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Introduction to Cost and Project Variances in Earned Value Management
Earned Value Management Variance Formulae leverage the Earned Value Management Fundamental Formulae (BAC, AC, PV, and EV) to determine the variances pertaining to project cost and schedule. Earned value cost and schedule variances are part of the Control Costs process group. Earned Value Management Variance formulae consist of:
- Cost Variance (CV): This is the completed work cost when compared to the planned cost. Cost Variance is computed by calculating the difference between the earned value and the actual cost, i.e. EV – AC. As you can deduce from the formula, Cost Variance will be negative for projects that are over-budget. Monitoring project cost variance is critical to ensuring the project is delivered on budget. Using realistic project estimation is good start to ensuring there isn't significant cost variance.
- Schedule Variance (SV): This is the completed work when compared to the planned schedule. Schedule Variance is computed by calculating the difference between the earned value and the planned value, i.e. EV – PV. A positive Schedule Variance tells you that the project is ahead of schedule, while a negative Schedule Variance tells you the project is behind schedule. Monitoring Schedule Variance is critical to delivering the project on-time.
Now that you know what is cost variance and what is schedule variance, let's look at a couple of examples.
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Earned Value Management - Cost Variance and Schedule Variance - Example 1
Suppose you have a budgeted cost of a project at $900,000. The project is to be completed in 9 months. After a month, you have completed 10 % of the project at a total expense of $100,000. The planned completion should have been 15 %.
Now, let’s see the variance in the project by computing the Cost Variance and Schedule Variance. In the Compute the Earned Value Management (EV) of a Project article, you learned to calculate the Earned Value and Planned Value for this example. The figures are:
- Planned Value = Planned Completion (%) * BAC = 15 % * $ 900,000 = $ 135,000
- Earned Value = Actual Completion (%) * BAC = 10 % * $ 900,000 = $ 90,000
Compute the earned value management cost and schedule variances:
- Cost Variance = EV – AC = $90,000 - $100,000 = -$ 10,000
- Schedule Variance = EV – PV = $90,000 - $135,000 = -$ 45,000
Interpretation: Since the Project Cost Variance is negative, this means the project is over-budget. Since Schedule Variance is negative, the project is behind schedule. This example project is in major trouble and corrective action needs to be taken to get it back on track. Earned Value Management cost variance and schedule variance will help you identify a project in trouble. To fix the problem areas is a different ball game. You will need to use effective risk management. In this case, the project schedule variance can be controlled by using the critical path method.
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Earned Value Management - Cost Variance and Schedule Variance - Example 2
Suppose you are managing a software development project. The project is expected to be completed in 8 months at a cost of $10000 per month. After 2 months, you realize that the project is 30 % 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: