VARIANCE ANALYSIS

Project Monitoring, Evaluation & Controlling

Rehan Rashid, 0984205, MPM – 3A

DEFINITION

Process aimed at computing variance between actual and budgeted or targeted levels of performance, and identification of their causes.

IN PROJECT MANAGEMENT Variance Analysis plays vital role for the

critical success factor for any project. It allows for “Corrective Actions” to be taken in

the event of schedule slippages or cost overruns for any activity under consideration.

As well as it allows to take “Preventive Actions” to be taken so that no slippage of schedule or cost overrun may happen for any activity under consideration.

Corrective and Preventive actions allows for the identification of causes involved in schedule slippages as well as cost overruns.

Result Better performance of project

VARIANCES Variances are deviations from plan.

Think of a variance as the difference between what was planned and what actually occurred.

There are two types of variances:

Positive variances and Negative variances.

POSITIVE VARIANCES Positive variances are deviations from

plan that indicate that an ahead-of-schedule situation has occurred or that an actual cost was less than a planned cost.

This type of variance is good news to the project manager, who would rather hear that the project is ahead of schedule or under budget.

POSITIVE VARIANCES Positive variances bring their own set of problems,

which can be as serious as negative variances.1) Positive variances can allow for rescheduling to

bring the project to completion early, under budget, or both.

2) Resources can be reallocated from ahead-of-schedule projects to behind-schedule projects.

3) Positive variances also can result from schedule slippage! Consider budget. Being under budget means that not all dollars were expended, which may be the direct result of not having completed work that was scheduled for completion during the report period.

POSITIVE VARIANCES On the other hand, if the ahead-of-schedule

situation is the result of the project team’s finding a better way or a shortcut to completing work, the project manager will be pleased.

This situation may be a short-lived benefit, however. Getting ahead of schedule is great, but staying

ahead of schedule presents another kind of problem. To stay ahead of schedule, the project manager will

have to negotiate changes to the resource schedule. Given the aggressive project portfolios in place in

most companies, there is not much reason to believe that resource schedule changes can be made.

In the final analysis, being ahead of schedule may be a myth.

NEGATIVE VARIANCES Negative variances are deviations from

plan that indicate that a behind-schedule situation has occurred or that an actual cost was greater than a planned cost.

Being behind schedule or over budget is not what the project manager or his reporting manager wants to hear.

Negative variances, just like positive variances, are not necessarily bad news.

NEGATIVE VARIANCES For example, you might have overspent because

you accomplished more work during the report period than was planned.

But in overspending during this period, you could have accomplished the work at less cost than was originally planned.

You can’t tell by looking at the variance report. In most cases, negative time variances affect

project completion only if they are associated with critical path activities or if the schedule slippage on noncritical path activities exceeds the activity’s total float.

Variances use up the float time for that activity; more serious ones will cause a change in the critical path.

NEGATIVE VARIANCES Negative cost variances can result from

uncontrollable factors such as cost increases from suppliers or unexpected equipment malfunctions.

Some negative variances can result from inefficiencies or error.

COST SCHEDULE CONTROL Cost schedule control is used to

measure project performance and, by tradition, uses the dollar value of work as the metric.

As an alternative, resource person hours/day can be used in cases where the project manager does not directly manage the project budget.

Actual work performed is compared against planned and budgeted work expressed in these equivalents.

COST SCHEDULE CONTROL These metrics are used to determine schedule

and cost variances for both the current period and cumulative to date.

Cost and resource person hours/day are not good objective indicators with which to measure performance or progress.

While this is true, there is no other good objective indicator.

Given this, we are left with dollars or person hours/day, which we are at least familiar working with in other contexts.

Either one by itself does not tell the whole story. We need to relate them to one another.

COST SCHEDULE CONTROL One drawback that these metrics have

is that they report history. Although they can be used to make extrapolated predictions for the future, they primarily provide a measure of the general health of the project, which the project manager can correct as needed to restore the project to good health.

