Cost Variance – Earned Value Management

House falling from cliff

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.

Formula

CV = EV – AC

Where:

  • 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.

EV = Percent Complete (actual) x Task 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.

For example,

  • 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.

Cost Baseline

In order to calculate the cost variance, the project must initially be divided into tasks and each task must be assigned the following data:

  1. Start and Finish Dates
  2. Budget

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.

 

Example

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
TOTAL $2,500

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%
TOTAL $500  

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
TOTAL $2,500   $1,125

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
TOTAL $2,500   $1,125 $1,225

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
TOTAL $2,500   $1,125 $1,225 -$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.

About Bernie Roseke, P.Eng., PMP

Bernie Roseke, P.Eng., PMP, is the president of Roseke Engineering. As a bridge engineer and project manager, he manages projects ranging from small, local bridges to multi-million dollar projects. He is also the technical brains behind ProjectEngineer, the online project management system for engineers. He is a licensed professional engineer, certified project manager, and six sigma black belt. He lives in Lethbridge, Alberta, Canada, with his wife and two kids.

View all posts by Bernie Roseke, P.Eng., PMP

Leave a Reply

Your email address will not be published. Required fields are marked *

*