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Variance Analysis

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About this lesson

Variance occurs when the actual situation is different from the planned or expected situation. In projects, variance analysis applies to schedule variance and cost variance. It determines both why the actual situation is different than what was planned and the impact that will have on the project.

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Variance Analysis

When to use

Variance analysis is a technique that is used as part of project control. Once a project baseline is established during project planning, the actual project performance can be compared to that baseline at any point in time in the project. If there is a difference, it is a variance and variance analysis should be done.

Instructions

Using variance analysis, deviations from the baseline are analyzed to determine if they were a “one-time” occurrence or an ongoing trend that is likely to continue. You can then determine if they will impact the project’s overall goals and objectives. Variance analysis often leads to corrective actions to reverse unwanted variances. A variance analysis should always be done prior to developing a project forecast.

Projects hardly ever go exactly according to plan (at least I have never had one that went exactly to plan). Some things go better than expected, some go worse. Some start early, some late, and some are just different. Variance analysis helps the project team understand why things are different than expected, and more importantly, what they should do about it, if anything.

Types of variance

Current period variance: this is variance in the time period of the report, typically monthly. It can be strongly impacted by tasks that are ahead or behind schedule, and therefore drop out or come into the period.
Trend variance: this is normally a cumulative look at a type of activity from the beginning of the project or phase. This will help to cancel out variances that are due to minor schedule changes, but it can also mask important variances until they become very large.
Earned value variance: this is a set of variances that separates schedule variance effects and cost variance effects. It requires the use of a financial system that is able to collect and analyse task-level financial data.

Cost variance

Cost variance is the underrun or overrun of actual costs as compared to the estimated project costs found in the cost baseline. When evaluating current project cost variance, it is important to exclude the effect of tasks that are ahead or behind schedule. The cost baseline has embedded assumptions for which tasks will occur in which months. If a task is not worked on during a month because of a schedule delay, that could appear to be an underrun to the project for that month, since less money was spent than planned. However, if the task is accomplished the following month, it would appear to be an overrun for that month since the cost occurred in that month without any planned cost for that task occurring in that month. A trend analysis variance will smooth out that effect over time. However, a trend analysis can mask an underrun or overrun if the overall project significantly deviates from the planned schedule. The Earned Value Management approach eliminates the schedule impact on cost variance by using Earned Value (EV) for the baseline cost instead of Planned Value (PV). The EV represents the planned or budgeted cost for the work that has been performed. The Actual Cost (AC) is the total costs associated with doing that work. The cost variance then is calculated as the difference between EV and AC. A positive cost variance is an underrun and a negative cost variance is an overrun.

Cost Variance = EV - AC

Schedule variance

Schedule variance is the ahead of schedule or behind schedule position of the project as compared to the schedule found in the schedule baseline. Schedule variance is normally presented in terms of time (days or weeks) ahead of or behind schedule. A caution when calculating currernt schedule variance, the important tasks to consider are the critical path tasks. As long as the critical path tasks are on schedule and the non-critical path tasks have float, the project should still be able to complete on time. The non-critical path tasks could be weeks or months late, as long as they have float, they should be able to complete before the critical path tasks complete.

The Earned Value Management approach to schedule variance gives the variance in units of money, not time. The Earned Value Management schedule variance is the estimated cost of the work that has not been done according to the project schedule plan. For work that is accomplished earlier than scheduled, this would be a positive value representing the estimate of the work accomplished early. For work that was late this is a negative value representing the estimated cost of the work that was not done when scheduled. The schedule variance is then the difference between the EV, which is the estimated or budgeted cost of the work that has been performed and the PV which is estimated or budgeted cost of the work that should have been performed if the work was done to the baseline schedule.

Schedule Variance = EV - PV

Earned Value Management variance analysis provides a clear understanding of how much variance is a schedule issue and how much is a cost issue.

Definitions

Variance: “A quantifiable deviation, departure, or divergence away from a known baseline or expected value.” PMBOK^® Guide
Actual Cost (AC): “The realized cost incurred for the work perfomed on an activity during a specific time period.” PMBOK^® Guide
Cost Variance (CV): “The amount of budget deficit or surplus at a given point in time, expressed as the difference between the Earned Value (EV) and the Actual Cost (AC).” PMBOK^® Guide
Schedule Variance (SV): “A measure of schedule performance expressed as the difference between the Earned Value (EV) and the Planned Value (PV).” PMBOK^® Guide

These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK^® Guide) – Sixth Edition, Project Management Institute, Inc., 2017.

