## About this lesson

Variance occurs when the actual situation is different from the planned or expected situation. In projects, variance analysis applies to schedule variance and cost variance. It determines both why the actual situation is different than what was planned and the impact that will have on the project.

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## Quick reference

### Variance Analysis

Variance occurs when the actual situation is different from the planned or expected situation. In projects, variance analysis applies to schedule variance and cost variance. It determines both why the actual situation is different than what was planned and the impact that will have on the project.

### When to use

Variance analysis is a technique that is used as part of project control. Once a project baseline is established during project planning, the actual project performance can be compared to that baseline at any point in time in the project. If there is a difference, it is a variance and variance analysis should be done.

### Instructions

Using variance analysis, deviations from the baseline are analyzed to determine if they were a “one-time” occurrence or an ongoing trend that is likely to continue. You can then determine if they will impact the project’s overall goals and objectives. Variance analysis often leads to corrective actions to reverse unwanted variances. A variance analysis should always be done prior to developing a project forecast.

Projects hardly ever go exactly according to plan (at least I have never had one that went exactly to plan). Some things go better than expected, some go worse. Some start early, some late, and some are just different. Variance analysis helps the project team understand why things are different than expected, and more importantly, what they should do about it, if anything.

#### Types of variance

- Current period variance: this is variance in the time period of the report, typically monthly. It can be strongly impacted by tasks that are ahead or behind schedule, and therefore drop out or come into the period.
- Trend variance: this is normally a cumulative look at a type of activity from the beginning of the project or phase. This will help to cancel out variances that are due to minor schedule changes, but it can also mask important variances until they become very large.
- Earned value variance: this is a set of variances that separates schedule variance effects and cost variance effects. It requires the use of a financial system that is able to collect and analyse task-level financial data.

#### Cost variance

Cost variance is the underrun or overrun of actual costs as compared to the estimated project costs found in the cost baseline. When evaluating current project cost variance, it is important to exclude the effect of tasks that are ahead or behind schedule. The cost baseline has embedded assumptions for which tasks will occur in which months. If a task is not worked on during a month because of a schedule delay, that could appear to be an underrun to the project for that month, since less money was spent than planned. However, if the task is accomplished the following month, it would appear to be an overrun for that month since the cost occurred in that month without any planned cost for that task occurring in that month. A trend analysis variance will smooth out that effect over time. However, a trend analysis can mask an underrun or overrun if the overall project significantly deviates from the planned schedule. The Earned Value Management approach eliminates the schedule impact on cost variance by using Earned Value (EV) for the baseline cost instead of Planned Value (PV). The EV represents the planned or budgeted cost for the work that has been performed. The Actual Cost (AC) is the total costs associated with doing that work. The cost variance then is calculated as the difference between EV and AC. A positive cost variance is an underrun and a negative cost variance is an overrun.

Cost Variance = EV - AC

#### Schedule variance

Schedule variance is the ahead of schedule or behind schedule position of the project as compared to the schedule found in the schedule baseline. Schedule variance is normally presented in terms of time (days or weeks) ahead of or behind schedule. A caution when calculating currernt schedule variance, the important tasks to consider are the critical path tasks. As long as the critical path tasks are on schedule and the non-critical path tasks have float, the project should still be able to complete on time. The non-critical path tasks could be weeks or months late, as long as they have float, they should be able to complete before the critical path tasks complete.

The Earned Value Management approach to schedule variance gives the variance in units of money, not time. The Earned Value Management schedule variance is the estimated cost of the work that has not been done according to the project schedule plan. For work that is accomplished earlier than scheduled, this would be a positive value representing the estimate of the work accomplished early. For work that was late this is a negative value representing the estimated cost of the work that was not done when scheduled. The schedule variance is then the difference between the EV, which is the estimated or budgeted cost of the work that has been performed and the PV which is estimated or budgeted cost of the work that should have been performed if the work was done to the baseline schedule.

Schedule Variance = EV - PV

Earned Value Management variance analysis provides a clear understanding of how much variance is a schedule issue and how much is a cost issue.

#### Definitions

- Variance: “A quantifiable deviation, departure, or divergence away from a known baseline or expected value.”
*PMBOK*^{®}*Guide* - Actual Cost (AC): “The realized cost incurred for the work perfomed on an activity during a specific time period.”
*PMBOK*^{®}*Guide* - Cost Variance (CV): “The amount of budget deficit or surplus at a given point in time, expressed as the difference between the Earned Value (EV) and the Actual Cost (AC).”
*PMBOK*^{®}*Guide* - Schedule Variance (SV): “A measure of schedule performance expressed as the difference between the Earned Value (EV) and the Planned Value (PV).”
*PMBOK*^{®}*Guide*

These definitions are taken from the Glossary of the Project Management Institute, *A Guide to the Project Management Body of Knowledge*, (*PMBOK*^{®} *Guide*) – Sixth Edition, Project Management Institute, Inc., 2017.

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