Determine the right threshold for project cost and schedule variances
By Bonnie Biafore
If you find out early enough that your project schedule is slipping, or costs are blowing beyond your budget, you can take corrective action to bring your project back on track. Many of your objectives boil down to how long will it take and how much will it cost. So project managers usually keep an eye on how actual project cost and schedule compare to the associated plan. The differences between actual and planned values are known as variances. The problem is that these don't always tell the entire story. Variance values that would doom one project might barely ripple the surface of a gargantuan effort.
Monitoring project health by tracking variances is a lot easier if you know what to look for. Instead of worrying about the tiniest overruns, take some time during project planning to decide how much variance your project can handle. By setting thresholds for cost and schedule variances, you'll know when you should take corrective action. The trick is choosing the right thresholds for your project variances, so you don't worry needlessly or act too late.
How variances indicate project performance
By the time stakeholders sign off on a project plan, you have a complete picture of estimated project performance. From the estimated work, duration, and costs of individual tasks to the budget and proposed schedule for the entire project, baseline values are the standard against which you compare actual performance. However, as soon as you begin to execute the project plan, actual values start rolling in and reality is rarely the same as the baseline everyone envisioned. Cost and schedule variances help you determine if tasks, or your entire project, are over budget or behind schedule. You can use this information to determine what you must do to bring the project back on track.
Microsoft Office Project 2007 calculates variances by subtracting baseline values from the current estimated values in your schedule. After you begin tracking actual values, Office Project 2007 calculates the current estimated values (scheduled values) by adding the actual values, for work completed, to the baseline values for the work that remains. For example, suppose the baseline duration is 20 days and your team has taken 15 days to complete 50 percent of the work. The scheduled duration is now 25 days: 15 days for the actual duration of the 50 percent that's complete and the baseline 10 days for the remaining 50 percent.
If a variance value is positive, the scheduled value is greater than the baseline value, and your project is either over budget or behind schedule. Negative variances represent an under-budget or ahead-of-schedule situation. The bottom line is that variances of zero or less are good; those greater than zero might be cause for concern.
Track variances with Project 2007
Office Project 2007 has fields for commonly used variances:
Cost This variance is the difference between your scheduled and original baseline costs. It shows if you are over or under budget.
Duration This is the difference between the scheduled duration of a task or project and the baseline duration. It indicates if tasks are taking longer than planned, which in turn affects the project schedule.
Work Determine the gap between scheduled and baseline work times. A positive work variance indicates that team members are spending more time than you estimated to complete work. When work variance is positive, there's a good chance that all the other variance fields are positive as well.
Start This is the time difference between the scheduled (or actual) and the baseline start date. If start variance is positive, the actual start date was late or predecessor tasks are delaying the scheduled start date.
Finish Shows how the scheduled (or actual) and baseline finish dates differ. If finish variance is positive, the finish date for the task is delayed.
Determining thresholds for project variances
Although positive variances in Office Project 2007 are not good news, you don't necessarily have to launch into action. Some are too trivial for your valuable time. More dangerous is spending time correcting minor variances while ignoring potentially troublesome issues. Rather than trying to remember what's important, or when overruns are truly a problem, you can set thresholds for project cost and schedule variances as reminders. Then, you can quickly check if variances have exceeded their corresponding thresholds and then take action.
Sizing variance thresholds
Your dog gaining 5 pounds might not seem like a problem — unless he's a Chihuahua. Similarly, the size of a project is an obvious factor when setting variance thresholds. Because projects come in all shapes and sizes ― like breeds of dogs ― percentages to calculate thresholds produce reliable indicators, regardless of the size of the project. For example, a 10-percent variance might be a warning sign that your schedule is 5 weeks or 50 past due. On the other hand, a $10 million budget that is $30,000 over budget is a mere .3-percent nibble from reserves that management sets aside; but $30,000 over on a project that's supposed to cost $20,000 is a whopping 150-percent over budget.
Guidelines for determining variance thresholds
Variance thresholds vary from company to company and are based on risk strategies and the management reserves an organization uses, which are typically 10 to 15 percent. Thresholds can also vary from project to project depending on how critical the business objectives are.
Here are some common threshold percentages you can use as guidelines; but you may need to modify them to fit your project's circumstances.
Less than 5 percent (low-risk tolerance) Cost or schedule variances less than 5 percent are an early warning for potential problems.
Between 5 and 10 percent (moderate risk) This range requires that you to take action.
Greater than 10 percent (high risk) Anything greater than 10 percent requires immediate and substantial action.
These guidelines are best for schedule variances on the critical path because they directly affect the finish date. The guidelines are also appropriate for cost variances because the costs for tasks contribute to the final expenditures of a project. You can set higher thresholds (for instance, adding 5 percent to the values above) for schedule variances on noncritical path tasks. The higher thresholds mean you don't have to take action as quickly, but you also don't want those tasks to be delayed so long that they affect those on the critical path.
What drives project variance thresholds?
The variance values that spell trouble not only vary from project to project but also from task to task. Each project is unique and achieves different objectives. In addition, some objectives are more important than others, which might lead to stricter thresholds for some variances. Business objectives such as time to market, a strict budget, or scarce resources can lead to different thresholds for cost and schedule variances. During the planning phase, work with your stakeholders to identify objectives. At the same time, you can discuss the priority for project objectives to help determine variance thresholds.
For example, a few years ago Y2K software projects couldn't accept a delay past December 31, 1999. The threshold for schedule variance might have been zero, while the threshold for cost variance was 20-percent of the project budget. So, if you're living in a trailer on your property while you build your new house, the schedule threshold might not be as much of an issue as the cost. You set aside 10-percent of the budget for contingencies, and there's no more money to be had. Then again, your spouse might have other ideas about living in a trailer for one week longer than necessary.
Greater than zero
Although Office Project 2007 calculates variances for several project measurements, these numbers are not enough information to help you determine the best use of your time. A more effective way to measure project performance is to determine thresholds for cost and schedule variances. It's good to keep an eye on variances that are greater than zero, but you know you need to act if a variance exceeds its threshold.
About the author Bonnie Biafore is a Project Management Institute (PMI)–certified Project Management Professional (PMP). She is a consultant, trainer, speaker, and award-winning author of several books about investing, personal finance, and project management, including On Time! On Track! On Target! Managing Your Projects Successfully with Microsoft® Project (Microsoft Press, 2006).