My last post talked about the Bermuda Triangle of project management, variance analysis. Specifically, for Earned Value Management reporting, we discussed schedule variances. In my opinion, schedule variances are the tougher of the two variance types to analyze. This week it’s time to complete your training and show you how to navigate through the write-up of a solid cost variance analysis. In this situation, your actual cost is out of line with your performance numbers. It’s either costing you more or less to produce that widget and everyone wants to know why. What they really mean is “what are you doing to screw this up?” Cost variance analysis can be tricky. In a negative variance, you’re trying to communicate the reasons for performance numbers that make it seem like your ship is sinking, yet still calm the client’s nerves, and make it clear to management you know how to fix the hole in the boat. In a positive variance, you’ve got to convince everyone that this trend is still temporary and to not get carried away with taking money from your project. Welcome to the eye of the storm!
When reporting these kinds of Earned Value metrics, how does one satisfy management, the client, and the project in a cost variance write-up? As we discussed with schedule variances, the formula is the same: keep it simple. Make a list of the tasks that are causing the cost variance and address them in a factual sense. Perhaps labor was more costly than originally planned? Do not get into the common mistake of saying “task took longer than planned” because is incorrect when dealing with a cost variance! That phrase is describing is a schedule variance. What you mean to say is, “task required more effort than planned”. Quantify the words “more effort” by defining it as more man-hours or overtime, etc. Be specific about what took more effort, why, and what corrective action needs to be taken. Once again, be wary of talking about schedule, and don’t forget to only discuss variances associated with work that was done and its associated cost. You can’t have a variance on work that isn’t in the baseline.
If you’re not true to your variance write-up, you may not get the “help” you need to course correct the project. So be honest about what is occurring to cause the variance and share your plans for turning it around. And if there is a continuous negative trend on the project, it’s OK to admit it and say that it will be reflected in the project’s EAC. I’ve seen quite a few PM’s hanged by their shoestrings when trying to “hide” the real reasons for variances. Be politically correct, be eloquent even, but don’t lie. They’ll catch you eventually.
Remember, in order to write a proper cost variance analysis; you have to start with the correct cause for the variance. To help get your feet wet and start you in the right direction, let’s take a look at some common causes for cost variances:
- Rate changes (i.e., labor, overhead)
- Vendor discounts or price increases
- Quantity discounts
- Material cost changes
- Requirement changes
- Inefficiencies in labor (i.e. extra hours needed to complete what was planned, this can be from inexperienced craft available from the labor union…etc.)
Click here to view: Part 2 of this blog article, where look at some examples of these issues
Our next posts is Scale your EVMS and obtain the Biggest Bang for Your Buck
- Melissa Duncan (About Melissa)
Read the previous posting Earned Value Exposed: How to Avoid Being Sucked into the Votex of Schedule Variance Analysis.
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
CPI=Cost Performance Index
EVM=Earned Value Management
EVMS=Earned Value Management System
WBS=Work Breakdown Structure
OBS=Organizational Breakdown Structure
SPI=Schedule Performance Index
IPMR=Integrated Program Management Report
SPI=Schedule Performance Index
IPMR=Integrated Program Management Report
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