Integrate variance tracking into your project change management process

By Jane Suchan, PMP

Project management is about figuring out what you want to accomplish, creating a to-do list of work that needs to be done to get you there, determining how long it will take, and calculating how much it's going to cost.     Sounds simple, huh? But the really hard part is keeping track of it all. Is the project running on time? Will it be done ahead of schedule? Is it under budget? Will it still be under budget when all the work is done?

One way to evaluate a project's health is to track the difference between the original project plan and what is actually happening. This gap is better known as variance, a comparison of the intended or budgeted amount and the actual amount spent. Variance analysis is the practice of comparing actual project results to what was planned or expected. It's a way to quantify how well ― or how badly ― a project is progressing.

Planning for variances: Establish baselines

To determine project variances, you need to put a stake in the ground as your starting point: this is your baseline. Without this, you are chasing and attempting to control a moving target. Two key baselines to establish before you can put variance tracking and reporting into play are cost and schedule. But before you can get there, you'll want to nail down the project scope.

Using a work-breakdown structure to create scope

The scope baseline includes all project deliverables; as such, it identifies all the work to be done. One way to document scope is to create a work-breakdown structure (WBS), a hierarchical view of project deliverables. Each level down the hierarchy represents an increasingly detailed description of deliverables. For example, a WBS for construction of a new house would include the foundation, framing, roof, and electrical and plumbing systems, as well as landscaping plans, architectural drawings, and inspection permits.

Establishing schedule and cost baselines

The schedule and cost baselines are established only after scope is determined. Without a clear picture of what the project will produce, you cannot determine how long it will take or how much it will cost.

The schedule baseline is the approved project schedule, the basis for measuring and reporting schedule performance. The cost baseline is the approved time-phased budget, against which cost performance will be measured. It's determined by adding the costs for a specific project period or phase, which requires assigning costs to project tasks. Allocating costs to project components may be time consuming, but it will enable you to perform more detailed and accurate cost-performance reporting, something your stakeholders and project sponsor will be very interested in.

To establish schedule and cost baselines:

  1. Develop the schedule by identifying the activities and tasks to produce each deliverable in the WBS.
  2. Identify resources for each task. Consider constraints or how much time each person can realistically devote to this project.
  3. Estimate how long (in hours or days) it will take to complete each task.
  4. Estimate the cost of each task, using an average hourly, or daily, rate for each resource, plus any fixed costs associated with the task.
  5. Determine which tasks are dependent on others and then develop the critical path.
  6. Develop the cost baseline; this is a time-phased budget to measure the project's cost performance. To do this, add the estimated costs, by task or by time period.

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Responding to variances: Change control

After you have established scope, schedule, and cost baselines, create the steps the team will take to manage variances for these plans. This information becomes your project change management plan. This plan defines when you determine a project change request (PCR) is required, how to document variances and submit for approval, and what happens after a change request is approved.

Variance calculations are used to determine if a PCR is needed and if the project schedule or cost baselines will be changed. Variances may be either positive or negative:

  • A positive variance indicates that the project is ahead of schedule or under budget. Positive scenarios might enable you to reallocate money and resources to those in the negative territory.
  • A negative variance is your indicator that the project is behind schedule or over budget and that you need to take action. You might have to increase your budget or accept reduced profit margins.

Variance thresholds are an important component of any project change management plan. They constitute the material changes to the project, and therefore necessitate documentation and approval in a PCR. Not all PCRs will result in reestablishing scope, schedule, or budget. This is a significant task, one that can require considerable time to complete, and you'll be obliged to get approval up and down the project organization.

Tracking cost and schedule variances throughout the life cycle of the project helps you identify weak spots ― areas with repeated changes ― and respond accordingly. For example, if you see that the testing team is encountering continual delays, you may need to assign additional resources to stay on schedule.

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Taking it one step further: Earned-value analysis

No discussion about project variances is complete without mentioning earned value, a project management technique for estimating cost and schedule at a given time. Earned-value analysis compares the work finished with the established baselines. It helps you evaluate current project performance and make course corrections where needed.

To perform earned-value analysis, you must have a WBS, a detailed project schedule, and a budget (by phase or time period) for the work planned.

Asking the earned-value questions

At any point, earned-value analysis measures project health by asking three key questions:

  • Planned value: What is the amount needed for the work?
  • Earned value: What did you actually complete?
  • Actual cost: How much did it cost you to complete the work?

Planned value (PV) is the budgeted cost of planned tasks. Earned value (EV) is the sum of all the budgeted costs of completed work. Actual costs (AC) are what was spent on the work produced.

Learning about earned-value analysis

The easiest way to describe earned value is through example. Let's say you're managing a four-month project with a budget of $100,000. You're three months into it, and you realize that the team has completed only half the work, thus the EV is $50,000. Based on the project schedule, about 75 percent of the work should be done by now, thus the PV is $75,000. You also know that the team has spent $90,000 so far, thus the AC is $90,000.

Using these numbers, you can calculate cost and schedule variances. The cost variance (CV) measures the difference between the actual costs of work performed and the project budget:

CV = EV – AC    

The schedule variance (SV) measures actual progress against the project schedule:

SV = EV – PV    

Using the example above, the cost variance for this project is $50,000 – $90,000 = $40,000. The schedule variance is $50,000 – $75,000 = $25,000.

Any project manager could see that the project has spent 90 percent of its budget and has completed only 50 percent of the work. The project is behind schedule and will be over budget by the time it's complete, so change is required. The project manager should reduce scope, extend the schedule, or obtain more funding to complete the work.

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Getting started with variance tracking

Integrating variance tracking into your project management is fairly straightforward, but it requires a systematic approach. After you have your project assignment, work with your sponsor to establish the scope, budget, and schedule. Then work with your team to create a robust change management plan, which identifies variance thresholds and describes how to deal with variances if they exceed threshold values. After you develop the WBS and define the detailed project schedule, you can establish the project schedule and budget. After all the components are in place, you're ready to start tracking variances and put your change management plans into practice.

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About the author     Jane Suchan is a program manager with experience managing enterprise business initiatives and developing project management methodologies. Jane lives in Seattle, Washington.