Suppose you are managing a software development project. The project is expected to be completed in 8 months at a cost of $10,000 per month. After 2 months, you realize that the project is 30 percent completed at a cost of $40,000. You need to determine whether the project is on-time and on-budget after 2 months. Let's see how healthy the project is by calculating the cost variance and schedule variance.
Step 1: Calculate the Planned Value and Earned Value
From the scenario:
- Budget at Completion (BAC) = $10,000 * 8 = $80,000
- Actual Cost (AC) = $40,000
- Planned Completion = 2/8 = 25%
- Actual Completion = 30%
- Planned Value = Planned Completion (%) * BAC = 25% * $80,000 = $20,000
- Earned Value = Actual Completion (%) * BAC = 30% * $80,000 = $24,000
Step 2: Compute the earned value management cost and schedule variances:
Cost Variance = EV – AC = $24,000 - $40,000 = -$16,000
Schedule Variance = EV – PV = $24,000 - $20,000 = $4,000
Interpretation: Since Cost Variance is negative, this means the project is over-budget. Since Schedule Variance is positive, the project is ahead of schedule. However, this has come at a cost of going over-budget. If work is continued at this rate, the project will be delivered ahead of schedule and over-budget. Therefore, corrective action should be taken in terms of cost. To control the project cost variance, you will need to monitor resource utilization more carefully. It is also possible that the initial project estimate was unrealistic. Hence, your need to protect your project from cost overruns. You consider not using techniques that increase the cost variance, such as crashing the project schedule.
Apart from computing the cost and schedule variances, you can calculate: