What Is Cost Variance (CV)? Definition, Formula, Example ...

Cost Variance (CV) is an indicator of the difference between earned value and actual costs in a project. It is a measure of the variance analysis technique ... SkiptocontentHomeTools&TemplatesWhatIsCostVariance(CV)?Definition,Formula,Example,CalculatorYouprobablycameacrossthecostvariance(CV)whenyouhadbeenreadingaboutearnedvaluemanagementandvarianceanalysis.WhetheryouarecontrollingthecostofyourprojectorpreparingforthePMPexam–beingfamiliarwiththeCVisessentialtomasterprojectcostmanagement.This articleintroducestheconceptofcostvariance.Italsocontainsthe definitionsofthedifferentCVtypes,theirformulasaswellasanexampleand acostvariancecalculator.ContentsWhatIsCostVariance?WhatIsPoint-in-time/Period-by-Period CostVariance?WhatIsCumulativeCost Variance?WhatIsVarianceat Completion(VAC)?HowIsCostVariance Calculated?HowIsthePeriod-by-Period CostVarianceCalculated?HowIstheCumulativeCost VarianceCalculated?WhatIstheMeaningofthe CalculatedCostVarianceValues?CalculatorforCost Variances(Period-by-PeriodorCumulativeCV)ExamplesofaCost VarianceCalculationandAnalysisExample1:ASimpleCalculationofCumulativeandPointinTimeCostVariancesCalculationofCostVariancesInterpretationoftheCalculatedCVExample2:CaseStudyofaProjectin aTurnaroundSituationCalculatingtheCumulativeandPeriod-by-PeriodCVInterpretationoftheCostVariancesConclusionWhatIsCostVariance?CostVariance(CV)isanindicatorofthedifferencebetweenearnedvalueandactualcostsinaproject.Itisameasureofthevarianceanalysistechniquewhichisapartoftheearnedvaluemanagementmethodology(EVM;source).Somearguethatisanelementoftheearnedvalueanalysis(EVA)aswell.However,thisisnotexactlyaccurate–EVAisratherthetechniquewheretheinputdata(i.e.thecostandvalueindicators)forthecalculationofcostandschedulevariancesaredetermined.Thereare threetypesofcostvariances:point-in-timeorperiod-by-period costvariance,cumulativecostvariance,andvarianceatcompletion(VAC),asaspecific typeofthecumulativecostvariance.The followingsectionsshedalightontheirdefinitionsanddifferencesofthese types.WhatIsPoint-in-time/Period-by-Period CostVariance?Thisisthesimplesttypeofcostvariance:Itbasicallyreferstothedifferencebetweenactualcostandearnedvaluewithinoneperiod.Thereby,itdoesnottakeanyindicatorsorvariancesofpreviousorfuturevariancesintoaccount.For instance,ifyouareinmonth4ofaproject,youwouldcalculatethe point-in-timecostvarianceofthatperiodbyusingtheactualcost(AC)and earnedvalue(EV)ofthe4thmonthonly.Chartpresentingperiod-by-periodcostvariances(CV),earnedvalue(EV)andactualcost(AC)perperiod.WhatIsCumulativeCost Variance?The cumulativeCVisameasureforthecumulativedifferenceofthecumulativeearned valueandactualcostfiguresofseveral,usuallyconsecutive,periods.Ifa projectmanagerintendstocalculatethecumulativecostvarianceofthe4thmonthofaproject,forinstance,she/hewillhavetocalculatethecumulative earnedvalue(EV)andthecumulativeactualcost(AC)ofthe4thand thepreviousmonthsfirst.Inother words,thecumulativecostvarianceofthe1sttothe4thmonthisthedifferencebetweenthesumofEV(1)+EV(2)+EV(3)+EV(4)andthesum ofAC(1)+AC(2)+AC(3)+AC(4).Samplechart,illustratingthecumulativecostvarianceinconjunctionwithperiod-by-periodcostvariances.WhatIsVarianceat Completion(VAC)?Thevarianceatcompletionisthecumulativecostvarianceattheendoftheproject.Thecalculationparametersarethebudgetatcompletion(BAC)andtheactualorestimatedcostatcompletion(EAC).TheVACisoftenusedasameasureoftheforecastingtechniques–youwillfindmoredetailsinthisarticleontheestimateatcompletion(EAC).HowIsCostVariance