Cost Variance (CV) in Earned Value Management

Cost Variance (CV) in Earned Value Management
Cost Variance (CV) in Earned Value Management

Cost Variance (CV) in Earned Value Management

Performance measurement is an important task in project management. In order to manage and complete a project successfully, project managers need some tools and techniques to measure their project’s cost performance. One of the most effective tools used for this purpose is the Earned Value Analysis (EVA). Basically, the Earned Value Analysis (EVA) allows the project manager to measure the amount of work actually performed on a project in a given period. There are some outputs of the Earned Value Management System such as  Schedule Performance Index (SPI), Cost Performance Index (CPI), Schedule Variance (SV) and Cost Variance (CV). In this article we will review the Cost Variance (CV) concept and analyze some examples for better understanding.

Earned Value Analysis (EVA)

Stakeholders often ask the project manager following questions regarding to the performance of the project.

  • How is our projects current performance ?
  • Is the project under or over budget ?
  • Is the current performance enough to complete the project on time

Earned Value Analysis (EVA) provides inputs to answer the questions related with the projects performance.

In order to understand the Earned Value concept, let’s analyze the simple example below.

Assume that your company has undertaken a project to erect ten light poles this year. You created a work schedule and according to your plan, you will spend 50 man hours to erect each light pole. Six months have passed and four of the light poles are erected. When you have checked the projects performance, you saw that the erection team has spent 300 man hours to erect four light poles.

Is your project behind the schedule ?

Basically schedule performance is lower than planned because you should be erected at least five poles in six months considering the project duration.

What about the productivity?

You planned to spent 50 man hours for one light pole. For four light poles, planned man hour is 4 x 50 = 200 man hours. However the erection team spent 300 man hours for the erection of four light poles.

Your productivity is less than planned because you spent more man hours to erect fewer light poles.

Earned Value Analysis use parameters to analyze a projects schedule and cost performance . Schedule Performance Index (SPI), Cost Performance Index (CPI), Schedule Variance (SV) and Cost Variance (CV) are the the key performance indicators of the Earned Value Management.

Cost Variance (CV) in Earned Value Management

Cost Variance (CV) measures the cost performance of a project. It can be calculated as the difference between the earned value and the actual cost. Cost Variance (CV) is one of the essential outputs of Earned Value Management which alerts the project management teams if the project is under or over budget.

Cost Variance (CV) Formula

CV = EV – AC
 SV = Cost Variance
 EV = Earned Value
 AC = Actual Cost

Cost Variance (CV) Explanation of Results



 If CV is positive, project is under budget
 If CV is negative, project is over budget.
 If CV is zero, project is on budget.

For better understanding, let’s analyze the below examples.

Cost Variance (CV) Example 1

Assume that we have a construction project to be completed in 15 months and the budget of the project is 450,000 USD. 3 months have passed and 120,000 USD has been spent. However, only 15% of the work has been completed.

Let’s calculate the Cost Variance (CV) of the project.

Earned Value (EV) = %15 x 450,000 USD = 67,500 USD
Actual Cost (AC) = 120,000 USD
CV = Earned Value – Actual Cost
CV = EV – AC = 67,500 – 120,000 = – 52,500 USD

The project’s Cost Variance (CV) is -52,500 USD, this shows that we are over budget. Therefore, we should anallyze this problem with the key stakholders and take corrective actions . In order to make an efficient cost control we need to check resource productivity correctly.

Cost Variance (CV) Example 2



We are managing a dam construction project. The project is expected to be completed in 20 months with a cost of 10,000,000 USD per month. After 5 months, the project is 20% completed  60,000,000 USD has been spent.

Earned Value (EV) = %20 x 200,000,000 USD = 40,000,000 USD
Actual Cost (AC) = 60,000,000 USD
CV = Earned Value – Actual Cost
CV = EV – AC = 40,000,000 – 60,000,000 = – 20,000,000 USD
The project’s CV is -20,000,000 USD, and we are over budget.

Cost Variance (CV) Example 3

Assume that we have a bridge project to be completed in 10 months and the budgeted cost of the project is 100,000,000 USD. 6 months have passed and 40,000,000 USD has been spent. However, only 30% of the work has been completed.

Let’s calculate the Cost Variance (CV) of the project.

Earned Value (EV) = %30 x 100,000,000 USD = 30,000,000 USD
Actual Cost (AC) = 40,000,000 USD
CV = Earned Value – Actual Cost
CV = EV – AC = 30,000,000 – 40,000,000 = – 10,000,000 USD

The project is over budget. We spent more money but we completed less work.

Summary



Cost Variance (CV) is an effective tool to measure the projects cost performance. If the Cost Variance (CV) is negative we are over budget and corrective action should be taken to reach the targets. If THE Cost Variance (CV) is positive we can say that we are under budget and our projects cost performance is well.

All the project managers would like to complete their projects within the approved budget. Cost deviations and damages are bad news for clients, stakeholders and project managers.

Please note that Earned Value Analysis (EVA) is a significant concept for the PMP Certification Exam. Therefore you must understand the Earned Value Management Concept and its key aspects to in order to pass the exam.

If you want to add or share your experiences related with Earned Value Management, you can use the comments box below.

See Also

Schedule Variance (SV) in Earned Value Management

External References

What is Earned Value ?

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