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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 analyze 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 current 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, but 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 the 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 scheduling 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 performed 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

00:03 Hello again, I'm Ray Sheen.
00:05 Let's talk now about an aspect of project control known as variance analysis.
00:10 The Project Management Body of Knowledge,
00:13 the PMBOK Guide defines variance as a quantifiable deviation, departure, or
00:18 divergence away from a known baseline or expected value.
00:21 Variance is an indication that something unexpected has happened on the project.
00:26 Reality did not match expectations, at least,
00:29 not the expectations found in the project plan.
00:32 Positive variance is a condition where the project is ahead of schedule or underrun.
00:38 This is usually a good variance.
00:40 Negative variance is where the project is behind schedule or overrun.
00:44 Since variance occurs when reality is different from the plan,
00:47 the variance could be caused by an unrealistic or inaccurate plan,
00:51 rather than failed project performance.
00:54 We don't yet know why there's a difference,
00:56 the variance just tells us that there is one.
00:59 There are several types of variance that project managers may have
01:02 reported to them.
01:03 The current variance is the variance from what happened this month as compared to
01:08 what was expected to happen this month.
01:10 This variance can be very dependent upon small schedule changes as an activity
01:14 moves forward or backward by just a few weeks.
01:17 The trend variance or cumulative variance is a difference between what has happened
01:21 on the entire project since it started,
01:24 as compared to what the plan says should have happened at this point.
01:28 It's often called the trend variance since it's not subject to the minor month to
01:32 month changes, but will reflect significant trends.
01:36 The earned value management approach, that we've discussed on previous lessons,
01:40 allows the project manager to look at variants on the project.
01:43 And quickly separate out the effects of a header behind schedule from underrun or
01:48 overrun.
01:48 Before I discuss earned value cost and schedule variance though, there's
01:53 one more piece of data that is required for the earned value system to work.
01:57 Earned value considers three project cost perspectives, the planned value,
02:02 which was the project plan,
02:03 the earned value, which was the progress that had been made and the actual cost.
02:08 The Project Management Body of Knowledge, the PMBOK Guide,
02:12 defines actual cost as the realized cost incurred for
02:15 the work performed on an activity during a specified time period.
02:20 Actual cost is found in the business financial accounting systems.
02:23 The system records all costs incurred in the business and
02:26 allocates them to the proper account, in our case, the project account.
02:30 The financial system usually segregates the cost by spending categories,
02:35 such as functional departments, projects,
02:38 project tasks, or even personnel costs or travel costs.
02:42 The actual costs will be reported in one of two ways,
02:45 similar to what we just talked about with variance.
02:47 There is the current period actual cost,
02:50 which is the amount of money spent on the project during the past month.
02:54 And the cumulative actual costs,
02:56 which is the amount of money that's been spent on the project since it started.
03:00 Now we're ready to discuss cost variance.
03:03 The PMBOK Guide defines cost variance as the amount of budget deficit or
03:08 surplus at a given point in time,
03:10 expressed as the difference between the earned value and the actual cost.
03:14 Cost variance or CV is calculated as earned value minus actual cost.
03:20 And the calculation can be done either using current values or cumulative values.
03:26 Current value will tell you about cost variance during this preceding month,
03:30 and cumulative value looks at the entire project.
03:33 Based upon our formula, negative cost variance is an overrun since
03:37 the costs are higher than the planned costs for the work that was actually done.
03:41 Positive cost variance is an underrun, since the actual costs are lower than
03:46 the estimated cost for the amount of work that was done.
03:49 A typical problem with analyzing cost variance on projects is that the work may
03:53 not be on schedule.
03:54 So comparing the actual cost of the original plan doesn't really tell
03:58 you the whole story.
03:59 If my plan was to spend $100,000 this month and I only spent 80,000,
04:04 did I under run?
04:04 I don't know until I can determine if I did everything that I was supposed to do.
04:09 If I did all the work, I have an underrun.
04:11 But if I only did half the work, I spent 80% of the money, and
04:15 I overran the estimate for the work that I did.
04:17 By calculating our cost variance using the earned value method,
04:21 we have removed the schedule problem.
04:23 We are comparing the actual cost and the planned cost, but
04:27 only for the work that has been done.
04:29 We'll now do a similar analysis with schedule variance.
04:32 The PMBOK Guide defines schedule variance as a measure of schedule performance
04:37 expressed as a difference between the earned value and the planned value.
04:41 The formula for chedule variance is earned value minus planned value.
04:46 And just like cost variance, we can calculate that for a month or for
04:50 the entire project.
04:51 Negative schedule variance represents a project delay since we planned to do more
04:55 work than was actually accomplished.
04:57 And a positive schedule variance represents an ahead of schedule condition.
05:01 This schedule variance will give us an accurate understanding of how much work is
05:05 ahead or behind schedule.
05:07 Since the numbers it's comparing are starting from the same basis,
05:11 the task estimates, both earned value and
05:13 planned value rely on the estimated cost of the tasks.
05:17 So any variance represents only the difference between what was planned to be
05:21 done and what has actually been done.
05:23 Let's look at our project chart now.
05:26 We'll add the actual cost as the green line.
05:29 Recall that the earned value is the gold line and
05:32 the planned value is the blue line.
05:34 When we compare the earned value to the planned value,
05:37 we have the schedule variance.
05:39 In this case,
05:40 we're behind schedule, since the earned value is lower than the planned value.
05:44 When we compare the earned value to the actual cost, we have cost variance.
05:49 In this case, we are overrun,
05:50 since the actual costs are much higher than the earned value.
05:54 The project manager is able to determine how much of which variants exists,
05:58 which will help in the variance reporting.
06:01 Take a look for a moment in month two and three.
06:04 In this case, the project is ahead of schedule and underrun.
06:09 Even though the actual costs are higher than the planned costs at that point,
06:13 the earned value measurement allows us to see that we have completed much more work
06:18 than planned.
06:19 The actual cost of the work completed is lower than the planned as
06:23 represented by the earned value.
06:26 So those activities were underrun even though they are ahead of schedule.
06:30 The earned value variance calculation lets us understand this situation.
06:35 I've never had a project that went precisely according to plan,
06:39 variances will occur.
06:41 A variance analysis will allow the project manager the ability
06:45 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