Cost Variance in Project Management – Tips and Strategies

Cost variance in project management refers to the difference between the budgeted cost of a project and the actual cost of the project. It is an essential metric for project managers to monitor and manage, as cost variance can indicate potential budget overruns or cost savings. By tracking cost variance and taking corrective actions when necessary, project managers can ensure that the project is completed within the planned budget and timeline.

Cost Variance in Project Management

Project management involves various processes, including planning, executing, monitoring, and controlling. One of the essential aspects of project management is managing the project’s cost. Cost variance is a metric used to measure the difference between a project’s budgeted cost and the project’s actual cost. This article will discuss cost variance in project management, including its definition, formula, causes, and ways to manage it.

What is Cost Variance in Project Management? Cost variance (CV) is a measure of the difference between the budgeted cost of work performed (BCWP) and the actual cost of work performed (ACWP). In other words, it measures how well the project performs in terms of its cost objectives. The formula for calculating the cost variance is:

CV = BCWP – ACWP

If the result of the formula is positive, it means that the project is under budget, and if it is negative, it is over budget. The cost variance can be expressed as a percentage by dividing the CV by the BCWP and multiplying it by 100. A positive percentage indicates that the project is under budget, while a negative percentage indicates that the project is over budget.

Example: Let’s assume that a project’s budgeted cost of work performed (BCWP) is $100,000, and the actual cost of work performed (ACWP) is $110,000. To calculate the cost variance, we can use the formula:

CV = BCWP – ACWP CV = $100,000 – $110,000 CV = -$10,000

The result of the formula is negative, indicating that the project is over budget by $10,000. We can express this as a percentage by dividing the CV by the BCWP and multiplying by 100:

Cost Variance (%) = (CV / BCWP) x 100 Cost Variance (%) = (-$10,000 / $100,000) x 100 Cost Variance (%) = -10%

The result is negative, indicating that the project is over budget by 10%.

Causes of Cost Variance in Project Management There can be various causes of cost variance in project management, some of which are discussed below:

1. Inaccurate cost estimates. 

One of the significant causes of cost variance in project management is inaccurate cost estimates. If the project team has not accurately estimated the project’s cost, it can result in cost variance. Inaccurate cost estimates can result from inadequate experience estimating project costs, incorrect assumptions, or insufficient data.

2. Changes in the Scope of The Project Can also Cause Cost Variance. 

If the project team has yet to plan for changes in the project scope adequately, it can result in additional costs. For example, if the client requests additional features not initially included in the project scope, it can result in additional costs that were not budgeted.

3. Unexpected Events or Delays Unexpected Events or Delays Can also Cause Cost Variance. 

For example, if a critical team member falls sick or a piece of equipment fails, it can result in delays and additional costs. Similarly, unexpected events such as natural disasters or political unrest can cause delays and additional costs.

4. Variations in the Cost of Labor or Materials.

 Variations in the cost of labor or materials can also cause cost variance. For example, if the cost of materials increases unexpectedly, it can result in additional costs that should have been budgeted. Similarly, if the cost of labor increases due to a shortage of skilled workers or other factors, it can result in additional costs.

Managing Cost Variance in Project Management

To manage cost variance effectively, project managers must establish a baseline budget, regularly monitor and track the project’s progress, and take corrective actions when necessary. Some of the ways to manage cost variance in project management are discussed below:

1. Establish a baseline budget 

The first step in managing cost variance is establishing a baseline budget. The baseline budget is the original budget the project team developed during the planning phase. It includes all the project’s costs, including labor, materials, equipment, and other expenses. By establishing a baseline budget, project managers can compare the project’s actual cost with the planned cost and determine the cost variance.

2. Monitor and track the project’s progress. 

Once the baseline budget is established, project managers must regularly monitor and track the project’s progress. They should compare the project’s actual cost with the planned cost and identify any cost variance. They should also track the project’s schedule and identify any delays that can result in additional costs.

3. Corrective Actions

Project managers should take corrective actions to address the issue if they identify cost variance. Corrective actions can include revising the project plan, reallocating resources, renegotiating contracts, or reducing the project scope. Project managers should also communicate the cost variance to the stakeholders and provide regular updates on progress.

4. Project Management Software

Project management software can help project managers track progress and manage cost variance. The software can provide real-time data on the project’s cost and schedule, enabling project managers to identify any cost variance and take corrective actions. Project management software can also help project managers communicate with the project team and stakeholders, ensuring everyone is on the same page.

Conclusion 

Cost variance is an essential metric in project management, as it measures the difference between the budgeted cost of a project and the actual cost. Various factors, including inaccurate cost estimates, changes in the scope of the project, unexpected events or delays, and variations in the cost of labor or materials, can cause cost variance. To manage cost variance effectively, project managers must establish a baseline budget, monitor and track the project’s progress, and take corrective actions when necessary. 

Project management software can help managers manage cost variance and communicate with the project team and stakeholders. By effectively managing cost variance, project managers can ensure the project is completed within the planned budget and timeline.