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What are the key metrics and indicators of project cost variance?

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Project cost variance analysis is a vital tool for project accounting, as it helps you measure and control the performance of your project budget. In this article, you will learn what are the key metrics and indicators of project cost variance, and how to use them to improve your project management and profitability.

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PIYUSH KSHIRSAGAR

BE Chemical Engineer, Pharma Professional
Jonathan Corrie

1 What is project cost variance?

Project cost variance (PCV) is the difference between the actual cost and the planned cost of a project. It shows whether your project is over budget or under budget, and by how much. A positive PCV means that your project is spending less than planned, while a negative PCV means that your project is spending more than planned. PCV can be calculated for the whole project, or for specific activities, tasks, or resources within the project.

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PIYUSH KSHIRSAGAR

BE Chemical Engineer, Pharma Professional
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Key metrics for project cost variance include Cost Performance Index (CPI), Variance at Completion (VAC), and Earned Value (EV). Monitoring these indicators helps prevent over-budgeting by providing real-time insights into project cost efficiency, progress, and potential risks. Regularly analyzing these metrics allows for proactive adjustments to ensure projects stay within budgetary constraints.

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2 Why is project cost variance important?

Project cost variance is a vital tool to monitor and control your project budget and identify any issues or risks that may affect your project outcome. Tracking and analyzing PCV allows you to evaluate the efficiency and effectiveness of your project execution and resource allocation. Furthermore, it can help you adjust your project plan and budget to account for any changes or deviations. Additionally, it ensures that you can communicate your project status and progress to stakeholders and clients, ultimately ensuring that your project meets its objectives and delivers value.

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Camille Jones

Co-Founder of Seed Technologies LLC - Robotics and Mobile Apps Company
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PCV can help identify areas of need. For example if a project is over budget and progress is slow then it is an opportunity to investigate areas where individuals may be over complicating a task or don't understand requirements. However, it may also indicate a task has more technical risk then expected and requires more resources. The key in determining the correct root cause is open and honest communication with an emphasis on meeting the client's needs not just maintaining budget and schedule.

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Jonathan Corrie
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If you are looking to scale the delivery of projects or services then understanding your ability to deliver against the budget and cost profile is important. Understanding variance in project costings is a great starting point to identify if you have an effective delivery methodology. Cost overrun could mean that you are not accurately scoping projects or that your labor costs are too high compared with the fees you charge for your service. Ultimately being able to unpack the bottlenecks in project delivery will inform how you can better manage your costs.

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3 How to calculate project cost variance?

To calculate project cost variance, you need two data points: the actual cost (AC) and the planned cost (PC). The actual cost is the amount of money that you have spent on your project so far, while the planned cost is the amount of money that you have budgeted for your project or a specific period of time. The formula for PCV is:

PCV = PC - AC

For example, if your planned cost for a month is $10,000 and your actual cost is $9,500, your PCV is:

PCV = $10,000 - $9,500

PCV = $500

This means that you have a positive PCV of $500, which means that you are under budget by $500.

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4 How to interpret project cost variance?

Project cost variance can be expressed as a percentage or a ratio, to make it easier to compare and understand. The percentage or ratio of PCV indicates the degree of variance from the planned cost, and whether it is favorable or unfavorable. The formulas for percentage and ratio of PCV are:

Percentage of PCV = (PCV / PC) x 100

Ratio of PCV = PC / AC

For example, if your planned cost for a month is $10,000 and your actual cost is $9,500, your percentage and ratio of PCV are:

Percentage of PCV = ($500 / $10,000) x 100

Percentage of PCV = 5%

Ratio of PCV = $10,000 / $9,500

Ratio of PCV = 1.05

This means that your PCV is 5% of your planned cost, and that your planned cost is 1.05 times your actual cost. A percentage or ratio of PCV above 0% or 1 means that you have a positive or favorable PCV, while a percentage or ratio of PCV below 0% or 1 means that you have a negative or unfavorable PCV.

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5 How to improve project cost variance?

Project cost variance is influenced by many factors, such as scope changes, schedule delays, resource availability, quality issues, risks, and uncertainties. To improve your PCV, you need to identify and address the root causes of your cost deviations and implement corrective actions or preventive measures. Some of the best practices to do this include planning your project budget realistically and accurately based on historical data, market research, and expert opinions; monitoring and updating your project budget regularly; implementing a change control process to manage and document any changes to scope, schedule or resources; using a contingency reserve to cover any unforeseen or unavoidable costs; and applying earned value management (EVM) to integrate cost, schedule and scope performance, as well as calculate metrics such as cost performance index (CPI) and estimate at completion (EAC).

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Jonathan Corrie
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Too often teams will run to the method of delivery as the first mechanism to improve project cost performance. Often issues such as overrun or going over budget are driven by front end activities related to how the project was sold or scoped. Start by reviewing the level of discounting provided and analyse your pricing vs. competition or for peers. Understand how effective your scoping is of projects. If you have a cohort of projects where the variance shows your costs are always over then it points to an underlying issue that either you aren't charging enough or you have vastly under estimated the effort that it will take to complete the project. From here follow the thread of the project and review processes where you can improve.

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What are the key metrics and indicators of project cost variance?

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1 What is project cost variance?

2 Why is project cost variance important?

3 How to calculate project cost variance?

4 How to interpret project cost variance?

5 How to improve project cost variance?

Project Accounting

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