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Variance Analysis

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Variance Analysis is a fundamental project management technique used to quantitatively assess the differences between planned and actual performance. It involves comparing baseline project metrics, such as cost, schedule, and scope, against actual project outcomes to identify deviations (variances). This analysis helps project managers understand the extent of these variances, determine their causes, and develop strategies to address them. Key components of Variance Analysis include: - **Cost Variance (CV)**: Measures the difference between the earned value of work performed (EV) and the actual cost incurred (AC). It indicates whether the project is under or over budget. - **CV = EV - AC** - **Schedule Variance (SV)**: Assesses the difference between the earned value of work performed (EV) and the planned value of work scheduled (PV). It shows whether the project is ahead of or behind schedule. - **SV = EV - PV** - **Variance at Completion (VAC)**: Estimates the expected budget variance at the project's completion by comparing the Budget at Completion (BAC) with the Estimate at Completion (EAC). - **VAC = BAC - EAC** Variance Analysis is essential for several reasons: 1. **Performance Measurement**: It provides objective data on project performance, allowing for accurate assessment of progress toward goals. 2. **Trend Identification**: By analyzing variances over time, project managers can identify trends that may indicate underlying issues needing attention. 3. **Cause Identification**: Understanding the root causes of variances enables the team to implement corrective actions and prevent future deviations. 4. **Forecasting**: Variance Analysis aids in predicting future project performance, facilitating better planning and resource allocation. 5. **Stakeholder Communication**: It offers a clear and quantitative method to communicate project status to stakeholders, enhancing transparency and trust. Implementing Variance Analysis requires regular monitoring and data collection throughout the project lifecycle. It should be integrated into the project's performance reporting processes. When variances are identified, it's crucial to conduct a thorough analysis to determine if they represent a temporary fluctuation or a systemic issue that could impact project success. In summary, Variance Analysis is a proactive tool that empowers project managers to maintain control over project outcomes. By systematically examining deviations from the plan, it supports informed decision-making, risk management, and contributes to the efficient and effective delivery of project objectives.

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PMI-SP - Variance Analysis Example Questions

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Question 1

Project manager Paula is overseeing a construction project. The project has a planned value of $200,000 and an actual cost of $250,000. Earned Value is $180,000. What is the cost and schedule performance of the project?

Correct Answer: The project is over budget and behind schedule

Cost Performance Index (CPI) is calculated as the Earned Value (EV) divided by the Actual Cost (AC). In this case, it is 180,000 divided by 250,000, which is less than 1. A CPI less than 1 indicates that the project is over budget. Schedule Performance Index (SPI) is calculated as the EV divided by the Planned Value (PV). In this case, it is 180,000 divided by 200,000, which is again less than 1. An SPI less than 1 indicates that the project is behind schedule. Therefore, 'The project is over budget and behind schedule' is the correct answer. The other answers are incorrect because they assert the project is under budget, ahead of schedule, or a combination of both, which contradicts the calculated CPI and SPI.

Question 2

Project manager Alex is working on a building project with a planned value of $200,000. The actual cost is $175,000 and earned value is $185,000. What is the project’s cost and schedule performance?

Correct Answer: The project is under budget and behind schedule.

To determine the project's cost and schedule performance, we need to look at the Cost Performance Index (CPI) and Schedule Performance Index (SPI). CPI is calculated as Earned Value (EV) divided by Actual Cost (AC). In this case, EV is $185,000 and AC is $175,000. Therefore, CPI is $185,000 divided by $175,000, which is greater than 1. This indicates that the project is under budget. SPI is calculated as EV divided by Planned Value (PV). Here, PV is $200,000 and EV is $185,000. So, SPI is $185,000 divided by $200,000, which is less than 1. This indicates that the project is behind schedule. Thus, the project's cost and schedule performance is: The project is under budget and behind schedule.

Question 3

In a project where the Cost Performance Index (CPI) is 0.9 and the Schedule Performance Index (SPI) is 1.1, what does the variance analysis suggest?

Correct Answer: The project is over budget but ahead of schedule

The best answer is: The project is over budget but ahead of schedule. Let's analyze the given information: 1. Cost Performance Index (CPI) = 0.9 2. Schedule Performance Index (SPI) = 1.1 CPI interpretation: - CPI < 1 indicates the project is over budget - CPI = 0.9 means the project is spending more than planned SPI interpretation: - SPI > 1 indicates the project is ahead of schedule - SPI = 1.1 means the project is progressing faster than planned Therefore, the variance analysis suggests that the project is over budget (CPI < 1) but ahead of schedule (SPI > 1). The other options are incorrect because: - The project cannot be under budget when CPI < 1 - The project is not behind schedule when SPI > 1 - The project is not perfectly on track for both cost and schedule performance, as both indices deviate from 1.0

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