Finance – Budget at completion

Budget at completion

Budget at completion (BAC): Everything you need to know

What is budget at completion?

Budget at completion or BAC is the total anticipated and budgeted spend for a project or specific phase of works, or in simple terms, the estimated cost of the project before the project begins.

When a project manager or company forecasts and plans a project, they will break this project down into individual items or activities into costs. Add all of these costs together, and you get your project budget at completion.

BAC is used in project management and as part of earned value management to compare the original forecast with continued project performance on a schedule and cost basis throughout a project.

The other main way that budget at completion is used is to compare the BAC with the actual pre-determined budget which was set at the proposal, quote or tender stage (if this BAC is not calculated accurately before this stage).

Used in this way, a project manager, company or management can weigh the budget at completion against what was budgeted initially to see if anything needs to be cut, looked into or even added.

Budget at completion formula

There is no real budget at completion formula. BAC simply equals the budgeted cost of a project.

Budget at completion formula

The 'formula' behind deriving the budget at completion is different for every company, but there are typically a few different and relied upon approaches:

  • Parametric estimating - Calculating BAC in this way involves calculating the combined unit rates of all of the activities involved with delivering a project. These unit rates or 'averages' can be pulled from industry averages, or the averages companies have recorded and analysed over time. These averages can also be adjusted based on specifics for a certain project to make it even more accurate.
  • Analogous estimating - Much like an 'analogy', this type of BAC formula involves estimating costs based on similar projects. If there are tangible differences between the projects, this should of course be accounted for in order to make BAC as accurate as possible.
  • Expert analysis and judgement - Just as it sounds, this type of budget at completion calculation involves finding an expert to produce an estimate on the cost of a project.

Budget at completion is a powerful measure in project management, and is relied upon as a source of information and comparison through the life of a project. For this reason, whatever method you use as your BAC formula needs to be accurate, consistent and repeatable across all of the possible projects you accept and partake in.

Budget at completion calculation

As we saw from the above, the budget at completion formula is a simple one, but the calculation can of course be complicated.

The level of detail and sophistication of the BAC calculation will differ from company to company and project to project based on a number of factors, but the end goal is always to forecast the budget at completion more and more accurately so that the company can better predict costs, generate revenue and make a profit.

Budget at completion example

As a super simple example of what a budget at completion calculation might look like, let's consider a simple housing construction project which has multiple phases:

  • Demolition - $20,000
  • Building walls - $60,000
  • Rendering walls - $25,000
  • Installing flooring - $40,000
  • Painting walls - $8,000

The budget at completion for this project would be calculated out to $153,000.

This final BAC could then be used to better inform resource allocation, and gauge project performance throughout the life of the project.

You can see how BAC is used in association with the earned value formula to understand how a project is tracking from a cost and schedule basis here.

Budget at completion vs variance at completion

There are many project management measures and metrics which project-based companies need to be aware of. Much like many of the other measurements, budget at completion has a close and important relative: variance at completion.

When considering budget at completion vs variance at completion (VAC), a good shortcut is to remember that BAC is determined at the start of a project while variance at completion is calculated during a project.

We have already looked into the formula and calculations behind BAC above. In contrast to these, VAC does have a formula, and it involves another project management measure: estimate at completion. EAC is essentially the revised forecast or estimate of the budget at completion once the project and work has begun (read more about EAC here).

Variance at completion = budget at completion - estimate at completion

A negative VAC is a red (or yellow) flag and indicates that a project will not be finished under budget and that there is a likely variance over the budget, while a positive VAC shows that the budget at completion is a larger number than the new estimate - which indicates the project is on schedule to finish under budget - and that new components or resources may be able to be added to increase the scope or quality of work, or finish it even quicker (if other parties permit).

Budget at completion is one of the most important project, financial and production metrics a project-based company will calculate and use. getting your BAC right is the first step to a feasible project and profitable business. The rest comes down to project execution.

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About Lance Hodgson

Lance is the Head of Marketing & Growth at Sitemate. His aim is to bring awareness to a brighter future for the heavy industries where people and companies work smarter.

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