MEC-21

Variance Analysis
Outline
▪ Materiality and Trends
▪ Types of Variance in Project Management
▪ Exception Plan
▪ Material Variances in Projects
▪ Labour Variances in Projects
Readings
▪ PMBOK-7, pages 100-101, 113, 177, 182 & 252
▪ Drury, Chapter 17
▪ Lecture Notes
1

Variance & Variance Analysis

▪ Variance is the difference between what is estimated or planned and how it turns
out to be in actual effect; in simple words, Variance is the difference between
Expectations and Results
▪ Variances can be in scope, duration estimates, cost estimates, resources utilization,
resources rates, technical performance, and other metrics
Example: There is a plot of land on which a house is to be built. Based on the expert
opinion, it is estimated to cost Rs 10 million. Once complete, the house has actually
cost Rs 12 million. The house has yielded an UNFAVOURABLE or NEGATIVE Variance
of Rs 2 million
▪ Variance Analysis is finding out the Variance as well as its Root Causes
In the previous example, the UNFAVOURABLE or NEGATIVE Variance of Rs 2
million may have been due to escalating prices of building material, particularly
bricks, cement and steel, between the time of estimation and the period of
implementation of the project

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 ‘Materiality’ and ‘Trends’ in Variance Analysis
‘Materiality’ refers to the impact of Variance. When calculating Variances,
materiality needs consideration
▪ An Unfavourable Variance of Rs 1.00 on a brick planned at Rs 9.00 isn't a big deal if
the quantity required is small but would add significantly to the material cost if the
quantity required is for the entire house
▪ A Favourable Variance of Rs 2,000 on a geyser is not significant but a Rs 10
Favourable Variance on a bag of cement is
▪ Time spent on Variance Analysis should be proportional to the effect of the Variance
on the Project Baselines; no need being penny wise
‘Trends’ are an important consideration in Variance Analysis
▪ Control actions based on Point-in-time (Singular) Variances need caution; Variance
Trends over time enable better Control actions
▪ A Negative Variance over time of say Rs 9, 10, 11, 8 and 11 is indicative of a steady
trend of increasing costs and, if large enough to be material, merits investigation
followed by a suitable Control action
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Types of Variance (High Level)

A. Estimated to Planned
B. Planned to Actual
C. Estimated to Actual

Estimates Plan Actuals

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 A. Estimated to Planned Variance
Variance between what was Estimated for the Project, based on the
estimation techniques or expert opinion, and what emerged upon
Planning
• Occurs in situations where projects are quoted based on best
guesses and ball park figures, by a group who will not actually
execute the work. Detailed planning, however, results in different
figures
• Reasons for such a Variance: new processes, technology, laws, taxes
etc introduced since the initial estimates, or a flawed estimate, or
excessive delay between initiation & planning
• If the variance is significantly Unfavourable, the whole Business
Case or the Feasibility Study for the Project would need review, or
the Project might be shelved

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B. Planned to Actual Variance

Variance between what was Planned for the Project and how it is
actually working out
• Yields Progress of the Project
• Most widely used in Project Management as EVA and various types
of Variance Analyses like Material Rate & Usage Variance, Labour
Rate & Efficiency Variance etc
• Reasons for such a Variance: change in material and labour costs,
taxes, force majeure, scope creep, progressive elaboration etc
• If the variance is significantly Unfavourable, the situation is
controlled through Preventive or Corrective Actions, or Defect
Repairs, or in the worst case scenario, Rework

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 Planned/Estimated & Actual Spending
3,500

Threshold crossed.
Formulate and Implement
3,000 the Exception Plan

2,500
Cost Baseline
+10% Threshold/Tolerance
2,000 Actual Spending
Spending

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1,500

1,000
Exception Plan An agreed-upon set of Corrective
Actions to be taken if a threshold or forecast is
500 crossed. Usually done at a Stakeholder meeting.
Agreed Plan is implemented and followed through to
determine if it is working.
0
0 5 10 15 Time 20 25 30 35 7

C. Estimated to Actual Variance

Variance between what was Estimated for the Project and how it is
actually working out
• Applies to Projects which are started intuitively, without a plan or
relying mostly on the Business Case or Feasibility Study
• Also applies to Procurement Contracts where Bids differ significantly
from the Quotations; if so, the corrective action may warrant
change of vendors, processes, materials, contractual stipulations,
etc.

