Variance And Earned Value

A variance is defined as any schedule, technical performance, or cost deviation from a specific plan. Variances must be tracked and reported. They should be mitigated through corrective actions and not eliminated through a baseline change unless there is a good reason. Variances are used by all levels of management to verify the budgeting system and the scheduling system. The budgeting and scheduling system variance must be compared because:

• The cost variance compares deviations only from the budget and does not provide a measure of comparison between work scheduled and work accomplished.

• The scheduling variance provides a comparison between planned and actual performance but does not include costs.

There are two primary methods of measurement:

• Measurable efforts: Discrete increments of work with a definable schedule for accomplishment, whose completion produces tangible results.

• Level of effort: Work that does not lend itself to subdivision into discrete scheduled increments of work, such as project support and project control.

Variances are used on both types of measurement.

In order to calculate variances, we must define the three basic variances for budgeting and actual costs for work scheduled and performed. Archibald defines these variables3:

• Budgeted cost for work scheduled (BCWS) is the budgeted amount of cost for work scheduled to be accomplished plus the amount or level of effort or apportioned effort scheduled to be accomplished in a given time period.

• Budget cost for work performed (BCWP) is the budgeted amount of cost for completed work, plus budgeted for level of effort or apportioned effort activity completed within a given time period. This is sometimes referred to as "earned value."

• Actual cost for work performed (ACWP) is the amount reported as actually expended in completing the work accomplished within a given time period.

Note: The Project Management Institute has changed the nomenclature in their new version of the PMBOK whereby BCWS is now PV, BCWP is now EV, and ACWP is now AC. However, the majority of heavy users of these acronyms, specifically government contractors, still use the old acronyms. Until the PMI acronyms are accepted across all industries, we will continue to focus on the most commonly used acronyms.

BCWS represents the time-phased budget plan against which performance is measured. For the total contract, BCWS is normally the negotiated contract plus the estimated cost of authorized but unpriced work (less any management reserve). It is time-phased by the assignment of budgets to scheduled increments of work. For any given time period, BCWS is determined at the cost account level by totaling budgets for all work packages, plus the budget for the portion of in-process work (open work packages), plus the budget for level of effort and apportioned effort.

A contractor must utilize anticipated learning when developing the time-phased BCWS. Any recognized method used to apply leaning is usually acceptable as long as the BCWS is established to represent as closely as possible the expected actual cost (ACWP) that will be charged to the cost account/work package.

These costs can then be applied to any level of the work breakdown structure (i.e., program, project, task, subtask, work package) for work that is completed, in-program, or anticipated. Using these definitions, the following variance definitions are obtained:

• Cost variance (CV) calculation:

3. Russell D. Archibald, Managing High-Technology Programs and Projects (New York: John Wiley & Sons, 1976), p. 176.

A negative variance indicates a cost-overrun condition.

• Schedule variance (SV) calculation:

A negative variance indicates a behind-schedule condition.

In the analysis of both cost and schedule, costs are used as the lowest common denominator. In other words, the schedule variance is given as a function of cost. To alleviate this problem, the variances are usually converted to percentages:

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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