Understanding variance analysis is crucial in our journey to becoming efficient professionals. Variance analysis is a systematic approach to identify and measure the difference between actual and planned behavior. This technique helps us understand the causes and drivers of variances and helps in improving performance in the next estimate, planning, or control cycle.
A Methodical Approach to Performing Variance Analysis
Here is a methodical approach to performing variance analysis.
Identification of Variances
The first step in variance analysis is identifying the differences between the planned amount (budgeted) and the actual amount. This requires a comparison of actual results versus budgeted amounts. This could be time, cost, scope, or any other metric pertinent to your project. For instance, if you had budgeted $5000 for a particular task, and it ended up costing you $6000, your variance is $1000.
Analyzing Variances
The second step involves analyzing the cause and impact of the identified variance. It would help if you found why the actual results differ so much from what was planned. For instance, maybe the task took longer because the team lacked experience in that area, or maybe the cost of materials increased. This step involves gathering details related to these financial and non-financial causes.
Calculation of Variance
During this step, the variance is calculated as a numerical figure, which can be expressed as a percentage if required. This calculation is significant in translating the extent of the variance in quantifiable terms so that it can be utilized for future prediction and analysis and risk management. For instance, if the budgeted cost was $5000, and the actual cost was $6000, the variance is ($6000 – $5000) = $1000. If required, the variance percentage would be ($1000 / $5000) * 100 = 20%.
Types of Variances
Depending on the various project constraints, various variances can be calculated. In Project Management, most commonly, we deal with Cost Variance (CV) and Schedule Variance (SV).
- Cost Variance = BCWP – ACWP
Where BCWP is the Budgeted Cost of Work Performed (Earned Value)
ACWP is Actual Cost of Work Performed - Schedule Variance = BCWP – BCWS
Where BCWS is Budgeted Cost of Work Scheduled
Interpreting Variances
Positive variance indicates that the project is under-budget or ahead of schedule, while negative variance indicates that the project is over-budget or behind schedule. Management should investigate both positive and negative variances to learn lessons and improve future planning and controlling processes.
Closing the Variance
The last step would be to take corrective and preventive actions necessary to close the variance. The actions could be reallocation of resources, rescheduling of tasks, cost adjustment, etc., based on the identified cause behind the variance.
Variance analysis is a proactive strategy used in maintaining control over a project’s direction. PMI-RMP professionals need to perform these analyses regularly to continually improve their project’s estimation, planning, and control processes. It enables them to anticipate potential issues or changes and implement timely corrective actions, which ultimately results in better risk management.
Practice Test
True or False: Variance analysis compares actual performance to performance standards or benchmarks.
- True
- False
Answer: True
Explanation: Variance analysis is used in financial, project, and operations management as a tool to identify and understand the variance between actual performance and standards or benchmarks.
In project management, which of the following can be evaluated using variance analysis?
- A. Budget
- B. Schedule
- C. Quality
- D. All of the above
Answer: D. All of the above
Explanation: Variance analysis is a comprehensive tool that can be applied to evaluate all aspects of a project, including budget, schedule, and quality.
True or False: A positive variance necessarily means a positive performance.
- True
- False
Answer: False
Explanation: A positive variance can mean the project is under budget or ahead of schedule, but it could also potentially signify under-utilization of resources or inaccurate planning.
When should you perform a variance analysis?
- A. At the beginning of the project
- B. Halfway through the project
- C. At the end of the project
- D. Regularly throughout the project
Answer: D. Regularly throughout the project
Explanation: Variance analysis should be performed regularly throughout the project to identify any deviations from the plan and take corrective actions proactively.
In variance analysis, the term “Favorable Variance” refers to:
- A. The forecast is higher than the actual result
- B. The forecast is lower than the actual result
- C. The actual result is the same as the forecast
- D. None of the above.
Answer: A. The forecast is higher than the actual result
Explanation: A favorable variance indicates that the actual performance is better than the standard or planned performance.
Variance analysis should be used in conjunction with other types of analysis for a more accurate understanding of the project’s performance.
- A. True
- B. False
Answer: A. True
Explanation: While variance analysis is important, it is not the only measure of a project’s success. It should be used with other types of analysis for a well-rounded view of project performance.
