VARIANCE (SV) & COST VARIANCE (CV) IN CONTRACT COST MANAGEMENT

VARIANCE (SV) & COST VARIANCE (CV) IN CONTRACT COST MANAGEMENT Schedule Variance and Cost Variance are two important parameters in earned value management which help you analyze the project’s progress, i.e. how are you performing in terms of schedule and cost. In my previous blog posts I have discussed earned value management and its three basic elements. If you haven’t read these blog posts, I suggest you read them first and then come back to this post. Here we are going to discuss Schedule Variance and Cost Variance, which are determined with the help of earned value, planned value and actual cost. Let’s start with an example. Suppose you are managing a construction project, and the client comes and asks you to update him about the current status and progress of the project. What does the client mean by asking for the status and progress of the project, and how will you get this information? The client is asking about the cost incurred to date, work completed, and how are you performing in terms of cost and schedule. Put more simply, the client is asking you to provide him with the project’s earned value, planned value, actual cost, Schedule Variance, and Cost Variance. Earned value is the value of the work actually completed to date, planned value is the money that you should have spent as per the schedule, and actual cost is the amount spent on the project to date Schedule Variance tells you whether you are behind or ahead of schedule, and Cost Variance tells you whether you are under budget or over budget. These variances give you important information about the project’s progress, and it is your job to monitor these variances regularly. Variance analysis is a key to the success of your project. A successful project must finish on time and within the approved budget. With the help of these variances, you can easily monitor your project performance and take corrective action whenever required. Variance analysis tells you if you are going in the correct direction or not. Schedule Variance (SV) It is very important for you to keep your project on schedule. Not only does it help you complete your project on time, but it also helps you avoid unnecessary cost overrun due to slippage of schedule. Because as you go over the stipulated time, your costs start rising exponentially. For example, let’s say that you have rented some equipment for a certain duration of time. However, if you need this equipment for extra time, you may end up paying more because the equipment may not be available at the previously negotiated price, or you may need to rent this equipment from other suppliers on an urgent basis at a higher price. So, you can see that Schedule Variance is a very important analytical tool for you. This tool gives you information about how far behind or ahead of schedule you are in terms of dollars. Schedule Variance is a measure of the schedule performance of a project. Formula for Schedule Variance (SV) Schedule Variance can be calculated by subtracting planned value from earned value. Schedule Variance = Earned Value – Planned Value SV = EV – PV From the above formula, we can conclude that: • If Schedule Variance is positive, this means you are ahead of schedule. • If Schedule Variance is negative, this means you are behind schedule. • If Schedule Variance is zero, this means you are on schedule. • When the project is completed Schedule Variance becomes zero, because at the end of the project all Planned Value has been earned. Example of Schedule Variance (SV) You have a project to be completed in 12 months and the cost of the project is 100,000 USD. Six months have passed and 60,000 USD has been spent, but on closer review you find that only 40% of the work has been completed so far. Find the project’s Schedule Variance (SV), and deduce whether you are ahead of schedule or behind schedule. Given in the question: Actual Cost (AC) = 60,000 USD Planned Value (PV) = 50% of 100,000 = 50,000 USD Earned Value (EV) = 40% of 100,000 = 40,000 USD Now, Schedule Variance = Earned Value – Planned Value = 40,000 – 50,000 = – 10,000 USD Hence, the project’s Schedule Variance is -10,000 USD, and since it is negative, you are behind schedule. Cost Variance (CV) Cost Variance is equally as important as Schedule Variance. You must complete your project within the approved budget. It is bad for you and your client if the project cost exceeds its boundary. It is all about the money and the clients are very cautious about what they are spending. Organizations are also very sensitive towards it because any deviation from the cost baseline can affect their profit, and in the worst case they may have to put more money into the project to complete it. This is especially detrimental if the contract is fixed price. Cost Variance deals with the cost baseline of the project. It gives you information about whether you’re over budget or under budget in terms of dollars. Cost Variance is a measure of cost performance of a project. Formula for Cost Variance (CV) Cost Variance can be calculated by subtracting actual cost from earned value. Cost Variance = Earned Value – Actual Cost CV = EV – AC From the above formula, we can conclude that, • If Cost Variance is positive, this means you are under budget. • If Cost Variance is negative, this means you are over budget. • If Cost Variance is zero, this means you are on budget. Example of Cost Variance (CV) You have a project to be completed in 12 months and the cost of the project is 100,000 USD. Six months have passed and 60,000 USD has been spent, but on closer review you find that only 40% of the work has been completed so far. Find the project’s Cost Variance (CV), and deduce whether you are under budget or over budget. Given in the question: Actual Cost (AC) = 60,000 USD Earned Value (EV) = 40% of $100,000 = 40,000 USD Now, Cost Variance = Earned Value – Actual Cost CV = EV – AC = 40,000 – 60,000 = –20,000 USD Hence, the project’s Cost Variance is -20,000 USD, and since it is negative, you are over budget. Summary Schedule Variance and Cost Variance are great tools to analyze project health. If both variances are positive, this means that you are going in the correct direction. However, if either variance is negative, this means that something is wrong and you have to take corrective action to bring the project back on track. This was all about Schedule Variance and Cost Variance. If you have something to add, you can do so through the comments section. You can now move on to my next blog post on Schedule Performance Index and Cost Performance Index. If you are interested in learning all the mathematical formulas for the PMP exam, you can try my PMP Formula Guide. You can also try my PMP Question Bank to practice 400 PMP exam sample questions.