COST SCHEDULE CONTROL S curve, which represents the baseline

progress curve for the original project plan, can be used as a reference point. You can compare your actual progress to date against the curve and determine how well the project is doing. Again, progress can be expressed as either dollars or person hours/day.

COST SCHEDULE CONTROL

COST SCHEDULE CONTROL By adding the actual progress curve to

the baseline curve, you can now see the current status versus the planned status.

Figure on next slide shows the actual progress curve to be below the planned curve.

If this represented dollars, we might be tempted to believe the project is running under budget. Is that really true?

COST SCHEDULE CONTROL

COST SCHEDULE CONTROL Projects rarely run significantly under

budget. A more common reason for the actual

curve to be below the baseline is that the activities that should have been done have not been, and thus the dollars or person hours/day that were planned to be expended have not been.

The possible schedule variance is highlighted in next slide.

COST SCHEDULE CONTROL

COST SCHEDULE CONTROL To determine whether there has really been a

progress schedule variance, you need some additional information. Cost schedule control (CSC) comprises three basic measurements: Budgeted Cost of Work Scheduled (PV), Budgeted Cost of Work Performed (EV), and Actual Cost of Work Performed (AC).

These measurements result in two variance values: Schedule Variance (SV) and Cost Variance (CV).

The next slide is a graphical representation of the three measurements.

COST SCHEDULE CONTROL

COST SCHEDULE CONTROL The figure shows a single activity that has a five-day

duration and a budget of $500. The budget is prorated over the five days at an average daily value of $100. The left panel of Figure 10.10 shows an initial (baseline) schedule with the activity starting on the first day of the week (Monday) and finishing at the end of the week (Friday). The budgeted $500 value of the work is planned to be accomplished all within that week. This is the planned value (PV). The center panel shows the actual work that was done. Note that the schedule slipped and work did not begin until the third day of the week. Using an average daily budget of $100, we see that we were able to complete only $300 of the scheduled work. This is the earned value (EV). The rightmost panel shows the actual schedule as in the center panel, but now we see the actual dollars that were spent to accomplish the three days’ work. This $400 is the actual cost (AC).

COST SCHEDULE CONTROL The PV, EV, and AC are used to compute

and track two variances. The first is schedule variance (SV). SV is the

difference between the EV and PV, which is –$200 (EV – PV) for this example. That is, the SV is the schedule difference between what was done and what was planned to be done, expressed in dollar or person hours/day equivalents.

The second is cost variance (CV). CV is the difference between the EV and the AC, which is $100 in this example. That is, we overspent by $100 (AC – EV) the cost of the work completed.

COST SCHEDULE CONTROL To correctly interpret the data shown in Figure

10.9, you need to add the EV data that was given in Figure 10.10 to produce Figure 10.11.

Comparing the EV curve with the PV curve, you see that you have under-spent because all of the work that was scheduled has not been completed.

Comparing the EV curve to the AC curve also indicates that you overspent for the work that was done.

Clearly, management would have been misled by Figure 10.8 had they ignored the data in Figure 10.10. Either one by itself may be telling a half-truth.

COST SCHEDULE CONTROL

COST SCHEDULE CONTROL The three basic indicators yield one

additional level of analysis for us.

Schedule Performance Index (SPI) and Cost Performance Index (CPI) are a further

refinement.

They are computed as follows:

SPI = EV/PVCPI = EV/AC

COST SCHEDULE CONTROL

SCHEDULE PERFORMANCE INDEX The schedule performance index is a

measure of how close the project is to performing work as it was actually scheduled. If we are ahead of schedule, EV will be greater than PV, and therefore the SPI will be greater than 1.

Obviously, this is desirable. On the other hand, an SPI below 1 would indicate that the work performed was less than the work scheduled. Not a good thing.

COST PERFORMANCE INDEX The cost performance index is a

measure of how close the project is to spending on the work performed to what was planned to have been spent.

If you are spending less on the work performed than was budgeted, the CPI will be greater than 1.

If not, and you are spending more than was budgeted for the work performed, then the CPI will be less than 1.

THANK YOU