Cost Variance (CV)

Cost Variance (CV) in Project Management - Complete Guide

What is Cost Variance (CV)?

Cost Variance (CV) is a critical project management metric that measures the budgetary performance of a project by comparing the earned value to the actual costs. Simply put, CV shows whether a project is under or over budget at a specific point in time.

The formula for Cost Variance is:

CV = EV - AC

Where:
- EV (Earned Value): The value of work actually completed
- AC (Actual Cost): The actual costs incurred for the work completed

Why is Cost Variance Important?

Cost Variance is important because it:

1. Provides an objective measure of budgetary performance
2. Serves as an early warning system for potential budget overruns
3. Helps project managers make informed decisions about corrective actions
4. Enables stakeholders to understand the financial health of the project
5. Forms a crucial part of Earned Value Management (EVM), a comprehensive project control technique

How Does Cost Variance Work?

Cost Variance works by comparing what you've achieved (in monetary terms) against what you've spent:

- Positive CV (CV > 0): Indicates the project is under budget. You've spent less than planned for the work completed.

- Zero CV (CV = 0): Indicates the project is exactly on budget. The actual costs match the earned value.

- Negative CV (CV < 0): Indicates the project is over budget. You've spent more than planned for the work completed.

Example:

Let's say a project has:
- Earned Value (EV) = $80,000
- Actual Cost (AC) = $95,000

CV = $80,000 - $95,000 = -$15,000

The negative CV (-$15,000) indicates the project is $15,000 over budget for the work completed so far.

Cost Variance in Context

CV is often used alongside other EVM metrics:

1. Schedule Variance (SV): Measures whether the project is ahead or behind schedule
2. Cost Performance Index (CPI): Measures cost efficiency (CV expressed as a ratio)
3. Schedule Performance Index (SPI): Measures schedule efficiency

Together, these metrics provide a comprehensive view of project performance.

Exam Tips: Answering Questions on Cost Variance (CV)

1. Know the formula perfectly: CV = EV - AC. This is fundamental.

2. Understand the interpretation:
- Positive CV → Under budget (good)
- Zero CV → On budget
- Negative CV → Over budget (bad)

3. Practice calculations: Many exam questions require calculating CV given EV and AC values.

4. Master related formulas:
- CPI = EV/AC (Cost Performance Index)
- CV% = CV/EV (Cost Variance Percentage)

5. Remember reporting conventions: CV is typically expressed in currency units (dollars, euros, etc.).

6. Link to corrective actions: Be prepared to recommend appropriate actions based on CV results.

7. Consider limiting factors: Recognize that CV only shows current status, not future trends.

8. Look for scenario questions: Exam questions often present project scenarios where you must calculate and interpret CV.

9. Watch for tricky questions that might reverse the formula or confuse CV with other metrics.

10. Focus on practical applications: Questions may ask how CV affects project decisions or stakeholder communications.

Common Exam Question Types:

1. Calculation questions: "If EV = $200,000 and AC = $180,000, what is the CV?"
2. Interpretation questions: "What does a CV of -$25,000 tell you about the project's budget performance?"
3. Action questions: "Given a negative CV trend over three reporting periods, what should the project manager do?"
4. Integration questions: "How would you use CV along with SV to evaluate overall project health?"
By mastering Cost Variance and its applications, you'll be well-prepared to handle related questions on the PMI-SP exam and apply these concepts in real-world project management scenarios.