Anyone who dreams of making it big in any area must remember that the project budget should always be a priority. Every aspect of finance - from basic administration, goal setting, determining investment value to your most important financial goals - needs constant attention. Competent financial literacy is even more important when you are just starting a business. One of the fundamental lessons you need to understand is the difference between cost variance and plan variance.
Applying this knowledge will surely come in handy when tackling tasks like yoursrisk management processesand target settings.
Why should you know the difference between cost variance and plan variance?
Knowing the difference between cost variance and schedule variance will help you plan your time and budget for your projects or business. Are you on schedule in reaching your goal? Were you able to meet a planned budget or have you already exceeded it?
By asking these questions and keeping these factors in mind, you can identify your strengths and areas for improvement.
This also allows you or your business to maintain and strengthen what is generatingbenefitand works well for the overall success of your project.
An example for agency owners
For example, even the smallest change in material replenishment, or a big decision like hiring an additional employee or a part-time consultant, can impact how your budget plays out over a project's development and deadline.
The evaluation and analysis of these two factors will therefore support you in your decision-making. Your monitoring is vital.
Read on to learn more about the differences between the two, explained below.
Cost variance, defined
In reality, many things can happen when handling a business project. It is possible that you will incur more costs than you have budgeted for. Here the cost variance will play a decisive role.
The cost variance is calculated by the formula CV = EV - AC. One has to get the difference between Earned Value andthe actual costto measure project success.
The three methods of cost variance
The same formula is used through three methods, namely (1) cost variance at time, (2) cumulative variance, and (3) variance at completion.
The first guy looks at thedeserved value, which refers to how valuable the actual work done is.
The second type takes into account how much of a project's budget has only been used up to a certain point in time.
Budget from start to finish
Finally, the third type looks at the total budget from inception to its completion - compared to the allocated budget, which is mainly used for future preparations.
Tip for project managers
A key tip for project managers is to leave some wiggle room when planning a budget, no matter how solid the budgeting is. Some factors can be difficult to control, such as B. Delivery peaks or delivery bottlenecksPrices, fluctuations in currency changes and labor costs.
Here's an example of cost variances at work.
Imagine running a school that needed repairs in some classrooms.
- The classroom repair budget was $8000, but the actual repair cost was $9500.
- This results in a cost variance of $1500.
- Because the actual cost exceeds the budgeted amount, this is an unfavorable cost variance.
To keep things within your budget, the actual cost should be less than your budgeted amount.
Also important is how you investigate what led to the $1500 cost variance. You can check the quantities of materials procured for your classroom in terms of material price. This can help you make decisions about how to handle your money.
Luckily, another factor comes into play that can kind of level the playing field. That would be a deviation from the plan.
Deviation from plan, defined
Everyone loves a tight and well-planned schedule. One has to realize that for every delay there is an undesirable effect.
In the business world, the plan variance helps to identify whether there will be liquidity problems and cost overruns. You can calculate the plan variance by subtracting the Earned Value (EV) from the Planned Total Value (PV). Keeping these on track will prevent you from adding resources and working overtime.
Furthermore, plan variance analysis also eliminates the possibility of being in debt considering that most business transactions also involve contracts.
If you fail to meet your budget within a specific timeline – let's say you failed to give an outside consultant the agreed amount just within the promised timeframe to meet aCooperationwith you - it is very likely that you will have to face a lawsuit in the future for not being able to fulfill your obligation.
Finally, make sure your budget is planned within a specific timeline. You can also use a so-calledPlanleistungsindex. It is calculated by dividing your total earned value by your projected value. You know your project is progressing well or as planned when the score is greater than or equal to one.
Deviation from plan, illustrated
To illustrate how a plan variance analysis is performed, below is an example scenario. To make it easier, let's break it down into steps.
Know all the factors involved.
Imagine the hypothetical situation that you are running a school and need to have one of your classrooms repaired. You have allocated 10 work days to this project, which is estimated at $5,000.
Identify the Earned Value (EV)
In this scenario, let's assume that the work for your mini-library is 90% complete by day 7. You need to determine earned value by multiplying the actual work completed by the budgeted total cost ($5000). The value earned would be $4500.
Calculation for the planned value (PV)
Another factor to consider is that the project should be 70% complete by day 7 (divide 7 out of a total of 10 working days). Multiply the budgeted amount ($5000) and you get $3500.
Get the schedule variance
Recall that the formula for plan variance is Earned Value (EV) – Planned Value (PV). For the mini-library, $4500-$3500 makes a total of $1000.
This is a good sign as it is a positive number and it means you have done more work than originally planned.
Use the Schedule Performance Index to check
SPI in project management is calculated by dividing earned value by projected value. In the same scenario, dividing 4500 by 3500 gives a grand total of 1.29. This is greater than one, showing that the project is going well against schedule. The team in charge of fixing your classroom can also do 1.29 hours worth of workevery hour.
The final result
Simply put, knowing about cost and schedule variances gives you an opportunity to guide your business through two lenses: one that looks at the costs you incurred while working on a project, and one that looks at the time allotted to do it considers goal or cause.
Transparency for better project management
The effective application of these two variants ensures cost transparency, which would otherwise have remained hidden and would have prevented you from good preparation.
Better risk management and long-term plans
Eventually, they will also prove useful in other aspects of running a business, such as: B. in planning risk management, the realization of long-term plans and administrationshort-term financial goals.
With this knowledge, we hope that you keep costs under control and find solutions that are effective and suitable!
Frequently asked questions about cost variance and schedule variance
What is an acceptable cost variance?ㅤ
Benchmarks vary from industry to industry, but a general rule of thumb is to aim for a deviation of less than 10%.
Why is plan deviation important?
Deadline variances are typically important on projects where the deadline is very inelastic. It helps organizations identify projects early that are at risk of missing a deadline so they have the opportunity to get things back on track.
How is the cost variance calculated?ㅤ
Cost Variance = Earned Value - Actual Cost
You may come across more technical terms to describe earned value and actual cost, such as:
Cost Variance = Budgeted Labor Cost (BCWP) - Actual Labor Cost (ACWP)
What is a cost variance analysis?
In the context of professional services and agency work, cost variance analysis is a form of forecasting that uses the cost variance at a given point in the life cycle of a project to predict how much over or under the originally estimated cost the project will end up being high.