In a detailed variance analysis, variances are split into:
- A. Capacity variance
- B. Efficiency variance
- C. Rate variance
- D. Volume variance
- E. All of the above
Answer: E. All of the above
Explanation: A detailed variance analysis splits variances into capacity, efficiency, rate, and volume to assess the different elements contributing to the overall project variance.
True or False: Variance at Completion (VAC) is a forecast of what the variance, specifically the Cost Variance (CV), will be upon the completion of the project.
- True
- False
Answer: True
Explanation: Variance at Completion (VAC) helps to forecast the expected actual over or under budget amount at the end of the project.
Which of the following could be a root cause for a negative schedule variance?
- A. More resources than planned
- B. Higher productivity than expected
- C. Incorrect estimates
- D. All of the above
Answer: C. Incorrect estimates
Explanation: Incorrect estimates are a common cause for a negative schedule variance; the other two options generally contribute to a positive variance.
True or False: Variance Analysis is only used in cost and schedule management.
- True
- False
Answer: False
Explanation: Variance Analysis can be applied to all areas of project management, including cost, schedule, scope, and quality. It’s a tool to track project performance against the planned baseline.
Interview Questions
What is variance analysis in project management?
Variance analysis in project management is the quantitative investigation of the difference between actual and planned behavior. It involves identifying the causes and degrees of difference between the planned and actual performance and their impact on project outcomes.
How does variance analysis contribute to risk management?
Variance analysis helps identify potential risks and assess their impacts. By comparing actual results with expected outcomes, project managers can identify areas of concern, measure performance, and make necessary changes to mitigate risks.
What are the key components of variance analysis?
The key components of variance analysis include actual cost, planned value, and earned value. These values allow project managers to understand if they are over or under budget and how efficiently they are progressing compared to the project plan.
What is Schedule Variance (SV) in project management?
Schedule Variance (SV) in project management refers to the difference between the earned value (EV) and the planned value (PV). It shows whether the project is ahead or behind the schedule.
What is Cost Variance (CV) in project management?
Cost Variance (CV) in project management refers to the difference between the earned value (EV) and the actual cost (AC). It shows whether the project is under or over the projected costs.
How do you calculate Schedule Performance Index (SPI)?
The Schedule Performance Index (SPI) is calculated by dividing the Earned Value (EV) by the Planned Value (PV). It indicates how efficiently the project team is utilizing time.
How do you calculate Cost Performance Index (CPI)?
The Cost Performance Index (CPI) is calculated by dividing the Earned Value (EV) by the Actual Cost (AC). It indicates how efficiently the project team is utilizing its resources.
Can variance analysis be applied at different stages of the project?
Yes, variance analysis can and should be applied at different stages of a project. It provides crucial insights at each phase of the project, allowing project managers to make timely adjustments as necessary.
What action can a project manager take if the variance analysis shows a negative trend?
If variance analysis shows a negative trend, a project manager can take several actions, such as reassessing the project plan, realigning resources, changing project strategies, or even initiating corrective actions to bring the project back on track.
Is variance analysis a proactive or reactive approach to risk management?
While variance analysis can be both, it’s largely a reactive approach to risk management as it involves looking at past performance to inform future action. However, it can still be proactive when used regularly throughout the project to identify any potential issues or risks early on.
How does variance analysis assist in forecasting future project performance?
Variance analysis, through the understanding of past performance and present standing of a project, can help predict future performance. Data from variance analysis reveal trends that can be extrapolated to forecast future project costs, timeframes, and resource requirements.
Why is it important to conduct a variance analysis?
Conducting a variance analysis is crucial because it identifies areas where a project is underperforming, helps in identifying the root cause of these issues, and aids the project manager in making data-driven decisions to bring the project back on track.
What is the relationship between variance analysis and change management?
Variance analysis and change management are closely linked. The outcomes of a variance analysis can often lead to changes needing to be made in either project execution or planning. This is where change management comes in to efficiently implement these changes.
What is the role of Earned Value Management (EVM) in variance analysis?
Earned Value Management (EVM) is a method that combines schedule performance and cost performance to assess project performance and progress. It plays a crucial role in variance analysis by providing quantitative data to measure project performance against the project plan.
How can project managers use the results of a variance analysis?
Project managers can use the results of a variance analysis to identify deviations from the project plan, determine their cause, assess their impact, take corrective measures, and improve future performance. The analysis aids in effective decision-making regarding project progress and adjustment.
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