Variance at completion

Variance at Completion: Definition, Formula, Example, and FAQs

What Is Variance at Completion?

Variance at completion (VAC) is a key performance indicator in project management that forecasts the expected difference between the total planned budget for a project and the projected actual cost when the project is finished. It is a crucial metric within Earned Value Management (EVM), a methodology used to track and report project performance. A positive variance at completion indicates that the project is anticipated to finish under budget, while a negative VAC suggests an expected cost overrun. This metric provides valuable insight into the financial health of a project and helps stakeholders understand the ultimate financial outcome.

History and Origin

The foundational concepts behind what is now known as Variance at Completion emerged from the development of Earned Value Management (EVM). EVM traces its roots back to industrial manufacturing at the turn of the 20th century, with principles of "earned time" popularized by Frank and Lillian Gilbreth. The modern application of EVM, including the variance metrics, significantly evolved within the United States Department of Defense (DoD) in the 1960s. Facing increasingly complex defense programs, the DoD sought improved cost management and control systems. In 1967, the DoD established the Cost/Schedule Control Systems Criteria (C/SCSC), a criterion-based approach that set 35 guidelines for project management systems. This framework emphasized integrating cost, schedule, and technical performance measurements. The need for precise financial oversight on large-scale government projects, like those undertaken by the National Aeronautics and Space Administration (NASA), further solidified the use and refinement of EVM principles, including the calculation of variances like VAC.²³, ²⁴, ²⁵, ²⁶, ²⁷

Key Takeaways

Variance at completion (VAC) predicts the final difference between a project's total budget and its estimated final cost.
A positive VAC indicates the project is expected to be under budget, while a negative VAC forecasts an over budget scenario.
It is a critical component of Earned Value Management for effective performance measurement.
VAC helps project managers and stakeholders in financial forecasting and decision-making regarding potential budget adjustments.
The metric is calculated by subtracting the Estimate at Completion (EAC) from the Budget at Completion (BAC).

Formula and Calculation

The formula for Variance at Completion (VAC) is straightforward, relying on two core Earned Value Management metrics:

\text{VAC} = \text{BAC} - \text{EAC}

Where:

BAC (Budget at Completion) represents the total approved budget for the entire project or specific work package. It is the planned total cost of the project.
EAC (Estimate at Completion) is the most current projection of the total cost at the end of the project. This estimate is often updated throughout the project's lifecycle based on actual performance and anticipated future costs.

To calculate VAC, the estimated total cost to complete the project (EAC) is subtracted from the original planned total budget (BAC).

Interpreting the Variance at Completion

Interpreting the Variance at Completion provides a clear financial outlook for a project.

Positive VAC (BAC > EAC): A positive value indicates a favorable variance. This means the project is currently expected to finish under its original baseline budget. It suggests efficient cost management and potentially allows for budget reallocation or cost savings.
Negative VAC (BAC < EAC): A negative value signals an unfavorable variance. This means the project is forecasted to exceed its original baseline budget. It's a warning sign indicating potential financial trouble and often prompts corrective actions, such as budget revisions or scope adjustments, to mitigate further cost increases.
Zero VAC (BAC = EAC): A zero variance means the project is expected to finish exactly on budget.

The significance of the Variance at Completion also depends on its magnitude relative to the total project budget. A small variance might be negligible, but a substantial one requires immediate attention and possibly a deep dive into variance analysis to understand the root causes.

Hypothetical Example

Consider a software development project with an initial Budget at Completion (BAC) of $500,000. Halfway through the project, the project manager recalculates the Estimate at Completion (EAC) based on current performance and anticipated future expenses.

Initial Project Plan:

BAC: $500,000

Mid-Project Assessment:

Due to unforeseen technical challenges, increased resource costs, and a slight expansion of scope, the project team now estimates that the total cost to complete the project will be $550,000.
EAC: $550,000

Using the Variance at Completion formula:

\text{VAC} = \text{BAC} - \text{EAC}

\text{VAC} = \$500,000 - \$550,000

\text{VAC} = -\$50,000

In this example, the Variance at Completion is -$50,000. This negative VAC indicates that the software project is currently projected to finish $50,000 over its original budget. This signals a need for the project manager to investigate the causes of the increased costs and consider strategies to bring the project back within financial targets or formally request a budget increase.

