Cost Variance Percentage
This guideline describes how to measure Cost Variance Percentage to evaluate cost performance of completed projects.
Main Description

Overview

The Cost Variance Percentage measures project cost performance compared to project cost estimates. This is frequently used to evaluate cost management performance for both individual projects and project portfolios.

Measurement Method

Cost Variance = (Budget at Completion - Actual Cost) / Budget at Completion - where:

Budget at Completion (BAC) = Total budgeted costs, frequently the total original estimated project costs, for a specified completed project. Cost can be quantified in terms of currency (e.g., dollars) or effort (e.g., person-hours).

Actual Cost (AC) = Total costs actually spent on same specified project. Cost must be quantified in the same units as BAC, above.

The same formula can be used to evaluate multiple projects within a project portfolio for a defined evaluation period:

Portfolio Cost Variance = (Sum(BAC) - Sum(AC)) / Sum(BAC) – where:

Sum(BAC) = the sum of budget costs for the targeted completed projects for the specified evaluation period.

Sum(AC) = the sum of actual costs for the targeted completed projects for the specified evaluation period.

Measurement Analysis

Cost Variance Percentage indicates how accurately projects estimate actual costs or, alternatively, how well projects deliver their defined project objectives within their original budgets. Rendered as a percentage, this metric facilitates trend charting and comparisons from period to period to determine cost management performance over time.

Cost Variance Percentage should fall between optimal values, frequently ranging from +/- 5% to +/- 20%. However, the optimal range is dependent on the type of projects under evaluation. For example, highly predictable projects, such as maintenance or small enhancement projects, require a narrower range of evaluation (say, +/- 5%); whereas, highly risky projects require a wider range of evaluation (say, +/- 20%). Additional ranges can be used to establish tiered evaluation to characterize low, moderate, high variance conditions.

Upon establishing the evaluation ranges, if a project or portfolio falls within the optimal range, the project or portfolio is evaluated with optimal cost performance. Otherwise, the project or portfolio is evaluated at a lower level of cost performance.

Alternatively, a chart similar to the one that follows can classify portions of project portfolios by Cost Variance Percentage. This allows evaluation of portfolio performance from period to period.

Chart showing project portfolios classified by Cost Variance Percentage