00:04 Hello again, I'm Ray Sheen.
00:06 Let's talk now about an aspect of project control known as variance analysis.
00:13 The Project Management Body of Knowledge,
00:14 the PMBOK Guide, defines variance as a quantifiable deviation, departure,
00:19 or divergence away from a known baseline or expected value.
00:23 Variance is an indication that something unexpected has happened on the project.
00:27 Reality did not match expectations,
00:30 at least not the expectations found in the project plan.
00:33 Positive variance is the condition where the project is ahead of schedule or
00:36 underrun, this is usually good variance.
00:39 Negative variance is where the project is behind schedule or overrun.
00:43 Since variances occur when reality is different than the plan,
00:46 the variance could be caused by an unrealistic or
00:49 inaccurate plan rather than by failed project performance.
00:53 We don't yet know why there is a difference.
00:55 But variance just tells us that there is one.
00:58 There are several types of variances that project managers may have
01:01 reported to them.
01:02 The current variance is a variance from what happened this month as compared to
01:06 what was expected to happen this month.
01:08 This variance can be very depended upon small schedule changes
01:12 as an action moves forward or backwards by a few weeks.
01:16 The trend variance are cumulative variance is the difference between
01:19 what has happened on the entire project since it started
01:22 as compare to what the plan said should have happened.
01:25 It's often called the trend variance, since it's not subject to the minor month
01:29 to month changes but will reflect significant project trends.
01:33 The earned value management system that we have discussed allows a project manager to
01:37 look at the variances on the project, and quickly separate out
01:40 the effects of ahead or behind schedule from underrun and overrun.
01:44 Before I discuss earned value, cost and schedule variance, there's one more piece
01:48 of data that's required for the earned value system to work.
01:52 Earned value considers three project cost perspectives,
01:55 the planned value, which was the project plan,
01:58 the earned value, which was the progress that has been made and the actual cost.
02:03 The Project Management Body of Knowledge,
02:05 the PMBOK Guide, defines actual cost as, the realized cost incurred for
02:09 the work performed on an activity during a specific time period.
02:13 Actual cost is found in the business financial accounting system.
02:17 The system records all cost incurred in the business and
02:20 allocates them to the proper account, in our case, the project account.
02:24 The financial system usually segregates the cost by spending categories,
02:28 such as departments, projects, project tasks, or even cost type,
02:33 like personal costs or travel.
02:35 The actual cost will be reported in one of two ways
02:38 similar to what we saw with planned value and earned value.
02:41 There is the current period actual cost, which is the amount of money that was
02:44 spent on the project during the past month.
02:47 And the cumulative actual cost,
02:49 which is the amount of money that's been spent on the project since it started.
02:52 Now, we're ready to discuss cost variance.
02:55 PMBOK Guide defines cost variance as the amount of budget deficit or
02:59 surplus at a given point in time,
03:02 expressed as the difference between the earned value and the actual cost.
03:06 Cost variance or CV is calculated as earned value minus actual cost,
03:11 and this calculation can be done either using current values or cumulative values.
03:16 Current values will tell you about cost variance during the past month.
03:20 And cumulative looks at the whole project.
03:23 Based upon our formula, negative cost variances are an overrun.
03:26 Since the costs are higher than the planned costs for the amount of work done.
03:30 Positive cost variance is an underrun, since the actual costs are lower than
03:33 the estimated costs for the amount of work that was done.
03:37 Now, a typical problem with analyzing cost variance on a project
03:40 is that the work may not be on schedule.
03:43 So comparing the actual costs of the project plan doesn't really tell you
03:46 the whole story.
03:47 If my plan was to spend $100,000 this month, and I only spent $80,000,
03:52 did I underrun?
03:53 I don't know, until I can determine if I did everything I was supposed to do.
03:58 If I did all the work, I have an underrun.
04:00 But if I only did half, well, I spent 80% of the money for
04:04 just 50% of the effort, so I overran the estimate for the work that I did.
04:08 By calculating our cost variance using the earned value method, we have accounted for
04:13 the schedule problem.
04:15 We're comparing the actual cost and the planned cost but only for
04:19 the work that was done.
04:20 We'll now do a similar analysis with schedule variance.
04:24 The PMBOK Guide defines schedule variance as a measure of schedule performance
04:27 expressed as the difference between the earned value and the planned value.
04:32 The formula for schedule variance is earned value minus planned value.
04:35 And just like cost variance, we can calculate this for the month or for
04:39 the entire project.
04:41 Negative schedule variance represents a project delay,
04:44 since we planned to do more than what was accomplished.
04:47 And positive schedule variance represents an ahead of schedule condition.
04:50 This schedule variance will give us an accurate understanding of how much
04:53 work is ahead or behind schedule,
04:55 since it's comparing numbers that start from the same basis, the task estimates.
05:00 Both earned value and plan value rely on the estimated cost of the task.
05:03 So any variances represent only the differences in whether the work was done
05:07 in the originally planned time period or not.
05:10 Let's look at this project chart now.
05:12 While the actual cost is the green line,
05:15 recall that the earned value is gold line and the planned value is the blue line.
05:19 When we compare earned value to planned value, we have a schedule variance.
05:23 In this case we're behind schedule since earned value is lower than planned value.
05:28 When we compare the earned value to the actual cost, we have cost variance.
05:33 In this case,
05:33 we are overrun since the actual costs are much higher than the earned value.
05:38 The project manager is able to determine how much of which variance exists
05:43 which will help in their variance analysis reporting.
05:46 Take a look for a moment at months two and three.
05:48 In this case, the project is ahead of schedule and
05:51 underrun even though the actual costs are higher than the planned cost.
05:55 Their end value measurement allows us to see
05:57 that we have completed more work than was planned.
06:00 The actual cost of the work that was completed is lower than what was planned
06:04 as represented by the earned value.
06:06 So those activities were underrun.
06:08 The earned value variance calculation lets us understand this situation.
06:15 I've never had a project that went precisely according to plan.
06:18 Variances will occur.
06:20 And variance analysis will allow the project manager
06:23 the ability to understand the impact of that variance.

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Variance Analysis

About this lesson

Exercise files

Quick reference

Variance Analysis

When to use

Instructions

Types of variance

Cost variance

Schedule variance

Definitions