Variance Analysis

Understanding Variance Analysis in Cost Estimation and Control

Variance analysis is a crucial tool in cost estimation and control, helping project managers identify deviations from the planned budget and performance. It allows them to understand the reasons behind these deviations and take corrective action to optimize resource allocation and achieve project goals.

This article explores various variance analyses, explaining their significance in cost management.

Cost Variance Analysis

Cost variance measures the difference between the Budgeted Cost of Work Performed (BCWP) and the Actual Cost of Work Performed (ACWP).

BCWP: Represents the value of work completed as per the project schedule.
ACWP: Represents the actual cost incurred to complete the work.

Formula: Cost Variance (CV) = BCWP - ACWP

Positive CV: Indicates that the project is under budget, as the actual cost is less than the budgeted cost.
Negative CV: Indicates that the project is over budget, as the actual cost exceeds the budgeted cost.

Percentage Over/Under Analysis:

This analysis provides a percentage representation of the cost variance relative to the BCWP, highlighting the severity of the deviation.

Formula: % Over/Under = 100 x (ACWP - BCWP) / BCWP

Unit Variance Analysis

This analysis focuses on individual cost components and their respective variances. It helps pinpoint specific areas requiring attention for cost control. Key aspects include:

1. Labor Rate Variance:

Compares the actual labor rate paid to the budgeted labor rate.
Formula: Actual Labor Rate - Budgeted Labor Rate

2. Labor Hours/Units of Work Accomplished Variance:

Compares the actual labor hours worked to the budgeted labor hours for the completed work.
Formula: Actual Labor Hours - Budgeted Labor Hours

3. Material Rate Variance:

Compares the actual material cost per unit to the budgeted material cost per unit.
Formula: Actual Material Rate - Budgeted Material Rate

4. Material Usage Variance:

Compares the actual quantity of material used to the budgeted quantity for the completed work.
Formula: Actual Material Usage - Budgeted Material Usage

Schedule/Performance Analysis

Schedule/Performance variance measures the difference between the Budgeted Cost of Work Scheduled (BCWS) and the BCWP.

BCWS: Represents the planned value of work to be completed by a specific point in time.
BCWP: Represents the actual value of work completed as per the project schedule.

Formula: Schedule/Performance Variance (SV) = BCWP - BCWS

Positive SV: Indicates that the project is ahead of schedule, as more work is completed than planned.
Negative SV: Indicates that the project is behind schedule, as less work is completed than planned.

Conclusion:

Variance analysis is essential for effective cost management and project control. By identifying and analyzing cost deviations, project managers can proactively address challenges, optimize resource allocation, and ensure project completion within budget and schedule. Regularly reviewing and evaluating variances helps improve decision-making, leading to successful project outcomes.

Test Your Knowledge

Quiz: Understanding Variance Analysis in Cost Estimation and Control

Instructions: Choose the best answer for each question.

1. Which of the following is NOT a component of Cost Variance Analysis?

a) Budgeted Cost of Work Performed (BCWP) b) Actual Cost of Work Performed (ACWP) c) Budgeted Cost of Work Scheduled (BCWS) d) Cost Variance (CV)

Answer

c) Budgeted Cost of Work Scheduled (BCWS)

2. A positive Cost Variance (CV) indicates that the project is:

a) Over budget b) Under budget c) On budget d) Behind schedule

Answer

b) Under budget

3. What does the formula "% Over/Under = 100 x (ACWP - BCWP) / BCWP" calculate?

a) Schedule/Performance Variance b) Percentage deviation from the budgeted cost c) Labor Rate Variance d) Material Usage Variance

Answer

b) Percentage deviation from the budgeted cost

4. Which variance analysis focuses on the difference between actual labor hours worked and budgeted labor hours?

a) Labor Rate Variance b) Labor Hours/Units of Work Accomplished Variance c) Material Rate Variance d) Material Usage Variance

Answer

b) Labor Hours/Units of Work Accomplished Variance

5. A negative Schedule/Performance Variance (SV) indicates that the project is:

a) Ahead of schedule b) Behind schedule c) Over budget d) Under budget

Answer

b) Behind schedule

Exercise: Analyzing Variance

Scenario: You are managing a project with a budgeted cost of $100,000. The project is currently 50% complete. The BCWP is $45,000 and the ACWP is $50,000.

Task:

Calculate the Cost Variance (CV).
Calculate the percentage over/under.
Interpret the results.

Exercice Correction

1. **Cost Variance (CV):** CV = BCWP - ACWP CV = $45,000 - $50,000 **CV = -$5,000** 2. **Percentage Over/Under:** % Over/Under = 100 x (ACWP - BCWP) / BCWP % Over/Under = 100 x ($50,000 - $45,000) / $45,000 **% Over/Under = 11.11%** 3. **Interpretation:** * **Negative CV:** The project is over budget by $5,000. * **11.11% over budget:** The project is currently 11.11% over the planned budget. This analysis indicates that the project is currently exceeding its budget. Project managers should investigate the reasons behind this variance and take corrective action to control costs and bring the project back on track.

Books

Project Management: A Systems Approach to Planning, Scheduling, and Controlling by Harold Kerzner: This comprehensive textbook covers various aspects of project management, including cost estimation and variance analysis.
Cost Management for Project Managers: Understanding Cost Concepts and Techniques by Jeffrey Pinto: This book provides practical insights into cost management techniques, including variance analysis, for project managers.
Cost Engineering: Principles and Practice by AACE International: This authoritative guide offers in-depth coverage of cost engineering principles and methods, including variance analysis.
The Project Manager's Guide to Earned Value Management by David Hill: This book focuses on earned value management (EVM), a widely used method for project performance tracking, which relies heavily on variance analysis.

Articles

"Variance Analysis: A Powerful Tool for Cost Control" by David P. Deering, Project Management Journal: This article provides a detailed explanation of variance analysis and its application in cost control.
"The Importance of Variance Analysis in Project Management" by Project Management Institute: This article discusses the significance of variance analysis for achieving project success.
"Understanding and Using Cost Variance Analysis" by Construction Management: This article focuses on the use of variance analysis in construction projects.

Online Resources

Project Management Institute (PMI): PMI offers a wealth of resources on project management, including articles, webinars, and certification programs related to cost management and variance analysis. (https://www.pmi.org/)
AACE International: This professional organization provides comprehensive information on cost engineering, including various resources on variance analysis. (https://www.aacei.org/)
The Earned Value Management Association (EVMA): EVMA provides resources and training on EVM, including the use of variance analysis for project performance tracking. (https://www.evma.org/)

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