs from the present moment until the end of the project; it never includes the project expenditures and actual cost prior to that moment. Therefore, it can change as project progresses.
Why is the Estimate to Complete ETC so helpful?
ETC is a key cost performance index for every project manager. Together with Estimated Time to Completion it gives you an opportunity to inspect project progress in terms of time and budget.
Estimate to Complete allows project managers to compare the funding needs for the remaining project scope. You can calculate the ETC for individual tasks as well as the entire project. However, you cannot use this complete performance index to evaluate project's past performance!
Estimate to Complete is also a vital part of project management, as it is one of four calculations that comprise the Earned Value Management that allows managers to establish the actual cost of work.
This framework allows forecasting your project’s future performance using the cost performance index such as:
- Estimate to Complete (ETC)
- Estimate at Completion (EAC)
- Variance at Completion (VAC)
- To Complete Performance Index (TCPI)
What is EAC and why do you need ETC to calculate it?
The project’s progress often deviates from its set budget at completion (BAC). As a result, project budget may be different from what you may expect - and you mayt learn that way too late.
When performing resource forecasting for project management, predicting the project cost and creating the initial budget, you can use two estimates that sound very similar but are, in fact, completely different: Estimate to Complete (ETC) and Estimate at Completion (EAC).
Estimate at Completion (EAC) - definition
Estimate at completion (EAC) refers to the expected cost of the project as it progresses. You can determine the EAC in a number of ways.
The most common method of determining Estimate at Completion is the bottom up cost estimation. This is where you take the actual costs (AC) of your project and add them to the expected cost (the Estimate to Complete).
Estimate at Completion - formula
Here’s the formula:
EAC = actual costs (AC) + Estimate to Complete (ETC)
As you can see, the Estimate to Complete (ETC) is about forecasting the estimated costs of a project. It doesn’t take into account the actual costs (AC) the project incurred so far. You can’t calculate your project’s Estimate at Completion (EAC) without the ETC.
How do you calculate Estimate to Complete (ETC)?
You’re probably wondering what to consider in project management when calculating ETC. To do it correctly, it’s not enough to know the formula - you should know what costs should be taken into account so that your estimates are as accurate as possible.
Main types of costs for new estimate
- The cost of work of our employees and contractors based on the estimated number of hours/FTE (learn more about capacity planning in project management)
- Project overheads you plan to include (in line with your project planning process)
- Company overheads that the project should cover - here's a guide on how to include overhead price in the billable hours, if you have any doubts.
Now you know which costs are essential to calculating ETC. However, you still need to take care of one more task before starting your calculation.
Types of estimate at completion
Depending on which stage your project is at and how detailed you want your estimation to be, you can carry it out based on:
- High-level estimation and WBS (Work Breakdown Structure) of the project - recommended in particular:
- ~when you want to track ETC at the level of specific project phases to see the remaining project work, or
- ~when the project is already in progress and the client entrusts you with a specific scope of work, e.g., on a monthly basis (Agile), or
- ~you don’t know who will work on this project yet, but you know how much time you need to deliver the project or its phase.
- Long-term allocations of people to a project or project phase (more detailed) - recommended in particular:
- ~when you know who exactly will work on the project and are able to determine the time and financial commitment.
At best, you should calculate ETC on both these levels.
Start with high-level estimations, then allocate specific people to the project - making sure that these allocations are close to your high-level estimates.
With this information, you can easily track the ETC in your project at any time.
At this point, calculating the ETC is easy. Let's look at the example below.
Calculating ETC - example
Your team has been working on a mobile app for three months. The entire project duration is five months, so you have two more months to go.
The original budget (BAC) of your project was $100,000. By now, your team has completed 40% of the work - the remaining work counts for 60% of the project. Your actual costs to date amount to $50,000. How much more money is needed to complete the project?
To calculate your Estimate to Complete, use the following formula:
ETC = BAC – AC
ETC = $100,000 - $50,000
This brings us to ETC = $50,000
This ETC formula shows you how much you will spend from this point forward until the project ends.
If you'd like to try your hand at calculating ETC on your own - here's a handy calculator you can download and run all your numbers:
What is the formula for budget at completion?
The Budget at Completion (BAC) refers to the original budget of your project.
