In project management, getting an early indication of problems is the silver bullet that allows the project manager to correct the problems before they start.
Cost Variance, usually abbreviated as CV, is one of the fundamental outputs of Earned Value Management. It tells the project manager how far ahead or behind the project is at the point of analysis, usually right now.
- CV = Cost Variance
- EV = Earned Value
- AC = Actual Cost
All units are monetary (dollars, euros, etc.).
Earned Value (EV)
Also known as Budgeted Cost of Work Performed (BCWP), Earned Value is the amount of the task that is actually completed. It is calculated from the project budget.
For example, if the task ‘Paint Wall’ is 25% complete and the task budget is $500, EV = 25% x $500 = $125.
Actual Cost (AC)
Also known as Actual Cost of Work Performed (ACWP), Actual Cost is the amount that has been spent on the task. It should include values for labor, materials, equipment, and any other item of cost that was necessary to complete the task.
For example, if the actual cost of the task ‘Paint Wall’ is $100 for supplies and $200 for labor, AC = $100 + $200 = $300.
Interpretation of Results
- If CV is positive, the task is under budget.
- If CV is zero, the task is on budget.
- If CV is negative, the task is over budget.
- CV = $1,000 means the project is under budget.
- CV = $0 means the project is right on budget.
- CV = -$1,000 means the project is over budget.
What is it Used For?
Cost Variance represents how far the project is over or under budget relative to the work performed. For example, let’s say the task Paint Wall has a budget of $500 and the cost variance is $100. This would represent a project that is significantly under budget.
Cost variance must be calculated on a task by task basis and summed to determine the overall project’s cost variance.
It is a “snapshot” at a certain point in time. Whenever the project is being worked on the cost variance is changing, because the project is getting more over or under budget as time goes on and as work goes on.
In order for the Cost Variance to remain constant, the project would have to proceed at a perfect, linear pace from start date to finish date according to the schedule.
Related Earned Value Metrics
The cost variance should be analyzed in conjunction with the schedule variance (SV), which tells you how far ahead or behind schedule the project is.
- CV and SV are positive: The project is under budget and ahead of schedule (hooray!)
- CV is positive and SV is negative: The project is under budget but behind schedule. In other words, the tasks performed were efficient, but more of them should have been performed by now.
- CV is negative and SV is positive: The project is over budget but ahead of schedule. In other words, the tasks that have been performed have cost too much, but more of them have been performed than scheduled.
- CV and SV are negative: The project is over budget and behind schedule (boo!)
The Cost Performance Index (CPI) is similar to CV but is relative to the task budget. It gives you an idea how far over or under budget the task is relative to the overall task budget. As you can imagine, a -$500 cost variance is insignificant to a billion dollar oil platform project but quite significant to a $4,000 wall painting project.
In order to calculate the cost variance, the project must initially be divided into tasks and each task must be assigned the following data:
- Start and Finish Dates
This is called the cost baseline, and it gives the project manager something to track against. Project scheduling is one of the fundamental aspects of project management.
In this example we have a project with two tasks:
- Purchase Supplies
- Paint Wall
The initial cost baseline is:
|ID||Task||Start date||End Date||Budget|
|100||Purchase Supplies||Mar. 8||Mar. 18||$2,000|
|200||Paint Wall||Mar. 10||Mar. 23||$500|
Let’s say it’s March 13 today. Determine the Cost Variance for the project.
Step 1: Determine the percent complete for each task. We will assume the tasks are 50% and 25% complete, respectively.
We will add a percent complete column to the table.
|ID||Task||Start date||End Date||Budget||% Complete|
|100||Purchase Supplies||Mar. 8||Mar. 18||$2,000||50%|
|200||Paint Wall||Mar. 10||Mar. 23||$500||25%|
Step 2: Determine Earned Value (EV)
Task 100 is 50% complete, therefore EV = 50% x $2,000 = $1,000.
Task 200 is 25% complete, therefore EV = 25% x $500 = $125.
Next we will add a column called EV.
|ID||Task||Start date||End Date||Budget||% Complete||EV|
|100||Purchase Supplies||Mar. 8||Mar. 18||$2,000||50%||$1,000|
|200||Paint Wall||Mar. 10||Mar. 23||$500||25%||$125|
Step 3: Determine Actual Cost (AC).
We will assume that we have spent $1,200 on Task 100 and $25 on Task 200.
Now we will add a column called AC.
|ID||Task||Start date||End Date||Budget||% Complete||EV||AC|
|100||Purchase Supplies||Mar. 8||Mar. 18||$2,000||50%||$1,000||$1,200|
|200||Paint Wall||Mar. 10||Mar. 23||$500||25%||$125||$25|
Step 4: Determine Cost Variance (CV)
CV = EV – AC.
|ID||Task||Start date||End Date||Budget||% Complete||EV||AC||CV|
|100||Purchase Supplies||Mar. 18||Mar. 18||$2,000||50%||$1,000||$1,200||-$200|
|200||Paint Wall||Mar. 10||Mar. 23||$500||25%||$125||$25||$100|
The overall project cost variance is negative $100, therefore the project is over budget. The first task is over budget, and the second task is under budget but not enough to make up the shortfall.
The paint supplies cost too much so the wall painting has to be cheaper to make up the difference.