Sunday, October 21, 2018

Schedule Variance (SV) & Cost Variance (CV)

Schedule Variance and Cost Variance are two important parameters in earned value management, helping you analyze the project’s progress, i.e. how are you performing in terms of schedule and cost.
Suppose you are managing a construction project, and the client comes and asks you to update him about the current status and progress of the project.
What does the client mean by asking for the status and progress of the project?
How will you get this information?
The client is asking about the cost incurred to date, work completed, and how the project is performing in terms of cost and schedule. Put more simply, the client is asking you to provide him with the project’s earned value, planned value, actual cost, Schedule Variance, and Cost Variance.
Earned value is the value of the work actually completed to date, planned value is the money you should have spent as per the schedule, and actual cost is the amount spent on the project to date.
Schedule Variance helps determine if you are behind or ahead of schedule, and Cost Variance helps determine if you are under budget or over budget. These variances give you important information about the project’s progress. It is your job to monitor these variances regularly.
Variance analysis is a key to the success of any project. A successful project must finish on time and within the approved budget. With the help of these variances, you can easily monitor your project performance and take corrective action whenever required. Variance analysis will inform you if you are going in the correct direction or not.

Schedule Variance (SV)

It is very important for you to keep your project on schedule. Not only does it help you complete your project on time, but it also helps you avoid unnecessary cost overruns due to slippage of schedule, because as you go over the stipulated time, your costs start rising exponentially.
For example: you have rented some equipment for a specified duration of time. However, if you need this equipment for some additional time, you may end up paying more because the equipment may not be available at the previously negotiated price, or you may need to rent this equipment from other suppliers on an urgent, short-term contract at a higher price.
Schedule Variance is a very important analytical tool for you. This tool gives you the information needed to determine if you are ahead of schedule or behind the schedule in terms of dollars.
Formula for Schedule Variance (SV)
Schedule Variance can be calculated by subtracting planned value from earned value.
Schedule Variance = Earned Value – Planned Value
SV = EV – PV
From the above formula, we can conclude that:
  • If Schedule Variance is positive, this means you are ahead of schedule.
  • If Schedule Variance is negative, this means you are behind schedule.
  • If Schedule Variance is zero, this means you are on schedule.
When the project is completed, Schedule Variance becomes zero, because at the end of the project all Planned Value has been earned.
Example of Schedule Variance (SV)
You have a project to be completed in 12 months and the budget of the project is 100,000 USD. Six months have passed and 60,000 USD has been spent, but on closer review you find that only 40% of the work has been completed so far.
Find the project’s Schedule Variance (SV), and determine if you are ahead of schedule or behind schedule.
Given in the question:
Actual Cost (AC) = 60,000 USD
Planned Value (PV) = 50% of 100,000
= 50,000 USD
Earned Value (EV) = 40% of 100,000
= 40,000 USD
Now,
Schedule Variance = Earned Value – Planned Value
= 40,000 – 50,000
= – 10,000 USD
The project’s Schedule Variance is -10,000 USD. Since it is negative, you are behind schedule.

Cost Variance (CV)

Cost Variance is as important as Schedule Variance. You must complete your project within the approved budget. Exceeding planned budget is bad for you and your stakeholders.
It is all about the money, and clients are very cautious about what they are spending. Organizations are sensitive towards it because any deviation from the cost baseline can affect their profit, and, worst case, they may have to put more money into the project to complete it. This is especially detrimental if the contract is a fixed price.
Cost Variance deals with the cost baseline of the project. It provides you with information about whether you are over budget or under budget, in terms of dollars. Cost Variance is a measure of cost performance of a project.
Formula for Cost Variance (CV)
Cost Variance can be calculated by subtracting the actual cost from earned value.
Cost Variance = Earned Value – Actual Cost
CV = EV – AC
From the above formula, we can conclude that:
  • If Cost Variance is positive, this means you are under budget.
  • If Cost Variance is negative, this means you are over budget.
  • If Cost Variance is zero, this means you are on budget.
Example of Cost Variance (CV)
You have a project to be completed in 12 months and the budget of the project is 100,000 USD. Six months have passed and 60,000 USD has been spent, but on closer review you find that only 40% of the work has been completed so far.
Find the project’s Cost Variance (CV), and determine if you are under budget or over budget.
Given in the question:
Actual Cost (AC) = 60,000 USD
Earned Value (EV) = 40% of 100,000 USD
= 40,000 USD
Now,
Cost Variance = Earned Value – Actual Cost
CV = EV – AC
= 40,000 – 60,000
= –20,000 USD
Hence, the project’s Cost Variance is -20,000 USD, and since it is negative, you are over budget.

Summary

Schedule Variance and Cost Variance are great tools to analyze project health. If both variances are positive, this means that your project is progressing well. However, if either variance is negative, this means that something is wrong and you have to take corrective action to bring the project back on track.

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