Variance analysis

Definition

Variance analysis is a quantitative tool used to evaluate the difference between planned financial outcomes and actual financial performance. It helps project managers understand the reasons behind deviations from the budget or schedule, allowing for informed decision-making to keep the project on track.

5 Must Know Facts For Your Next Test

1. Variance analysis can be performed on various aspects of a project, including scope, cost, and schedule, to pinpoint specific areas needing attention.
2. It helps identify trends over time, allowing project managers to anticipate issues before they become significant problems.
3. By regularly conducting variance analysis, teams can make adjustments to improve future performance and optimize resource allocation.
4. Variance analysis is essential in change management, as it provides data to support or reject proposed changes based on their impact on overall project performance.
5. This tool is closely tied to Earned Value Management, as it uses performance metrics like Cost Performance Index (CPI) and Schedule Performance Index (SPI) for a more comprehensive analysis.

Review Questions

• How does variance analysis contribute to effective scope control in project management?
  • Variance analysis contributes to effective scope control by helping project managers identify discrepancies between what was planned and what has actually been completed. By analyzing variances, managers can pinpoint areas where scope changes may have occurred without proper authorization. This insight allows for timely adjustments and better communication with stakeholders regarding potential impacts on the project's overall goals.
• Discuss the role of variance analysis in budget development and maintaining financial control during a project's lifecycle.
  • Variance analysis plays a critical role in budget development by establishing a clear baseline for financial performance against which actual results are measured. Throughout a project's lifecycle, regular variance analysis allows project managers to detect budget overruns or underutilization early on. This ongoing evaluation not only aids in maintaining financial control but also informs necessary adjustments in budgeting to ensure successful project completion within financial constraints.
• Evaluate the effectiveness of variance analysis as a tool for risk monitoring and control within projects.
  • Variance analysis is highly effective for risk monitoring and control because it provides concrete data about deviations from planned performance metrics. By consistently assessing variances, project managers can identify emerging risks and their potential impacts before they escalate into major issues. This proactive approach enables teams to implement corrective actions promptly and adjust risk management strategies based on real-time data, ultimately enhancing the project's chances of success.

Related terms

Budget Variance: The difference between the budgeted amount of expense or revenue and the actual amount incurred or received.

Earned Value Management (EVM): A project management technique that integrates scope, schedule, and cost variables to assess project performance and progress.

Forecasting: The process of estimating future financial performance based on historical data and trends.