Project cost variance (PCV)

Cost variance shows whether a completed project used more or less money than its approved cost baseline. Historical reporting attributed striking overruns to major initiatives: a Standish Group summary stated that 70% of projects exceeded budget and that 52% finished at almost 200% of their initial estimate. Concorde was reported to cost 12 times its schedule, the Channel Tunnel 80% more than budget, and Boston’s “Big Dig” 275%—or $11 billion—over budget. The Big Dig had initially been priced at $2.8 billion; a Boston Globe estimate placed its ultimate interest-inclusive cost at $22 billion, with repayment continuing until 2038. Treat these figures as historical illustrations, not universal contemporary benchmarks.

When to use it

• Answer the key performance question: “To what extent are our projects delivered on budget?”
• Include the KPI in the operational processes and supply-chain perspective.
• Define the baseline, scope, collection process, formula, reporting frequency and data ownership before calculating the measure.
• Compare results with approved tolerances, comparable projects and the organisation’s historical forecasting performance.

Origins

Comparing actual project expenditure with an authorised budget is a foundational project-control practice. The simple PCV in this article is an end-of-project or like-for-like budget variance. It should not be confused with earned value management’s cost variance, which compares the budgeted value of work performed with its actual cost and can be used during delivery.

What it is

Perspective: Operational processes and supply chain perspective.

Key performance question: To what extent are our projects delivered on budget?

Material overruns can damage cash flow, investment capacity and reputation, and may create contractual or legal exposure. One historical example involved a lawsuit alleging a $20 million overrun on an Oracle software implementation.

PCV compares scheduled project cost with actual project cost for the same defined scope and price basis. A result of zero means actual cost matched the baseline; a negative result indicates an overrun; a positive result indicates expenditure below plan.

The number requires interpretation. A favourable variance may reflect efficiency, but it can also result from undelivered scope, lower quality, delayed invoices or an inflated baseline. An adverse variance may reflect poor control, an unrealistic estimate or an authorised scope change. Report the causes and forecast implications alongside the amount.

How to use it

Measurement

Freeze an approved cost baseline and define which costs it includes. Track authorised changes separately, accrue committed costs consistently and compare like with like. For active work, supplement the simple variance with forecast cost at completion and progress-based measures.