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 Variances & Risk Temperament
Variance often rooted in Risk Temperament of the Estimator or Planner:

6 6
6 Ideally: A, B, C ≈ 0
Planned 5
Actual
5 5
A B C
Estimated Estimated
4 4 4
C A B
Actual 3
Planned
3 3

2 Risk Aversion 2 Risk Taking 2

1 1 1

0 0 0
Category 1 Category 2 Category 1 Category 2 Category 1 Category 2

A. Estimated to Planned
B. Planned to Actual
C. Estimated to Actual
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Variance Analysis
of Changes in
Direct Material & Labour Costs
on Projects

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 Estimating Activity Resources & Costs
PLANNING EXECUTING
Create and
WBS MONITORING & CONTROL
• Scope Baseline
Define
Activities
• Activity List
Estimate
Activity
Resources
• Resource Requirements Control
Estimate Resources
Costs
• Actual Resources Utilised
• Cost Estimates
Determine Control
Budget Costs
VARIANCE
• Cost BL ANALYSIS • Actual Costs
• Project Budget
(CV, CPI, EAC, VAC, ETC, TCPI)
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Variance Analysis of Changes in Rates and Quantities

• While Budgeting, Materials & HR are Costed using Standard Rates & Quantities
• Should these Rates or Quantities change during the Project Life Cycle, Cost
Performance would be affected Favourably or Unfavourably
• Variance Analysis quantifies the effect of Variance between the Standard & Actual
Rates & Quantities for Materials used and Labour employed on a Project
• Types of Variances:
Material Rate Variance (MRV) Variance due to difference in Standard & Actual
Rates of Quantities Purchased
Material Usage Variance (MUV) Variance due to difference in Standard & Actual
Quantities Used
Labour Wage Rate Variance (LRV) Variance due to difference in Standard & Actual
Labour Rates
Labour Efficiency Variance (LEV) Variance due to difference in Standard & Actual
Worktimes or Efforts
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Variance FAVOURABLE if respective

ACTUAL RATE or QTY < STD RATE or QTY, & vice versa
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 Variance Analysis an Interplay of Rates & Quantities

Standard Quantity: Quantity of material required for a certain

activity based on Quantity Standard; eg 17.6 bags of cement
required to pour 100 cuft of 1:2:4 concrete. Therefore, 5,000
cuft will require 880 bags. This is Standard Quantity
Actual Quantity Purchased: Actual Quantity of material
purchased for the activity; eg 1,000 bags of cement purchased
for this activity

MUV
Actual Quantity Used: Actual Quantity of material used for
the activity; eg 900 bags of cement
MRV

Standard Rate: The rate or cost at which any material for a

project is planned; eg Rs 550 per cement bag

Actual Rate: Actual Rate at which the consumed material is

purchased; eg Rs 520 per cement bag

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Working out Standard Quantity (SQ)

Due care needs to be exercised when working out SQ from the Quantity
Standards (qs) as given in the Company’s OPAs, manufacturing standards or
such other documents. The underlying principle is to apply the qs to the Scope
of the work package/activity/deliverable (Quantity produced, Area covered
etc) to get the SQ, by multiplying them together. Following table illustrates:

Activity Quantity Number of Scope per

Material Deliverable Standard (qs) Units (u) Unit (s/u) SQ = qs x u x u/s
Rubber Trampoline 2.5 kg per 10,000 200 sq ft per (2.5/100)x10,000x200
sheets 100 sq ft sheets sheet =50,000 kg rubber

Bricks 9” standard 1,000 bricks 20 houses 5,000 sq ft (1,000/100)x20x5,000

walls per 100 sq ft wall per =1,000,000 bricks
wall house

Upon multiplication, units in numerators & denominators must cancel each other
except the Quantity units; eg, SQ (cft) of timber for 10 houses, 12 doors per house,
𝑑𝑜𝑜𝑟𝑠 𝑐𝑓𝑡
2 cft timber per door = 10 houses x 12 ℎ𝑜𝑢𝑠𝑒 x 2 𝑑𝑜𝑜𝑟 = 240 cft
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 Working out Standard Effort (SE)
• In Direct Labour Variance, the SE is used in place of SQ
• Effort is basically ‘How Many Resources & for How Long’. It is the product of
number of Resources and Duration for which they are employed
• HR Effort For HR, Effort is measured in Man-Hours, Man-Days, Man-Weeks
& so on, as follows:
One Man-Hour (MH) = One Man working for One Hour
One Man-Day (MD) = One Man working for One Day (8 Hrs) ∴ One MD=8 MH
One Man-Week (MW)= One Man working for One Week (40 hrs or 5 days,
@ 8 hrs per day, or as planned in the Project Calendar)
Examples:
Men Period Effort Effort Men-Period
40 5 hrs 200 MH
80 MH 10-8H, 5-16H, 2-40H etc
13 20 days 260 MD, 2,080 MH
4 3 weeks 12 MW, 60 MD, 480 MH 20-1D, 10-2D, 5-4D, 4-5D,
20 MD
4-1W, 2-2W, etc

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Approaches to Variance Analysis

