HomeBlogProject ManagementWhat is Budget at Completion (BAC)? Formula, Calculation, Example
The pre-work or project selection process is tedious and demands an all-around check of various factors to take up a project and plan for benefits from the project. One of the earned value management techniques that often comes in to help project management function during planning is determining the budget at completion, which is the sum of all the projected costs of undertaking all the planned project activities. In today’s article, let me take you through this important earned value management technique to demonstrate its usage, application, calculation, and how an essential concept like this can appear on the PMP examination. We will also try to closely examine the benefits this technique brings in the project management space, why it is crucial, and the various factors that determine its determination in the project.
Let us first see what does BAC stands for - BAC or Budget at completion, which is synonymous with budget at completion, refers to the total planned cost of the project. It is an important metric from the project cost management earned value management technique, which compares the estimates or planned costs against the actual project costs. It is built as a roll-up of all individual project cost components to determine the final budgeted after project cost i.e., the total project cost. As per the PMBOK definition, BAC is “the sum of all budgets established for the work to be performed.” Undergo the PMP self-paced training to understand the budget at completion in project management, concepts of earned value management, and more from KnowledgeHut’s proven training methodology.
Now that we are clear on what BAC is? Let us understand its importance and usage in project management. The budget at completion is the total estimate for completing all the project tasks and activities. It is essentially the project budget and helps build the yardstick against which project managers measure the performance of the project progress. It helps get an idea of the planned value of the completed project work and use it in comparison. If the actual project cost is more than the budget at completion calculation, i.e., the planned value of the project, the project is considered to be over budget, putting it in the red zone of project management (as the project baselines are impacted); otherwise, it remains under budget allowing business as usual to continue. BAC project management provides an early warning system and benchmark to the project stakeholders. It helps handle situations that may otherwise have a pessimistic effect on project deliverables, objectives, and/or resources.
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The BAC calculation project management involves collating information on completed project activities and adding the estimates for the remaining activities along with the project and organizational reserves. There is no straightforward formula to calculate the BAC. However, BAC itself is a part of various earned value formulas, which include - estimate at completion or EAC, planned value or PV, and variance at completion or VAC. The budget at completion formula is generally cited as the total of all project components and the project reserves, including the contingency and management reserves.
Bac pmp formula = Cost of individual project components + Project reserves
Or
BAC = Total project budget
It is important to note that BAC is always represented only by monetary value.
Budget at completion is a project cost management technique that is applied to determine the total projected cost of the project upon completion of all planned activities. It acts as a barometer to gauge the current cost against the level of completion and see how much the project cost will be on completion of the remaining work that has to be done. This is where it comes in super handy to project managers. Several methods utilize various cost estimation tools for project managers to determine the total planned cost for the project or the project budgeted at completion cost.
As we have seen above, there is no straightforward formula for calculating the budget at completion to define the bac project management definition as it is quite situational and based on the techniques applied. Let us now glimpse some of the methods used to derive BAC, which is more refined and accurate than ROM estimates, i.e., rough order of magnitude estimates, which are high-level or ballpark figures and do not represent BAC.
Analogous estimation is apt for simple projects or estimates to be given at the beginning of the project. It uses estimations made for similar past projects to compare with the current project and provide the best or most educated guess to determine what the budget is at completion for the project. This estimation method relies on lessons learned from past projects and offers quick results, though they may not be accurate or completely reliable. Since project conditions may be different, the estimates deduced from analogous methods have a more significant variation and can have a variance range of -25% to 75%. Due to this, it is used as a measure to look up project budgets without much wait time. It is often used when performing cost-benefit analysis and feasibility analysis for projects.
2. Expert judgment
Expert judgment is a technique where subject matter experts (SMEs) calculate and help determine the budget at completion based on their experience, expertise, brainstorming, etc. The SMEs, who may include any consulting teams/team members, third-party vendors, internal team members, etc., may employ any technique or method to reach the estimates and help project managers list down the project budget; this method is anyways considered to be more reliable over analogous estimation as there is a weightage on the expert inputs/analysis that helps reduce variations.
