Variance Analysis in Projects
Sireesha Nallagatla, PMP & Jayaraj Narayana PMP
During the project approval stage, the management reviews relevant plans, considers customer requirements, evaluates project scope, schedule, cost, quality metrics, resources, and risks. As the project starts, there is a need to compare the initial plan with the actual progress at different stages. This is Variance analysis; it is a quantitative investigation of the difference between actual and planned behavior. It is an efficient tool for planning, monitoring, and controlling a project.
This article helps you understand the benefits of using variance analysis as a tool in project management. You will also learn how to evaluate the different parameters to be included in variance analysis and the related organisational benefits.
Variance Analysis – When and How
Variance analysis can be performed either at the project closure or on reaching a certain critical milestone.
List of parameters to be considered:
- Scope – Variance analysis compares the change to the baseline and understands the impact of the change. The requirements listed during initial planning is never the final list for a program. New requirements are continuously added by the change control board. Analysis of the number of requirements added vis-a-vis original plan, adds predictability in time and budget calculations. Appropriate action to control the program can also be initiated.
- Schedule – Schedule Variance (SV) is a measure of schedule performance expressed as the difference between Earned Value (EV) and the Planned Value (PV) SV=EV-PV. It is the amount by which the project is ahead or behind the schedule.
- Cost – Variance at Completion (VAC) is the difference between the Budget at Completion (BAC) and the Estimate at Completion (EAC) (VAC = BAC – EAC). It represents the amount of predicted overrun (negative VAC) or underrun (positive VAC).
- Quality – The Quality acceptance criteria agreed at the program beginning might not be achieved 100% at the end of program due to certain unexpected conditions. There will be waivers taken at the end, which are practical solutions. Variance analysis of the quality criteria at the beginning versus at the end can help to revise the criteria for the new program. When doing variance analysis on quality, consider weightage for each parameter in the check list and perform a weighted average of all relevant items and check the score on a regular basis. This determines the parameter which needs more attention for the present program or for future planning.
- Resources – Resource planning is done by many HR managers in different organizations to identify variance analysis of resource and control budget for the program.
- Communication – Communication helps to improve the execution efficiency and expedites the planned duration by considering the geographical locations of project team members and the cultural aspects. Learning from previous projects helps in planning for future projects.
- Risks – Risk plans from relevant / similar projects is a good way to start. Also, for developing mitigation plans, it is equally important to select the most appropriate mitigation plan for each identified risk. Frequent review analysis and check points (for each risk item) also plays an important role in avoiding the risk occurrence. Recommended techniques for risk analysis include ARM (Active Risk Management), FMEA (Failure Modes and Effects Analysis), SWOT (Strength, Weakness, Opportunity and Threat) etc. Each risk item is given a score based on risk severity, probability of occurrence and impact; and this score must be reviewed on a regular basis and corrective actions implemented.
- Procurement – During procurement phase, if sufficient learning from analysis is not included in the process, it can result in unnecessary delays. For example, a delay due to shipment of an item, even if the correct item is selected, will cause an impact. Getting required items at the right time, with the optimized cost and good quality is very important.
- Stakeholder management – Key stakeholders identified in the beginning will not cover all the roles in a program. Variance analysis of stakeholder’s roles can help in effective communication in the early stages of the next program. Identifying the correct stakeholder at the beginning of every program helps to avoid several unexpected delays during execution phase. There can also be approval delays when adequate information is not provided to the right stakeholder in advance.
Key takeaways for Project Management in performing variance analysis
In long-term programs, most often, plan vs reality will be different as shown in Figure 2. There will be many learnings in a program that needs to be analyzed and corrective measures need timely implementation by program managers. Variance analysis is a simple and efficient technique that can be a high priority for all program managers, irrespective of the domain they work in. After all, the key for a successful program manager is to learn from the past experiences and plan accordingly for future projects. Comparing planned and actual values is critical while performing retrospective reviews. This analysis often leads to additional steps in project control and can also be used for effective planning of future projects. This ensures continuous improvement in team quality, team efficiency and schedule predictability, and improves time to market. Based on the findings of the analysis, it is important to identify best practices for approving future projects and controlling the execution.
This article attempts to address variance analysis, which compares planned values against actual values of a few typical project parameters. These parameters are identified based on industry best practices and experiences from past projects. The article also identifies the best time lines for this process in a typical project life cycle. This should be an eye opener for each project team member to act upfront in any project execution phase to enhance productivity and execution efficiency.