Do You Know the Cause of Variance on Projects?
Projects start with a plan. The team begins the work and then something happens… you start reporting a variance against the original baseline. While we all know that sometimes plans shift and the team has to accommodate that, what’s really helpful is understanding why variance on projects happens in the first place. Equipped with that information, teams can make better proactive choices to minimize the impact of variances later in the project.
So what does variance mean in project management?
Understanding variance
Variance is the term given to the difference between actual performance and planned performance. Normally, project teams manage and track cost variance and schedule variance.
Cost variance (CV) is the difference between earned value and actual cost. It tells you whether the project is overspending or underspending against your forecast.
Schedule variance (SV) is the difference between earned value and planned value. It shows whether work is ahead or behind of the schedule.
Read out guide to earned value formulas for more background on each of the measures. For now, we’re going to assume you’ve got a basic understanding of what they are, and you are interested in why they happen. Let’s dive into the reasons for variance on projects.
Causes of cost variance
There are lots of reasons why project costs change and why you might be reporting higher or lower costs than forecasts. Here are some common reasons.
Rate changes. If your forecast includes rateable work e.g. day rates for sub-contractors, labor rates, and those rates change, your whole forecast will be out. If the rates go up, you’ll be running over against the forecast. If the rates go down, your actual costs will be showing as underspent against the baseline. If the rate change is permanent and it is substantively affecting your ability to report accurately, the best thing to do would be to reforecast the budget with your new information.
Price changes. Similar to rate changes, but affecting individual items instead of the run rate for a particular resource. For example, if a supplier gives you a hefty discount on an item, or the price of a commodity increases.
Poor estimating. It happens even on big projects with mature estimating practises: sometimes estimates are based on incorrect assumptions. Or sometimes it’s difficult to know what is required until you strip back the site and see the underlying state of the wiring. When actual work doesn’t match up with what was estimated, that can affect your costs.
Changes. Scope changes affect the project’s requirements and therefore what work needs to be done. Items could be added or removed and that will affect the budget.
All of these can cause a variance in your cost reporting.
Causes of schedule variance
Schedule changes can happen for many reasons. Here are some of the most common.
Mismatched timing. Where a sub-contractor or supplier cannot meet the date in your schedule. Perhaps they originally agreed to the dates but then realized they were unable to hit it. Perhaps they were never involved in the original plan and the assumption was made that they would be able to work to the contract schedule. Whatever the reason, misaligned timing between suppliers and those receiving the goods or services can slow down a project. This is more likely to create a delay than be a reason why a project is running ahead of schedule.
Poor estimating. Just like with the project budget, inadequate estimates can affect the schedule too. It might be difficult to estimate the amount of time it takes for some tasks, and that has resulted in low quality estimates being used for the schedule. It could be that estimating practises are not mature, and the team is not equipped to provide more realistic data. Either way, the schedule could run behind or ahead based on performance against a baseline that was constructed with unrealistic estimates.
Not enough resources. Not having enough people on the team will cause a project to show a negative schedule variance. This could happen because there were plans to recruit and unfortunately the team was not able to find suitable candidates.
Changes to work patterns. A good schedule will take into account public holidays and allow for resources to take annual vacation time. However, some changes to work patterns cannot be foreseen with such clarity. For example, disputes on site might lead to work stopping for a period of time until the conflict can be resolved.
Changes. Changes have an impact on the schedule as well as the budget. Generally, changes add more time to the schedule. This can be the case even if scope items are removed, because remedial work is required to retrofit the remaining scope to the new reduced scope, and to re-test everything. However, if a big chunk of the requirements is taken out, you may see a positive schedule variance.
Understanding why variance happens is the key to minimizing the impact when it happens – or to avoid it happening at all. For example:
- Spend enough time on estimating, using statistical estimating models and robust analysis.
- Factor in time to build relationships with sub-contractors, suppliers and other key stakeholders to make it more likely that conflict can be resolved quickly and with minimal impact to the baseline.
- Be realistic about the resources required and where they are coming from.
- Consider what options are available for mitigating price changes and actively manage this within your risk management plans.
Earned value data analysis and reporting provides early sight of any variance on projects. That helps identify trends in project performance with enough time for the team to act on them. It might not be possible to avoid variance completely, but at least having information about why it happens and being able to spot deviation from the baseline as quickly as possible gives you the opportunity to get the project back on track.
If you feel that your team could do with some support with this topic, an earned value training course on variance reporting will help.