Perform a variance analysis

Variance analysis is a critical financial analysis technique that a Risk Management Professional (RMP), certified by the Project Management Institute (PMI), needs to master. Especially within the domain of risk response and control, variance analysis helps identify differences between planned and actual performance. These insights are useful to determine whether risks have been appropriately addressed, and whether there’s a need for further corrective action.

Understanding Variance Analysis

Variance analysis, in essence, is a quantitative investigation of the difference between actual and planned behavior. This process often involves the investigation of individual variances to understand their cause(s), impact and handling. In the context of the PMI-RMP exam, this type of analysis can be applied to any metric. Some common ones include cost variance (CV), schedule variance (SV), or scope variance.

For the PMI-RMP examination, you should be aware of the following types of variances:

• Direct variances: These are the differences between actual and planned values.
• Volume variances: These are associated with the number of resources used or the amount of work performed.
• Efficiency variances: These relate to how efficiently the resources are used.
• Price variances: These relate to the rate or price for resources.

How to Perform Variance Analysis

Here’s a general five-step approach to perform a variance analysis:

1. Establish a standard or plan: This could be the approved project plan, including scope, schedule, cost, and quality baselines.
2. Measure actual performance: Measure the performance against the project plan and obtain actual data on scope, schedule, cost, and quality.
3. Compare measured performance to established plans: Using the actual data, calculate the variances from the baseline data.
4. Investigate variances: Determine the root cause for any significant variances.
5. Take corrective action: Implement corrective or preventive actions to address the variances.

Variance Analysis Examples

Consider this example in the context of project cost management. The planned cost of a project is $100,000, and the actual cost is $110,000. The cost variance (CV) is $10,000, signifying that the project exceeded its budget. As a risk management professional, it is your responsibility to identify the cause(s) for this negative variance and apply the appropriate risk response strategy.

Another example in the context of project time management: the planned duration of a task is 5 days, and it actually took 7 days. The schedule variance (SV) is -2 days. This indicates a delay, which may have a cascading impact on the project schedule.

Importance of Variance Analysis in PMI-RMP Exam

As an aspiring PMI-RMP, understanding, performing, and interpreting variance analysis can be crucial to your success in managing project risks efficiently.

• It helps you understand what is happening in the project and why it is happening.
• It forms a strong basis for decision making. Only after proper variance analysis can effective corrective actions are taken.
• It is a valuable input for risk reassessment and risk response processes.
• The analysis provides stakeholders with a clear understanding of the project’s current status.

In conclusion, variance analysis is an essential tool for every PMI-RMP practitioner. It allows you not only to measure performance but to understand the reasons behind it, providing a foundation for managing and controlling project risks effectively. Armed with this information, you can adapt your plans and ensure that your project delivers the desired value.