Calculated?Thebasic formulaforcalculatingthecostvarianceis:CV=EV–AC,where:EV=Earnedvalue;AC=Actualcost.Earnedvalue(EV)referstothepartofthebudgetallocatedtothepartoftheworkthathasbeencompletedinaperiodorcumulativelyoverseveralperiods.Theactualcost(AC)istheamountofcostorresourcesthathasbeenincurredtoperformtheauthorizedwork.Itcanrelatetoasingleorseveralperiods(cumulativeAC)This formulaneedstobeadaptedforthedifferenttypesofcostvariances.While thebasiccalculation–thedifferenceofEVandAC–isbasicallythesame, theinputparametersarereplacedasfollows.HowIsthePeriod-by-Period CostVarianceCalculated?Theperiod-by-period orpoint-in-timecostvarianceiscalculatedbyusingthebasicformulawith inputparametersthatrefertoasingleperiod:CV(period)=EV(period)–AC(period)Theinput parameters–EVandAC–relatetotheworkperformedandthecostincurredin thereferenceperiod.Theydonotconsiderthenumbersforanyotherperiod.HowIstheCumulativeCost VarianceCalculated?The cumulativecostvarianceusesthebasicformulawithcumulativeinput parametersoverseveralperiods:CV(cumulative)=EV(cumulative)–AC(cumulative)or CV(cumulative)=SumofCV(all periods),where: CV(allperiods)representsallpoint-in-timeCVsoftheperiodsinscope.The cumulativecostvarianceisoftencalculatedforatimehorizonfromthe beginningofaprojecttothemostrecentperiod.However,itcanalsoreferto anyothercombinationofperiods,e.g.acumulativecostvariancecouldbe calculatedforthemonths2to4whichwouldnottakethefirstmonthnorany periodafterthe4thmonthintoaccount.WhatIstheMeaningofthe CalculatedCostVarianceValues?Thevalue ofacalculatedcostvariancefallsintooneofthefollowing3valueranges.Each ofthemhasadifferentmeaning:anegativecostvariance(CV<0) indicatesacostoverrun,apositivecostvariance(CV>0) indicatesthattheearnedvalueexceedstheactualcost,andacostvarianceof0whichmeans thatthebudgetismet,i.e.theactualcostisequivalenttotheearnedvalue.Thecostvarianceispositiveastheearnedvalueexceedstheactualcost.Theearnedvaluefallsbelowtheactualcost–thecostvarianceisnegative.CalculatorforCost Variances(Period-by-PeriodorCumulativeCV)Usethis calculatorifyouwishtocalculatetheperiod-by-periodorcumulativecost varianceofyourproject.Ifyouneed todeterminethecumulativecostvariance,fillinthecumulativeearnedvalue andcumulativeactualcost(makesurethatbothvaluesrelatetothesamescope ofperiods).Forasingleperiod,populateACandEVwiththevaluesforthat particularperiod.PaymentoptionsExamplesofaCost VarianceCalculationandAnalysisThefollowing2examplesillustratethecalculationandtheuseofcostvariancesinaproject.Asthesevariancesareoftenusedtogetherwiththecost-performanceindex(CPI)–youwillfindmoredetailsinthecorrespondingexampleinthisCPIarticle.NotethattheinputnumbersintheCPIarticleareconsistentwiththeseexamples.Example1:ASimpleCalculationofCumulativeandPointinTimeCostVariancesInthefirstexample,thePMO’searnedvalue analysisproducedthefollowing numbers: Month1Month2Cumulativenumbers (month2)PlannedValue50150200EarnedValue60130190ActualCost50170220CalculationofCostVariancesTheprojectmanagercalculates2cost variancetypes:thecumulativeandthepoint-in-timecostvariances,usingthe formulaAC=EV–AC. Month1Month2Cumulativenumbers (month2)EarnedValue60130190ActualCost50170220CostVariance(CV)perperiod60–50= 