1. Formula based:
MRV = ∑AQx(SR-AR) = AQ1x(SR-AR1) + AQ2x(SR-AR2) + AQ3x(SR-AR3) + …
MUV = SRx(SQ-AQ)
OE = MRV+MUV

2. Template Based:
Material Purchased Material Used
Actual Qty Actual Qty Actual Qty Std Qty
x x x x
Actual Rate Std Rate Std Rate Std Rate
MRV MUV
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OE

3. ‘Planned vs Actual’ (or ‘Cost Baseline vs Actual Cost’) Comparison

(straight and simple, if MRV and MUV are not required)
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Variance Analysis (Material) … 1/3 …Using Formulae
Material Cement: On a certain construction project, first slab with a volume of 6000
cft has been poured. For this activity, the standard quantities and rates for cement
were: 17.6 bags per 100 cft; Rs 400 per bag. 1200 bags were purchased @ Rs 500
per bag from one source and 200 bags @ Rs 450 from another. On completion of
pouring, 250 bags remained in the store. Carry out Variance Analysis (find MRV,
MUV and Overall Effect on Project Cost Performance).

SQ = 17.6 bags/100 cft x 6000 cft MRV1 = AQ1x(SR-AR1)

= 1056 bags = 1200x(400-500) = -120,000
MRV2 = AQ2x(SR-AR2)
SR = Rs 400/bag = 200x(400-450) = -10,000

AQ1 purchased= 1200 bags MRV = MRV1 + MRV2

AR1 = Rs 500/bag = (-120,000)+ (-10,000) = -130,000

MUV = SRx(SQ-AQ)
AQ2 purchased= 200 bags = 400x(1056-1150) = -37,600
AR2 = Rs 450/bag
Overall Material Cost Variance = MRV+MUV
AQ used = 1200+200-250 = 1150 bags = (-130,000)+(-37,600) = -167,600

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Variance Analysis (Material) … 2/3 …Using Template
Material Cement: On a certain construction project, first slab with a volume of 6000
cft has been poured. For this activity, the standard quantities and rates for cement
were: 17.6 bags per 100 cft; Rs 400 per bag. 1200 bags were purchased @ Rs 500
per bag from one source and 200 bags @ Rs 450 from another. On completion of
pouring, 250 bags remained in the store. Carry out Variance Analysis (find MRV,
MUV and Overall Effect on Project Cost Performance).
Material Purchased Material Used
SQ = 17.6 bags x 6000 cft
100 cft Actual Qty Actual Qty Actual Qty Std Qty
= 1056 bags x x x x
Actual Rate Std Rate Std Rate Std Rate
SR = Rs 400/bag 200 1200 bags 200+1200 bags 1150 bags 1056 bags
x + x x x x
AQ1 purchased= 1200 bags Rs 450 500 /bag Rs 400/bag Rs 400/bag Rs 400/bag
AR1 = Rs 500/bag = Rs 90,000+600,000 =Rs 560,000 =Rs 460,000 =Rs 422,400
MRV MUV
AQ2 purchased= 200 bags
AR2 = Rs 450/bag Rs 130,000 (U) Rs 37,600 (U)
Overall Material Cost Variance
AQ used = 1200+200-250 Rs 167,600 (U)
= 1150 bags

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Variance Analysis (Material) … 3/3 … Simplistic Approach
Material Cement: On a certain construction project, first slab with a volume of 6000
cft has been poured. For this activity, the standard quantities and rates for cement
were: 17.6 bags per 100 cft; Rs 400 per bag. 1200 bags were purchased @ Rs 500
per bag from one source and 200 bags @ Rs 450 from another. On completion of
pouring, 250 bags remained in the store. Carry out Variance Analysis (find MRV,
MUV and Overall Effect on Project Cost Performance).

SQ = 17.6 bags x 6000 cft Planned Material Cost (BL Cost)

100 cft = SR x SQ
= 1056 bags = Rs 400/bag x 1056 bags = Rs 422,400

SR = Rs 400/bag Actual Material Cost

= Σ(AR x AQ) - (UU x SR)
= 1200 bags x Rs 500/bag
AQ1 purchased= 1200 bags plus
AR1 = Rs 500/bag 200 bags x Rs 450/bag = Rs 590,000
minus
AQ2 purchased= 200 bags 250 bags x Rs 400/bag
AR2 = Rs 450/bag
Material Cost Variance
Q unused = 250 bags = Planned Material Cost – Actual Material Cost
= 422,400 - 590,000 = - Rs 167,600
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Variance Analysis (Material) → Variance Analysis (Labour) … 20

1/2

Material
Standard Quantity (SQ)
Actual Quantity (AQ)
Standard Rate (SR)
Actual Rate (AR)
Material Rate Variance (MRV)
Material Usage Variance (MUV)
Labour
Standard Effort (SE)
Actual Effort (AE)
Standard Labour Rate (SLR)
Actual Labour Rate (ALR)
Labour Rate Variance (LRV)
Labour Efficiency Variance (LEV)