3. Parametric estimation
Parametric estimation relies on historical data or industry averages but has a more quantitative approach to project estimations. It collates data from past projects and applies it to current data being used in the project to derive a more factored and current estimate. It gives a statistical edge along with past project data to make it more accurate and better than the analogous estimation method.
Let us now review our understanding of the BAC calculations with a few budget-at-completion examples:
Scenario-1
As an in-charge of the software development project, you have a project budget of $300,000 and a projected timeline of 24 months. The current status is that the project is 25% complete and is on schedule; however, it is over budget by $30,000. What is the budget at completion in this case?
Answer: The BAC is the project budget, which is $ 300,000.
Scenario 2
You decide to renovate your house and get the below quote from the contractor:
What is the BAC for this home renovation project?
Answer: The BAC here is the sum of all individual project components i.e., $85,500
Let us look at some fundamental differences between the 2 earned value management concepts of budget at completion and variance at completion:
Budget at completion (BAC) | Variance at completion (VAC) |
Gives the estimate of the total planned cost for the project. | Gives the difference between the planned and actual cost. |
Determined at the start of the project | Calculated during the project execution |
Helps project managers track costs. | Helps project managers control costs. |
BAC is determined using estimation methods | VAC is determined based on BAC & EAC (Estimate at Completion) |
Helps in budget and cost analysis | Helps in variance analysis |
There is no formula defined as the bac in the project management formula | VAC is calculated based on the difference between BAC and EAC |
Is a part of data collection metrics in the project | Is a part of the project performance forecasting metrics in the project |
To understand the BAC area of study for the PMP exam, it is essential to first understand a few points concerning the concept:
Budgeted at completion, or BAC, is a vital forecasting measure for PMP on which many PMP exam formulas are based. It helps calculate Estimate at Completion or EAC, To Complete Performance Index or TCPI, Variance at Completion or VAC, and finally, the Earned Value Management or EVM concepts of project management. From the exam's perspective, it is essential not only to comprehend these formulas but also to remember the basis of calculations and how they are applied in actual project management scenarios. KnowledgeHut’s best PMP training teaches you beyond just formulas by using real-world scenarios and tricky project management situations - learn from the experts today and ace your exam-plus career.
Calculating the BAC or Budget at Completion helps the project manager know the total cost or money required to complete the project activities. It is one of the most important projects, financial and production metrics that help enable a predictable delivery model and a financially viable project. BAC gives the total project budget, determined during the project commencement in the planning phase. It does not undergo any changes as it serves as a critical baseline for the project. There are various methods to determine the BAC, such as analogous or parametric estimation or analysis and judgment from experts in the field. Project BAC also helps in the pre-project stages with the cost-benefit analysis and trade-offs in project selection methods. In terms of the PMP exam, rather than understanding the BAC concept in a silo, it is paramount to understand the earned value methods and how various formulas involved help in data collection, project status reporting, and performance tracking.
No, the Budget at completion, or BAC, serves as an essential cost baseline for the project and does not change unless there is a significant change in the project scope or direction. It is calculated at the project commencement and used to track and analyze project performance throughout the project lifecycle.
The factors that influence the budget at completion are the very factors that help determine or arrive at its calculation - the estimates that come from analogous or parametric methods of estimates, as well as expert analysis and judgment. Apart from this, BAC and project budgets are also influenced by the organization’s governance model, cost center, organization division, and many more factors.
The BAC calculations are a part of the earned value method in project management, which involves 3 different types of metrics - data collection metrics such as Planned Value (PV), Earned Value (EV), Budget at Completion (BAC), project status reporting metrics such as the Schedule Variance (SV), Cost Variance (CV), Schedule Performance Index (SPI), and Cost Performance Index (CPI); project performance forecast metrics such as the Variance at Completion (VAC), Estimate at Completion (EAC), and To Complete Performance Index (TCPI).
Though the answer to this question can be subjective based on the organization's governance model, BAC must be reassessed or reviewed (without any changes to the baselines, of course) frequently to compare it with actual performance and track any variances.
The effectiveness of a project budget depends on the inclusion of all individual budget categories, which are defined and determined by the project budget management. BAC aggregates all individual budget components, and a robust project budgeting process will only help fortify the BAC calculations.
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