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/PV
 CPI = 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