For example, if your web development project has a budget of $75,000, your BAC = $75,000.
How does the Budget at Completion (BAC) differ from the Estimate at Completion (EAC)?
The EAC represents the forecasted final project account at a given point of the cost analysis - usually, the present moment. It’s based on your assumptions of future project performance.
How to analyze ETC in IT outsourcing projects? Real-life examples
Ok, you’ve reached the point where you know what the individual indicators are. Now it's time to test them in battle.
I have prepared a few examples for you - we will try to analyze them together.
The examples below are based on the project implementation status report generated in Primetric. If you’d like to test them on your own data, just request access to the platform.
Use-case #1: We burn through the estimated budget too fast
In the chart above, you can quickly see that in the Draft (T&M) project, we estimated $100,000 costs and generated $60,000 in revenue. The project is 25% complete.
EAC = $100,000
AC = $60,000
ETC = $100,000 - $60,000 = $40,000
ETC [%] = 40%
From this example, we see that we’re currently burning the funds at a much faster pace than we assumed. The average difference is 25% - 40% = -15%.
Use-case #2: We burn through the estimated budget too slowly (useful in T&M projects)
This is a similar scenario to the one we analyzed in use case #1 - just the other way around. We have completed 90% of the project but used only 60% of its set funds.
EAC = $100,000
AC = $60,000
ETC = $100,000 - $60,000 = $40,000
ETC [%] = 40%
From this example, we see that we’re currently burning the funds at a much lower pace than we assumed. The average difference is 90% - 40% = 50%.
Use-case #3: Plans vs. estimates vs. actual state don’t match
This example is slightly more complicated. As you can see, Sprint 3 was first estimated (the Estimated column) and then specific people were assigned to it (the Scheduled column).
As a result, we have both high-level estimates and estimates based on particular allocations of people.
The EAC for the estimate is: $72,000
The EAC for the allocation is: $47,081.25
AC = $2,241.96
First, we need to understand if the allocations for Sprint 3 have already been completed or not. If not, the EAC for estimation should be the maximum work for Sprint 3, and the EAC for allocation should be a reference point in relation to the currently burned budget.
To do this, you can compare the estimated time for Sprint 3 with the allocated time. In this case, we have 600 hours of estimation and 493.5 hours planned among the team.
Based on this, we can conclude that we have not yet allocated the total project - so this is the first case.
Phase completion status is 10%
ETC for allocation = 47,081.25 - 2,241.96 = $44,839.29
ETC [%] = 4.7%
ETC for estimation = 72,000 - 2,241.96 = $69,758.04
ETC [%] = 3.1%
As you can see, in this case, the account is burned through at a slower pace than project implementation.
Taking into account also the amount of logged working time in relation to the planned one, we can conclude that the project is going slower than assumed, and we should accelerate the work.
Use-case #4: Forecast of a burned-through budget without even one hour of work completed
EAC allocations = $41,359.98
EAC estimates = $30,000
You can also see that the number of delayed hours is 461h when estimates were made for 300h.
You should check why and update the estimates or allocations.
Bonus Tip: Dependencies between rough estimations and actual allocations
If Estimates < Allocations in a past or ongoing project, it means that we estimated the project at the beginning incorrectly and overestimated that we’d be able to deliver the project on such an hourly basis.
If Estimations > Allocations in a past project, it means that we were more pessimistic than initially, and the project was delivered with less involvement of our resources.
Why? Because we most often create estimates at the customer valuation level, and we take into account the entire scope of work for the project/phase.
In the case of allocation, we’re looking at already planned specific work per person in the project/phase - it’s a component of the estimation.
Wrap up
How often did your project diverge from its set budget while it was still in progress? That can happen a lot when you’re building software.
That’s why calculating the ETC and other values multiple times during the project is so important. It helps you instantly pinpoint the moment when your project is running off its course and take action to keep it profitable.
But as you can see, doing that manually is time-consuming and error-prone. After all, you need to keep your data updated and make sure that it’s accurate.
With a solution like Primetric, you can calculate the ETC, EAC, and other key values in real time, anytime you need to.
Don’t risk making decisions based on inaccurate data - book a demo to see how Primetric can help you increase your project’s profitability.
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