Practical Applications

Variance at completion is widely used across various industries, particularly in large-scale projects where stringent budget control is paramount. Its practical applications include:

Government Contracting: Government agencies, such as NASA and the Department of Defense, frequently mandate the use of Earned Value Management to oversee complex acquisitions and development projects. VAC helps them track compliance with budget guidelines and identify potential overruns early. NASA, for instance, provides extensive guidance on EVM implementation for its programs and contracts.²¹, ²²
Construction and Infrastructure: In large construction and infrastructure projects, where budgets can run into billions, calculating Variance at Completion is essential for monitoring financial performance and managing significant capital investments. Global infrastructure projects, which often face substantial funding gaps, heavily rely on such metrics for financial oversight.¹⁹, ²⁰
IT and Software Development: Many IT projects leverage EVM, and thus VAC, to manage budgets for software development, system implementations, and infrastructure upgrades.
Manufacturing and Engineering: Projects involving prototype development, plant construction, or large-scale product launches use VAC to ensure costs remain within acceptable limits.
Project Management Office (PMO) Reporting: PMOs often consolidate VAC reports from multiple projects to provide an aggregate financial health status to senior management, enabling strategic resource allocation and portfolio risk management.

Limitations and Criticisms

While Variance at Completion is a powerful performance measurement tool, it has limitations and is subject to certain criticisms.
One common critique arises when using EVM in adaptive environments, such as agile projects. Traditional EVM, including VAC, assumes a relatively fixed project schedule and scope, which can conflict with the iterative and evolving nature of agile methodologies. For instance, the Project Management Institute (PMI) acknowledges that traditional EVM may face challenges when applied to agile projects due to their inherent flexibility and frequent changes in scope and priorities.¹⁷, ¹⁸ Adapting EVM for agile requires careful consideration of how value is "earned" in shorter iterations.

Another limitation stems from the accuracy of the Estimate at Completion (EAC). If the EAC is based on unreliable data, overly optimistic assumptions, or insufficient detail for future work (Estimate to Complete), the resulting Variance at Completion will also be inaccurate. Moreover, VAC provides a monetary variance but does not inherently explain why the variance occurred. A detailed variance analysis is still necessary to identify the root causes of financial deviations, whether they are due to inefficiencies, scope changes, or external factors.

Variance at Completion vs. Cost Variance

Variance at Completion (VAC) and Cost Variance (CV) are both crucial metrics in Earned Value Management that assess financial performance, but they differ in their scope and timing.

Cost Variance (CV): This metric measures the difference between the earned value (EV) and the actual cost (AC) at a specific point in time during the project. It answers the question: "Are we over or under budget for the work completed so far?" A positive CV means the work completed to date cost less than planned, while a negative CV means it cost more.
$\text{CV} = \text{EV} - \text{AC}$
Variance at Completion (VAC): In contrast, VAC provides a forecasted total budget variance for the entire project. It answers the question: "Will we be over or under our total budget at the end of the project?" VAC looks at the big picture, comparing the total planned budget (Budget at Completion) against the projected total cost (Estimate at Completion) for the entire project lifecycle.

In essence, Cost Variance is a snapshot of past and current performance, whereas Variance at Completion is a forward-looking projection of the project's final financial outcome. Both are indispensable for comprehensive financial control, with CV offering immediate feedback and VAC providing strategic foresight.

FAQs

What does a negative Variance at Completion signify?

A negative Variance at Completion indicates that the project is currently expected to finish over its original planned budget. This is an unfavorable financial outcome and suggests that the projected total cost of the project (Estimate at Completion) exceeds the total approved budget (Budget at Completion).

Can Variance at Completion change during a project?

Yes, Variance at Completion can and often does change throughout the project lifecycle. This is because the Estimate at Completion (EAC), a key component of the VAC formula, is a dynamic projection that is regularly updated based on actual project performance, new information, unforeseen issues, or changes in scope and cost factors.

How does Variance at Completion help in project control?

Variance at Completion is a critical metric for project control because it provides an early warning system for potential budget deviations. By regularly calculating VAC, project managers can anticipate future financial shortfalls or surpluses. This foresight allows them to implement corrective actions, adjust resource allocation, or communicate necessary budget revisions to stakeholder management before the project reaches its conclusion, thereby mitigating large surprises and facilitating better financial governance.

Is Variance at Completion only for large projects?

While Variance at Completion and Earned Value Management are commonly associated with large, complex projects, their principles can be adapted for projects of varying sizes. Even smaller projects can benefit from understanding their projected final financial standing relative to their budget, although the level of formal EVM implementation might be scaled down.¹, ² ³, ⁴, ⁵, ⁶, ⁷ ⁸, ⁹, ¹⁰, ¹¹ ¹², ¹³, ¹⁴, ¹⁵, ¹⁶