Weathering the Storm of Cost Variance Analysis: Part Two

We are discussing the complexities of Earned Value Management related to cost variance analysis and have covered the basics in Part 1.   Let’s take a look at some real examples from real projects.

Good CV – Example #1 (Overrun situation)
Issue: The cost of preparing the xx document increased due to overtime required to process the high number of comments from the customer and the Board of Directors from the review process. 
Status: The additional cost will not be recovered.  The overtime allowed the project to recover the slip in the schedule.  Overrun has been trended and has been reflected in the project EAC.
Comments: 

• The issue explanation is clear and easy to understand, yet brief.  It states what and why.
• The status is clear and direct.  Two additional statements were added to show the related impact.

Good CV – Example #2 (Underrun situation)
Issue: The favorable cost variance is due to savings that resulted from consolidation of two procurement documents.
Status:  Cost savings have been documented and trended in the project EAC.  However, increased costs are anticipated in the fourth quarter due to projected increases in engineering and subcontract execution costs.
Comments: 

• The issue identifies the scope and why the variance occurred.
• Statusing that the trend has been documented is appropriate.  Since there is a future impact that will offset this trend, the additional statement is necessary.

Poor CV – Example #3 (Underrun situation)
Issue: The baseline reflects level-of-effort evenly for the entire FY.  The current schedule does not reflect a level-of-effort forecast.
Status:  Work will be performed in the last half of the year, decreasing the underrun.
Comments: 

• The issue statement does not describe what specific baseline scope is underrunning or why.  “Level-of-effort’ is also inconsistent with tracking progress by performance and deliverables, and should not be used.
• When the work is performed will influence the SV, not the CV, so the status statement is incorrect.  Likewise, if the work hasn’t been done yet (since it will be done later), there can be no underrun since there was no performance, and performance should not be reported on the schedule.

Poor CV – Example #4 (Underrun situation)
Issue: Savings from efficiencies in performing the valve scope.
Status:  N/A
Comments: 

• The “efficiencies” referred to should be defined.  If the word “efficiencies” is used, describe specifically what was done better/cheaper.  Ask yourself if this “efficiency” can be applied at other locations.  Usually, the best response is to simply identify the task that the savings occurred on and state why or how it caused the underrun (such as replacing fewer valves than planned).
• Since this is an underrun, no corrective action is necessary for ‘status’, but do state that the underrun has been/will be reflected in the EAC or that it will be offset by higher costs later.

Poor CV – Example #5 (Underrun situation)
Issue: Underrun from cancelling turbine work.
Status:  N/A
Comments: 

• The issue statement needs to be more specific and better defined.  Cancelled work cannot have a cost variance (must have performance to have savings) so describe the trend instead.  What happened and why is needed in the explanation (such as savings from consolidating two requirements into one rather than cancelling one of the requirements).
• Since this is an underrun, no corrective action is necessary for ‘status’, but do state that the underrun has been/will be reflected in the EAC or that it will be offset by higher costs later.

Poor CV – Example #6 (Overrun situation)
Issue: Overrun due to accrual error.
Status:  Error will be corrected next month.
Comments: 

• Even though it may be a valid reason, the “accrual error” variance explanation is used far too much and can over-shadow problem situations.  Many times accrual errors are not taken seriously enough, and can cause FY funding problems as well as a variance.  If the accrual is large, state what work scope was impacted and why the accrual was in error (such as entered twice or that it was entered incorrectly).
• Correcting the error next month is an appropriate statement if the accrual error will be reversed dollar for dollar.

Poor CV – Example #7 (Overrun situation)
Issue: Cost of the work was more than planned.
Status:  Overrun has been entered into EAC.
Comments: 

• The issue needs to be more specific.  Identify the specific work and state what was in the estimate or the assumption used vs. the actual result.
• Status “entered into EAC” is OK if it cannot be made up.

Keep in mind that cost variances are not impacted by changes to the EAC, remaining budget, funding, or future work scheduling.  This is your opportunity to communicate the activities causing the variance, the issue, the impact, and corrective action if necessary.  Focus on those simple items and you’ll get through the process each period relatively unscathed.  

This completes our two part series on variance analysis.  Do you have any great examples of what to write or not write?  Please share in the comments below.  Our next post's title is Scale your EVMS and obtain the Biggest Bang for Your Buck.  Here we will look as how to scale an earned value system.  

- Melissa Duncan (About Melissa)

Read the previous posting Earned Value Exposed: How to Avoid Being Sucked into the Votex of Schedule Variance Analysis. 

Subscribe to Blog 

Earned Value legend as there may be a few of us that don’t yet have this memorized…

PM=Project Manager

PC=Project Controls

CAM=Control Account Manager
CPI=Cost Performance Index

EVM=Earned Value Management

EVMS=Earned Value Management System

EAC=Estimate At Completion 
WBS=Work Breakdown Structure

OBS=Organizational Breakdown Structure
SPI=Schedule Performance Index
IPMR=Integrated Program Management Report