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Earned Value Management is a comprehensive project management technique that combines scope, schedule and resource management into one set of measures.  The Earned Value variance analysis is an analytical method for separating cost and schedule effects from financial variances.

Quick reference

Earned Value Variance Analysis

Earned Value Management is a comprehensive project management technique that combines scope, schedule and resource management into one set of measures.  The Earned Value variance analysis is an analytical method for separating cost and schedule effects from financial variances.

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.  Organizations using earned value management will normally conduct a variance analysis each month on each project.  A variance analysis should always be done prior to developing a project forecast.

Instructions

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.  These tasks can drop out or come into the period.  It is the difference between planned spending and actual spending during that month.
  • 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.  This calculation is based on determining a percentage overrun or underrun for a type of activity.
  • 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 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. 

The Earned Value Management approach eliminates the schedule impact on Cost Variance (CV) 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 CV 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.

CV = 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.  The Earned Value Management approach to schedule variance gives the variance in units of money, not time. 

The Earned Value Management Schedule Variance (SV) 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 SV 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.

SV = 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.

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  • 00:03 Hi, I'm Ray Sheen.
  • 00:04 I'd now like to show you how to use the earned value system when doing variance
  • 00:08 analysis.
  • 00:10 So let's dig into the concept of variance.
  • 00:14 Variance is a deviation, departure, or divergence from a baseline.
  • 00:19 A project manager should be tracking the variance on a project, so
  • 00:22 that they can understand what is going right and what is not on a project.
  • 00:27 If the plan was a well thought out and
  • 00:29 reasonable plan, a variance indicates that something unexpected has occurred.
  • 00:33 The project is no longer on plan.
  • 00:36 A positive variance indicates the project is ahead of schedule or underrun.
  • 00:40 A negative variance indicates the project is behind schedule or overrun.
  • 00:44 Of course, a variance just indicates that reality is different from the plan.
  • 00:48 It could be the plan was unrealistic, or
  • 00:51 it could be that something unexpected has occurred on the project.
  • 00:55 When analyzing variance, a project manager or
  • 00:57 cost account manager, is concerned about several types of variance.
  • 01:01 One type of variance is the current period variance.
  • 01:04 This is a variance of what happened during the past month.
  • 01:07 However, as we know with projects, there are good months and bad months.
  • 01:11 So, in addition to understanding the current period variance,
  • 01:14 the project manager and
  • 01:15 cost account manager are also interested in the trend variance which considers
  • 01:20 what is been the variance over a series of months, typically since the project start.
  • 01:25 The third type of variance, and what I'll focus on in this module,
  • 01:28 is earned value variance.
  • 01:30 This can be conducted for both current period and trend level, but even more
  • 01:34 important this will separate the effects of schedule variance and cost variance.
  • 01:38 I'll start with cost variance, in the earned value management system.
  • 01:43 Cost variance is the amount of spending deficit or surplus at a point in time for
  • 01:47 a given set of tasks.
  • 01:49 This is calculated as Earned Value minus actual cost.
  • 01:53 Let's talk for a minute about Actual Cost or AC.
  • 01:55 The finance system collects the spending that occurs in the project and
  • 01:59 reports that as Actual Cost.
  • 02:02 Unlike the PV and the EV, the project manager and
  • 02:05 cost account manager do not provide this number to the earn value system,
  • 02:09 this comes from the cost accounting system.
  • 02:12 With the AC in hand, cost variances calculated for both the current month and
  • 02:16 cumulative on the project.
  • 02:18 The cost variance, or CV, is an actual monetary amount.
  • 02:22 Many project managers and cost account managers will convert this cost variance
  • 02:26 to a percentage of the planned value.
  • 02:29 As you can see from the formula, a positive cost variance is an under-run and
  • 02:33 a negative cost variance is an over-run.
  • 02:35 By using the earned value in this calculation instead of the planned value,
  • 02:40 the effect of schedule variance has been removed and
  • 02:42 the variance calculated is true cost variance of the project work.
  • 02:47 The earned value is the planned or
  • 02:49 budgeted cost of the work that was completed, and
  • 02:52 the actual cost is the actual cost of the work that was completed.
  • 02:55 Therefore there is no impact of project work being ahead or behind schedule.
  • 03:00 So now let's look at schedule variance.
  • 03:02 Schedule variance, or SV is the measure of scheduled performance expressed as
  • 03:07 the difference between planned value and earned value.
  • 03:09 The formula is SV = EV- PV.
  • 03:13 And just like with cost variance, we can do this for the current period or for
  • 03:17 the cumulative project.
  • 03:19 Looking at the formula, we see that negative SV is a delay, and
  • 03:23 positive SV reflects an accelerated schedule.
  • 03:27 The reason this gives a true schedule variance, is,
  • 03:29 the effect of actual costs are not included.
  • 03:32 Instead, it is comparing the value of the work that should have been done,
  • 03:36 based upon the original estimate of the work, with the value of the work that
  • 03:39 actually was done, again based upon the original estimate of the work.
  • 03:44 The only thing impacting In the difference is how much work was done,
  • 03:47 which is the scheduled variance.
  • 03:49 One other side note, the scheduled variance, although represents schedule,
  • 03:54 is not in units of time, but rather is in the units of money.
  • 03:57 This brings new meaning to that old saying, time is money.
  • 04:02 Let's look at how these variances are depicted on our plot of the earned
  • 04:05 value measures.
  • 04:07 This is the chart up through month nine on the project, and
  • 04:09 this shows the information that the project managers and
  • 04:12 cost account managers can provide, which is the planned value and earned value.
  • 04:17 With this information the schedule variance can be calculated.
  • 04:20 In this case, the earned value is less than the planned value, so
  • 04:23 the project is behind schedule.
  • 04:25 If we use the older abbreviations, BCWS and BCWP, we see that for
  • 04:30 both of these lines we are comparing the Budget a cost of work.
  • 04:34 With the planned, it is the budget of work scheduled, and with the earned value,
  • 04:38 it is the budget of cost of work performed.
  • 04:41 Now let's look at the actual cost line, it is shown in green.
  • 04:45 An older term for actual cost was actual cost of work performed, and
  • 04:49 like the EV line, it stops at the end of current month because there
  • 04:53 are no costs collected for things that have not happened yet.
  • 04:57 The cost variance is the difference between the AC and EV.
  • 05:00 Looking at those older abbreviations again of ACWP and BCWP.
  • 05:06 We see that the cost variance comparing the cost of work performed.
  • 05:09 The actual cost is the actual cost of work performed.
  • 05:13 And the earned value is the budgeted cost of work performed.
  • 05:16 In this case, we see that the cost variance between actual cost and
  • 05:19 earned value is twice the size of the difference between the actual cost and
  • 05:24 the planned value.
  • 05:26 By including the effect of earned value, we can include the impact of the project
  • 05:30 delay and see the true magnitude of the overrun.
  • 05:36 Earned value variances are the best way for
  • 05:38 separating the differences between cost variance and schedule variance.
  • 05:42 These variances provide valuable insight to project managers and
  • 05:46 cost account managers.

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