Concepts
Any project manager will tell you, project overruns and delays are as predictable as the arrival of Monday. These are all too common in most workplaces, and, consequently, critical issues that a Certified Associate in Project Management (CAPM) needs to know how to manage. Two significant performance measuring tools used by project managers include cost variance (CV) and schedule variance (SV). These are crucial because they help managers to understand if their projects are running over budget or behind schedule.
I. Understanding Cost and Schedule Variance
CV and SV help gauge the health of a project during its lifecycle. CV allows managers to determine if their project is over or under budget at any given moment, while SV allows them to identify if they are ahead or behind schedule. Both measures can be expressed in monetary terms.
CV = Earned Value (EV) – Actual Cost (AC)
SV = Earned Value (EV) – Planned Value (PV)
When CV or SV is positive, it signifies the project is under budget or ahead of schedule, respectively. On the contrary, a negative CV or SV indicates the project is over budget or falling behind schedule.
II. An Illustrative Example of CV and SV
Consider the following example:
Suppose you are managing a project with a budget of $100,000 scheduled to be completed in ten months. After five months, suppose you have only achieved 40% of the project work, meaning the Earned Value (EV) is $40,000. Further, let’s say you have already spent $50,000 of your budget, meaning your Actual Cost (AC) is $50,000. The Planned Value (PV), at five months, would have been $50,000 considering the linear progression of work.
Using the formulas mentioned above, you can calculate CV and SV as follows:
CV = EV – AC = $40,000 – $50,000 = -$10,000
SV = EV – PV = $40,000 – $50,000 = -$10,000
The negative CV indicates that the project is $10,000 over budget, and a negative SV reveals that the project is equivalently behind schedule.
III. Analyzing and Acting on CV and SV Metrics
Evaluating and addressing these metrics is an integral part of a CAPM’s responsibilities. They must examine these parameters and conclude if corrective actions are required.
In general, if your project’s CV and SV are both negative, then immediate remedial measures may be required to bring the project back on track. On the other hand, if both CV and SV are positive, it means you’re under budget and ahead of schedule, although, even then, it is advisable to review and confirm that no corners are being cut, compromising work quality.
However, if either CV and SV is positive, while the other is negative, it indicates you may be overspending to catch up or rushing to make up for lost time, both of which require careful management.
In conclusion, calculating cost and schedule variances is an invaluable practice for any project manager, especially for those aiming to complete the CAPM examination. Understanding and applying these project management tools will help CAPM aspirants to better manage their projects, ensuring that they remain within their budget and timeline constraints.
Answer the Questions in Comment Section
True or False: Cost Variance (CV) represents the amount of budget surplus or deficit at any point in time.
- Answer: True
Explanation: CV is a measure of cost performance on a project. It is the algebraic difference between earned value (EV) and actual cost (AC). Thus, represents surplus or deficit.
True or False: A negative Schedule Variance (SV) means the project is ahead of schedule.
- Answer: False
Explanation: A negative Schedule Variance is indicative of being behind schedule, not ahead. It implies that it is taking longer than initially planned.
What is the formula to calculate Cost Variance (CV)?
- A) CV = EV – AC
- B) CV = EV + AC
- C) CV = AC – EV
- D) CV = PV – EV
- Answer: A) CV = EV – AC
Explanation: Cost Variance (CV) is calculated as the difference between the Earned Value (EV) and Actual Cost (AC).
If CV is 0, what does it interpret?
- A) The project is over budget
- B) The project is under budget
- C) The project is right on budget
- D) The cost of project is unreasonable
- Answer: C) The project is right on budget
Explanation: If CV is 0, it indicates the project is running right on budget. Neither over nor under.
True or False: A positive Schedule Performance Index (SPI) indicates the project is progressing faster than planned.
- Answer: True
Explanation: The Schedule Performance Index (SPI) is the ratio of earned value (EV) to planned value (PV). A SPI greater than 1 indicates the project is moving ahead of schedule.
What does a Cost Performance Index (CPI) of less than 1 indicate?
- A) The project is over budget
- B) The project is under budget
- C) The project is on schedule
- D) The project is ahead of schedule
- Answer: A) The project is over budget
Explanation: The Cost Performance Index (CPI) is the ratio of earned value (EV) to actual cost (AC). A CPI of less than 1 indicates that the project is over budget.
True or False: To calculate the Schedule Variance, we subtract the Earned Value from the Planned Value.
- Answer: False
Explanation: The Schedule Variance is calculated by subtracting the Planned Value from the Earned Value (EV – PV).
A negative Schedule Performance Index (SPI) signifies:
- A) The project is behind schedule
- B) The project is ahead of schedule
- C) The project is currently on schedule
- D) The project is over budget
- Answer: A) The project is behind schedule
Explanation: A SPI less than 1 shows that the project is behind schedule.
In general, who calculates cost and schedule variances?
- A) Team Members
- B) Project Sponsors
- C) Project Managers
- D) Customers
- Answer: C) Project Managers
Explanation: Generally, it is the responsibility of Project Managers to calculate cost and schedule variances as part of monitoring and control processes.
The formula for Schedule Performance Index (SPI) is:
- A) SPI = EV / PV
- B) SPI = PV / EV
- C) SPI = AC / EV
- D) SPI = EV / AC
- Answer: A) SPI = EV / PV
Explanation: The Schedule Performance Index (SPI) is the ratio of earned value (EV) to planned value (PV). It’s a measure of schedule efficiency on a project.
True or False: Schedule variance is an absolute measure of schedule performance on a project.
- Answer: True
Explanation: Schedule Variance gives the numerical difference between how much work has actually been done versus how much work was planned to be done at a specific time.
What would a Cost Variance of zero mean for a project?
- A) The project is over budget
- B) The project is under budget
- C) The project is on budget
- D) The project budget calculation is incorrect
- Answer: C) The project is on budget
Explanation: When a project’s cost variance is zero, it indicates that the project is exactly on budget. It neither has a surplus nor deficit.
This blog post is a great resource for understanding the basics of cost and schedule variances in project management!
Can someone explain how to calculate the cost variance (CV) and schedule variance (SV) for the CAPM exam?
@2 Sure! The formulas are CV = EV – AC and SV = EV – PV. EV is Earned Value, AC is Actual Cost, and PV is Planned Value.
To add on to @3’s comment, make sure you understand how to derive EV, AC, and PV from project data, as this is crucial for the exam.
I’m struggling with understanding how Earned Value (EV) is calculated. Any tips?
@5 EV is calculated by multiplying the percentage of work completed by the project’s total budget. For example, if the total project budget is $100,000 and 50% of the work is completed, EV would be $50,000.
Thanks, this really helped simplify the concepts for me.
Why do we use CV and SV in project management?
@8 CV and SV are used to measure project performance and efficiency. CV shows how much over or under budget the project is, while SV indicates if the project is on schedule.
Great article on CAPM exam prep.
I don’t get why my SV is negative. What does this mean and how can I fix it?
@11 A negative SV means your project is behind schedule. To fix this, you may need to reallocate resources, prioritize tasks, or add more resources to catch up.
Also @11, sometimes revisiting your project plan and identifying bottlenecks can help in improving your schedule variance.
I found the technical discussions in the comments very helpful. Thanks, everyone!