Quantifying evapotranspiration and drainage losses is essential for improving irrigation efficiency. The FAO-56 is the most popular method for computing crop evapotranspiration. There is, however, a need for locally derived crop coefficients (K-c) with a high temporal resolution to reduce errors in the water balance. The aim of this paper is to introduce a dynamic K-c approach, based on Leaf Area Index (LAI) observations, for improving water balance computations. Soil moisture and meteorological data were collected in a terraced nectarine (Prunus persica var. nucipersica) orchard in Cyprus, from 22 March 2019 to 18 November 2021. The K-c was derived as a function of the canopy cover fraction (c), from biweekly in situ LAI measurements. The use of a dynamic K-c resulted in K-c estimates with a bias of 17 mm and a mean absolute error of 0.8 mm. Evapotranspiration (ET) ranged from 41% of the rainfall (P) and irrigation (I) in the wet year (2019) to 57% of P + I in the dry year (2021). Drainage losses from irrigation (DR_I) were 44% of the total irrigation. The irrigation efficiency in the nectarine field could be improved by reducing irrigation amounts and increasing the irrigation frequency. Future studies should focus on improving the dynamic K-c approach by linking LAI field observations with remote sensing observations and by adding ground cover observations.