variance analysis and project monitoring

variance analysis

Variance Analysis.
The difference between the costs detailed in the plans and the actual costs is called variance. In order to calculate variance, up to date and accurate information is essential - providing a clear picture of the extent to which tasks are complete and the expense incurred to date. Clearly variance can be calculated for those tasks that have been completed, but for tasks that are partially completed the calculations are more complicated. A positive variance indicates that a project is under-spending whereas a negative variance indicates that a project is suffering from over-spend. In the above example the 'actual cost' has been established as 12,500 (cost) units and you can see the effect on the variance by altering the estimated 'cost to complete'.

Applying Variance.
Variance can be used to quantify the difference between the planned costs and the current planned costs, at whatever level is required - for example, for the project as a whole, for a sub-project, a group of related tasks or for individual tasks. Variance is usually expressed as a percentage, enabling the divergence to be quantified in proportional terms. Remember a negative variance indicates that the project is suffering from overspend.

Limitations of Variance Analysis.
This variance analysis can lead to the identification of certain types of task that frequently overrun their budget whilst other tasks may be seen to regularly come in under their budget. Occurrences such as these require further investigation in order to identify potential efficiency gains. The major problem with a variance analysis approach to project monitoring is the amount of time it takes to establish actual costs. On the majority of large projects, supported by a typical accounts department, there will be a time lag of around 6 weeks before spend information can be accurately reported.

The monitoring cycle can be so long that it renders the application of control impossible. Typically, by the time a problem has been identified through variance analysis it is too late to take corrective action. This is a major shortcoming of variance analysis and highlights the need for a monitoring system that depicts the current status of the project more effectively. A more practical approach, known as earned value analysis, is based on variance analysis and is introduced in the next section.

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