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Variance Analysis in Project Management- An Introduction:

This is perhaps one of the most important techniques for project management as it describes a method or a procedure for comparing the expected performance with the actual performance analysis of exception and hence determining and correcting deviations from the prescribed plan of the project. The variance analysis allows the project manager to know, understand, analyze, and address causes of deviations from the original objectives of the project. Types of variance analysis are discussed below along with examples.

Major Techniques of Variance Analysis

1.Schedule Variance (SV)

Schedule variance thus refers to the deviation between earned value and planned value and defines the difference between what is being spent actual and what is planned to spend. It tells if a project is keeping up with schedule.

Formula:

SV

=

EV

PV

SV=EV−PV

Interpretation:

  • Positive SV: ahead of schedule
  • Negative SV: behind schedule

Example:

Either if EV was $45,000 or PV was $50,000, thus the SV will be:

SV=45,000−50,000=−5,000

The negative SV indicated a delay in the schedule.

2. Cost Variance (CV):

Cost Variance is concerned with the measure of difference that exists between earned value (EV) and actual cost (AC). From this perspective, expectation indicates whether a project stays within the budget.

Formula

CV

=

EV

− AC

CV=EV−AC

Interpretation:

  • Positive CV means that the project is not within the budget.
  • Negative CV means that the project exceeds the budget.

Example:

If EV is $45,000 and AC is $48,000, then the

CV

=45,000-48,000 = -3,000

CV=45,000−48,000=−3,000

This negative CV indicates cost overruns.

3. Schedule Performance Index (SPI)

This is Schedule Performance Index. It determines the scheduling efficiency of the project by comparing the earned value to a planned value.

Formula:

SPI

= EV

PV

SPI=

PV

EV

Interpretation: SPI > 1: The project is ahead of schedule.

SPI < 1: The project is behind schedule. For example: If EV=$45, 000 and PV=$50, 000, SPI becomes SPI = 45,000 50,000 = 0.9 SPI= 50,000 45,000 =0.9 An SPI of 0.9 shows that there is delay in sthe chedule.

4. Cost Performance Index (CPI)

Cost Performance Index is a measure of cost efficiency using the ratio of EV to AC.

Formula: CPI= EV AC CPI = AC EV Interpretation: CPI > 1:

The project is under budget.

CPI< 1:

The project is over budget. For example, if the EV is $45,000 and the AC is $48,000, the CPI is: CPI =45,00048,000≈0.9375

CPI=

48,000

45,000

0.9375 A CPI of 0.9375 indicates a cost overrun. Interpreting Variance Analysis Results Positive SV: Indicates that the project is ahead of its schedule, which can be an advantage.

indicate underutilization of resources.

  1. Negative SV: Signifies delay in schedule, meaning adjustments on time and/or resources should be made.
  2. Positive CV: The project saves costs, yet it needs to be kept in check not to compromise quality.
  3. Negative CV: It is a cost overrun and it requires cost control measures.
  4. SPI and CPI > 1 are project efficiency metrics.
  5. SPI and CPI < 1 are pitfalls of schedule and cost measures.

Corrective Measure Actions

The following are some measures a project manager may consider after identifying variances in the project schedule:

  • Revising the Schedule: Adjust the timeline and reallocate resources to recover from delays.
  • Changing the Budget: Reallocation of funds, spending cuts, or seeking additional funds may be considered for dealing with an overbudget.
  • Optimizing Resource Utilization: Allocate resources more efficiently for better efficiency.
  • Assuring Quality: Cost and time have been consumed to achieve required quality or even better quality.

Example of a correctable action:

In a software project where there is a negative SV (schedule slippage), the project manager would do the following:

  • Add developers to speed up coding.
  • Do parallel testing to save time.
  • Use “critical path” methods to accelerate just those portions necessary to meet deadline requirements.

Conclusion

This last type of variance analysis provides an excellent means for project managers to actively hold their noses to the grindstone. Analysis of variances in schedule and cost and the determination of efficiency indicators such as SPI and CPI will shine bright beams over which it can view timely corrective actions and thus can keep the project on the quality track within the planned budget trajectory.

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