When a company plans a project, it will estimate the cost of the project before beginning. It may also estimate the amount of time it expects the project to take to complete. However, these estimates are rarely perfect. The variation in the cost estimate is known as the normal cost variance, while the variation in the estimated time to completion is the schedule variance.
A project's cost variation is the mathematical difference between the project's earned value at the time of the calculation and the project's actual cost at the time of calculation. A project's schedule variation is the mathematical difference between the project's earned value at the time of calculation and the project's actual value at the time of calculation. A project's earned value is the budgeted cost of the project multiplied by the actual percentage of completion, while its planned value is the budgeted cost of the project multiplied by the expected percentage of completion.
Assume your company budgeted the cost of a project at $600,000 and planned to complete it in eight months. After a month, your company has completed 10 percent of the project with a total cost of $75,000. Your company's plan shows that 15 percent of the project should have been complete at this point. In this case, the project's actual cost equals $75,000, its planned value equals $90,000 ($600,000 x .15), and its earned value equals $60,000 ($600,000 x .10). Then the project's normal cost variance is -$15,000 ($60,000 - $75,000), and its schedule variance is -$30,000 ($60,000 - $90,000).
Both the cost variance and the schedule variance incorporate a project's earned value to date. However, while the cost variance finds the difference between earned value and actual cost, the schedule variance finds the difference between the actual earned value and the company's predicted earned value for the project. The cost variance indicates whether the company is within its budget, but the schedule variance indicates whether the company will complete the project on time.
When cost variation is negative, it indicates that the project is costing more than the company expected. A schedule variation that is negative indicates that the project is taking longer to complete than the company expected. Positive values for cost variation and schedule variation indicate that the project is under budget and ahead of schedule. Most companies calculate cost variance and schedule variance several times during a project to monitor efficiency and ensure that the project remains within the projected budget.
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