The Project Cost Variance Analysis Model: A Project Management Tool

Abstract

Abstract Cost variance analysis in the project management environment as practiced today is an inexact science and is often limited to a narrative, subjective or qualitative analysis. The lack of clarity and consistency in cost variance analysis often leads to credibility issues with customers and senior leadership and does not provide a closed loop estimating process to facilitate continuous improvement. The Standard Cost Variance Model appears in many cost accounting texts and is widely used as a method to attribute total variance to cost input factors in the standard costing accounting environment. However, there has been very little useful translation of these concepts into the project management environment. This paper provides a methodology to apply a derivation of this variance model to the complex project management scenarios that are found in today's corporate (and government) cost accumulation environments. With many different stakeholders responsible for portions of a given cost baseline and associated variance, it is important to have a credible method to calculate the components of a cost variance that is simple and mathematically sound. When cost variances are significant, customers and senior management demand to know what is driving the variance. This paper provides an organization or project team with a tool to quantitatively calculate the components of cost variances in any cost accumulation environment, no matter how sophisticated. It will also provide a project team the quantitative data to assess initial project costing assumptions and make strategic and tactical course corrections.