How to Calculate Cost Variance for a Project (Formula Included)

Cost variance (also referred to as CV) is the difference between project costs estimated during the planning phase and the actual costs. In ... SkiptoContent ProjectManagement,Reporting ByQuincyYarbrough   |   Jul29,2021 Throughoutthelifeofaproject,projectmanagerscheckinonprogressandcompareittotheprojectplan—comparingtheirpredictionstoreality.Iftheydon’tdothisregularly,oddsarethebudgetwillsufferandtheirprojectwillfailentirely.Luckily,thesedeviancesfromtheplan,suchascostvariance,don’thavetosinkaproject. Infact,theycanactuallystrengthenit.Thekeyisspottingthemandmakingadjustmentstostayontherightpath.Oneofthebestwaystoavoidcostoverrunisbycalculatingcostvariance. UnderstandingProjectCosts Allprojectscostmoney,regardlessoftheirsize,scopeordeliverables.We’veallheard“there’snosuchthingasafreelunch”.Thesamegoesforprojects–there’snosuchthingasaprojectwithoutcosts.Thesecostscomeinmanydifferentforms,fromthecostofmaterialstosimplythecostofdoingbusiness(rent,salaries,etc.).It’stheprojectmanager’sjobtotakeallofthesecostsintoaccountandcreateaflexiblebudget. Trackyourproject’scostsinrealtimeanddeliveritunderbudgetwithProjectManager.TryItFree! DifferentTypesofProjectCosts Inordertofullyunderstandprojectcostvariance,it’shelpfultobefamiliarwiththemaintypesofprojectcosts.Takealookatthefouryou’remostlikelytosee.Mostprojectshaveallfour,andeachcancontributetooverallcostvariance: DirectCosts:Thinkofdirectcostsascoststhatgostraighttotheprojectinordertoachievedeliverables.Ahelpfulexampleofadirectcostisthecostofthematerialneededtobuildsomething.Thecostofthesematerialsisgoingtowardcreatinganendproduct. IndirectCosts:Indirectcosts,ontheotherhand,gotowardfunding“behindthescenes”expensesthatareincurredthroughoutthelifeofaproject.They’realsoknownasoverheadcosts.Forexample,thecostofrentinganofficespaceisacommonexpensefixedoverhead.Thisexpensemustbepaidinordertocompletetheproject,butitalsogoestowardsupportingotherprojects. FixedCosts:Fixedcostsareexpenseswithsetpricesthataren’tsubjecttoanykindofchange.Thesearedependablecoststhatwillnotfluctuateandpotentiallythrowoffabudget.Bothdirectandindirectcostscanalsobefixedcosts(orvariablecosts).Afixedcost,forexample,mightlookliketheflatfeeacontractorchargesfortheirservices. VariableCosts:Variablecosts,ontheotherhand,arenotaspredictable.Forexample,thecostofequipmentrentalmaygoupordowndependingonthevendor,thedemandorhowlongtheequipmentisneeded. Related:FreeProjectBudgetTemplateforExcel WhatIsCostVarianceinProjectManagement? Costvariance(alsoreferredtoasCV)isthedifferencebetweenprojectcostsestimatedduringtheplanningphaseandtheactualcosts.Inotherwords,itishowmuchactualcostsvaryfrombudgetedcosts.Calculatingcostvarianceishowprojectmanagerstrackexpensestoseeifaprojectisunderoroverbudget. Thesecalculationsarepartofatechniquecalledearnedvaluemanagement(EVM).InanEVMsystem,thegoalofcostmanagementistoestablishwhetheravarianceispositive,negativeorzero. Whenprojectmanagershavethisearnedvalueanalysisinformation,theycanmakethenecessaryadjustmentstostayontrack.Ifavarianceisextremelyhigh(negative),changesneedtobemade.Ifthereisanextremelylowcostvariance(positive)orzerovariance,theycantakeitasasigntokeepdoingwhatthey’redoing. TheFourTypesofCostVarianceFormulasinEVM Therearefourvariationsofthecostvarianceformulausedinearnedvaluemanagement(EVM).Eachofthesevarianceequationssolvefordifferentvalues,soit’sveryimportanttounderstandallofthemandwhatexactlytheyshow. CostVariance CostVariance(CV)=EarnedValue(EV)–ActualCost(AC)  Costvarianceisexactlyhowmuchaprojectisoverorunderbudget.Acostvarianceequationsubtractsactualcostfromearnedvaluetosolveforthisnumber. CostVariancePercentage CostVariancePercentage(CV%)=CostVariance(CV)/EarnedValue(EV)  Acostvariancepercentageisthepercentageoverorunderbudgetaprojectis.Thisiscalculatedbydividingcostvariancefromearnedvalue. CostPerformanceIndex CostPerformanceIndex(CPI)=EarnedValue(EV)/ActualCost(AC)  Acostperformanceindex(CPI)isametricusedtojudgehowwellresourcesarebeingusedinaproject.WhensolvingforaCPI,thevaluewillbeoneoftwothings: Lessthanorequalto1(resourcesarenotbeingusedefficiently) Greaterthanorequalto1(resourcesarebeingusedefficiently) InordertosolveforCPI,youmustdivideearnedvaluebyactualcosts. CompleteCostPerformanceIndex ToCompleteCostPerformanceIndex(TCPI)=(TotalBudget–EV)/(TotalBudget–AC) Solvingforacompletecostperformanceindex(TCPI)isextremelyhelpful,especiallyifyou’reexperiencingahigh(negative)projectvariance.ATCPIisanindexthatshowsyouhowresourcesmustbeusedfortherestofaprojectinordertocomeinunderoronbudget. TofindyourTCPI,beginbysubtractingyourearnedvaluefromyourtotalbudget.Then,subtractyouractualcostfromthetotalbudget.Last,dividethefirstquotientbythesecondquotient. UsingToolstoAutomaticallyCalculateProjectVariance Throughoutthelifeofaproject,you’llwanttohaveeachofthesecostvarianceformulasatyourdisposal.Thankfully,therearecostmanagementtoolsthatmakekeepingyoureyeonvarianceseffortlesssothatyoudon’thavetomanuallycrunchthenumbers. ProjectManagerfillsformulaswiththecorrectvaluesautomaticallyandpreventsanyhumanerrorthatcanleadtomajorbudgetingmistakes.Factorsliketotalbudget,actualcosts,earnedvaluesandmoreareupdatedinreal-timesothatyou’realwaysseeingthemostcurrentdata. Createandmanageprojectbudgets,aswellasseehowactualcostscomparetoplannedcostsontheprojectdashboard.TheProjectManagerprojectdashboardupdatesautomatically,soyou’realwayslookingatthemostcurrentfiguresandmakingthesmartestbudgetingdecisions.Thismakesallthedifferencebetweenspottingcostvariancesandmissingcrucialdetails.Keepyoureyeoncostbaselines,aswellasspendingandwhereprojectsareatintermsofbudget. Needtosharethisinformationwithstakeholders?Createabudgetreportinonlyafewclickstokeeptheteamuptospeedandmakingthebestdecisionstogether.Havingthisinformationatyourfingertipsandbeingabletoshareitisthedifferencebetweenprojectsstayingonbudgetandgoingoverbudget,whichcanresultincostoverrunandtotalfailure. Calculatingcostvariancerequiresprojectmanagementsoftwarerobustenoughtocalculateandorganizeyourdatainrealtime.ProjectManagerisacloud-basedprojectmanagementsoftwarethatkeepyourproject’scostswithinbudget.Tryittodaywiththisfree30-daytrial. 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