10-130–170= -40–CostVariance,cumulative––190–220=-30[or:10+(-40)=-30]InterpretationoftheCalculatedCVThecumulativecostvarianceisnegative. Thismeansthatthetotalcoststhathavebeenincurredsofarexceedthe earnedvalueby30.Thisdifferencebetweenearnedvalueand actualcostinthisexampleisactuallynotinsignificant.Calculatingthe cost-performanceindexanddeterminingtheto-completeperformanceindexcan helpanalyzethisresultandassessitsimpactontheoverallproject.Lookingattheperiod-by-periodcost variancesleadstoamoredifferentiatedpicture.Whilethefirstmonth’scost variancewaspositive(i.e.theearnedvalueexceededtheactualcost),it turnedeventuallynegativeinthe2ndmonth.Inthiscase,thecalculationofpoint-in-time costvariancesperperiod–inadditiontothecumulativecostvariance–can givetheprojectmanagerahintwheretolookfortherootcausesofthecost overrun.Example2:CaseStudyofaProjectin aTurnaroundSituationInthesecondexample,thePMOhas determinedthefollowingnumbersforthefirst3monthsofaproject: Month1Month2Month3CumulativePlannedValue100130200430EarnedValue60120220400ActualCost90150200440CalculatingtheCumulativeandPeriod-by-PeriodCVTheprojectmanageriscalculatingthecost variancesasfollows:cumulative CV=400–440=-40Again,thenegativecumulativecost varianceindicatesacostoverrunafterthefirst3monthsoftheproject.However,breakingitdownintoaperiod-by-period analysisleadstothefollowingfigures: Month1Month2Month3CumulativeCostVarianceperperiod-30-3020-40InterpretationoftheCostVariancesThecostvarianceschangedfromCV(m1)=-30inthefirstmonthtoapositiveCV(m3)= +20inthethirdmonth.Suchcostdevelopmentsarenotunusual giventhatprojectsandteamsmayrequiresome‘settlingin’timebeforetheycan leveragetheirfullperformancepotential.Withoutprejudicetootherinternal andenvironmentalaspects,thechangetoapositivepoint-in-timecostvariance inthe3rdmonthcouldbeanindicatorofapositiveturn-aroundof theproject’sperformance.Theprojectmanagermightwanttofurther assessandfacilitatethesustainabilityofthispositivedevelopment.ConclusionThecost varianceisoneofthefundamentalmeasuresofthevarianceanalysiswhichis partoftheearnedvaluemanagementmethodintroducedinPMI’sProject ManagementBodyofKnowledge(source: PMBOK®,6th ed.,ch.7.4.2.2DataAnalysis,p. 261-264).TheCV itselfindicateswhetherthecostincurredforworkperformedinoneormore periodsofaprojectmeets,exceedsorfallsbelowthebudgetedamount.Whilethismeasurerelatestothecostofaproject,thecorrespondingindicatorfortheprojectscheduleistheschedulevariance(SV).Variationsofthesemeasuresarethescheduleperformanceindexandthecostperformanceindex–youwillfindmoredetailsontheseindexesinthisarticle.Postnavigation←PreviousPostNextPost→CategoriesSearchfor:RecentPostsHowtoCreateaProjectScheduleBaseline(6IllustratedSteps)ProjectScheduleBaseline:Definition|Purpose|ExamplePerformanceMeasurementBaseline:Definition|Example|6-StepGuideScopeBaseline:Definition|Example|4-StepGuide|UsesCost-BenefitAnalysisChecklistforProjectManagers(FreeDownload)StakeholderEngagementAssessmentMatrix:Uses&ExampleAgileReleasePlanninginHybridandAgileProjectsDefinitiveEstimatevs.ROM/RoughOrderofMagnitude(+Calculator)ProjectScheduleNetworkDiagram:Definition|Uses|ExamplePDM–PrecedenceDiagrammingMethod[FS,FF,SS,SF](+Example)WhatAreLeadsandLagsinProjectManagement?HowProjectManagementSoftwareImprovesProductivityEstimatingActivityDurations:Definition,Methods,PracticalUsesBottom-UpEstimating–Definition,Example,Pros&ConsPerformancePrismforPerformance&StakeholderManagement