Definition: Cost Variance (CV) is the difference between Earned Value and Actual Cost, and it shows how much the project is ahead or behind schedule in terms of dollars.
The term “Cost Variance” is popularized by the PMI, and as per the PMBOK Guide, “Cost variance (CV) is the amount of budget deficit or surplus at a given point in time, expressed as the difference between earned value and the actual cost. It is a measure of cost performance on a project.”
Cost variance is calculated as a part of earned value analysis.
Cost Variance (CV) Formula
The formula to calculate SV is below:
Cost Variance = Earned Value (EV) – Actual Cost (AC)
The earned value is the value of complete work.
Actual Cost is the cost spent on the project to date.
If the CV is positive, the project is under budget, and the progress is good. If the CV is negative, the project is over budget and needs corrective actions to bring the project on budget. A CV value equal to zero shows the project is on budget.
Why do you need cost variance if the cost performance index provides the same information? CPI provides efficiency in terms of percentage, and variance provides information in dollar terms.
Both parameters provide the same information but with different metrics.
Cost Variance Examples and Calculations
Example-1
For a project, the earned value is 60,000, and the actual cost is 63,000 USD. Calculate the cost variance.
CV = EV – AC
= 60,000 – 63,000
= –3,000 USD
Since the CV is negative, the project is over budget.
Example-2
For a project, the earned value is 63,000, and the actual cost is 60,000 USD. Calculate the cost variance.
CV = EV – AC
= 63,000 – 60,000
= 3,000 USD
Since the CV is positive, the project is under budget.
Summary
Cost Variance (CV) shows if the project is under or over budget. If the difference exceeds acceptable limits, the project manager will find the root cause for this variance and take corrective actions to bring the project on budget.
This formula and calculation are important from a PMP exam point of view. In the PMP exam, a few questions can ask for cost variance calculation.
I am Mohammad Fahad Usmani, B.E. PMP, PMI-RMP. I have been blogging on project management topics since 2011. To date, thousands of professionals have passed the PMP exam using my resources.