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Variance Analysis (Material) → Variance Analysis (Labour) … 21
2/2
Material Labour
Formula Formula:
MRV = ∑AQx(SR-AR) LRV = ∑AEx(SLR-ALR)
MUV = SRx(SQ-AQ) LEV = SLRx(SE-AE)
OE = MRV+MUV OE = LRV+LEV
Template Template
Material Purchased Material Used Manpower Hired Manpower Employed
Actual Qty Actual Qty Actual Qty Std Qty Act Effort Act Effort Act Effort Std Effort
x x x x x x x x
Actual Rate Std Rate Std Rate Std Rate ALR SLR SLR SLR
MRV MUV LRV LEV
OE OE

Planned vs Actual Planned vs Actual

Material Cost Variance = Labour Cost Variance =
Planned Material Cost - Actual Material Cost Planned Labour Cost – Actual Labour Cost

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Variance Analysis (Direct Labour) … 1/3 …Using Formulae
On a certain construction project, HR Assignment Plan assigned 200 unskilled
workers (USW), on a particular activity, for 100 days, on a daily wage of Rs 500. Due
to countrywide shortage and escalating inflation no USW was available for less than
Rs 600 per day, and only 190 USWs could be made available. The activity actually
took 80 days to complete. Carry out Variance Analysis

SE = 200 USW x 100 days LRV = AEx(SLR-ALR)

= 20,000 man-days = 15,200 (500-600) = -1,520,000

SLR = Rs 500/day/USW
LEV = SLRx(SE-AE)
= 500x(20,000-15,200) = 2,400,000
AE = 190 USW x 80 days
= Rs 15,200 man-days
Overall Labour Cost Variance
ALR = Rs 600/day/USW = LRV+LEV
= (-1,520,000)+(2,400,000) = 880,000

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Variance Analysis (Direct Labour) … 2/3 …Using Template
On a certain construction project, HR Assignment Plan assigned 200 unskilled
workers (USW), on a particular activity, for 100 days, on a daily wage of Rs 500. Due
to countrywide shortage and escalating inflation no USW was available for less than
Rs 600 per day, and only 190 USWs could be made available. The activity actually
took 80 days to complete. Carry out Variance Analysis

Manpower Hired Manpower Employed

SE = 200 USW x 100 days Actual Effort Actual Effort Actual Effort Std Effort
= 20,000 man-days x x x x
Actual Lab Rate Std Lab Rate Std Lab Rate Std Lab Rate
SLR = Rs 500/day/USW 15,200 man-days 15,200 man-days 15,200 man-days 20,000 man-days
x x x x
AE = 190 USW x 80 days Rs 600/day/USK Rs 500/day/USK Rs 500/day/USK Rs 500/day/USK
= Rs 9,120,000 =Rs7,600,000 =Rs7,600,000 =Rs 10,000,000
= 15,200 man-days
LRV LEV

ALR = Rs 600/day/USW Rs 1,520,000 (U) Rs 2,400,000 (F)

Overall Labour Cost Variance

Rs 880,000 (F)

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Variance Analysis (Direct Labour) … 3/3 … Simplistic Approach
On a certain construction project, HR Assignment Plan assigned 200 unskilled
workers (USW), on a particular activity, for 100 days, on a daily wage of Rs 500. Due
to countrywide shortage and escalating inflation no USW was available for less than
Rs 600 per day, and only 190 USWs could be made available. The activity actually
took 80 days to complete. Carry out Variance Analysis

Planned Labour Cost (BL Cost)

= SLR x SE
SE = 200 USW x 100 days = Rs 500/man-day x 20,000 man-days
= 20,000 man-days
= Rs 10,000,000
SLR = Rs 500/day/USW
Actual Labour Cost
= Rs 500/man-day
= ALR x AE
= Rs 600/man-day x 15,200 man-days
AE = 190 USW x 80 days
= Rs 9,120,000
= 15,200 man-days
Labour Cost Variance
ALR = Rs 600/man-day
= Planned Labour Cost – Actual Labour Cost
= Rs 10,000,000 - Rs 9,120,000
= Rs 880,000

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 More Examples
using
the Simplistic Approach
+
Some Unsolved Examples

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Example 1
Work Package (WP) Scope: Aluminium Windows with Single Pane Glass
20 houses, 10 windows/house, 48 sq ft/window
Standard Rate for WP Costing: Rs 500 per sq ft
After the project started, the Scope was changed to have double glazed (double
paned) windows for better habitability. Resultantly, the rate escalated to Rs 800/sq ft.
To Control Costs, one window was deleted from each house as one room was to be
converted into a store. Carry out Variance Analysis
SQ = 20 houses x 10 windows/house x Planned Material Cost (BL Cost)
48 sq ft/window = 9,600 sq ft = SR x SQ
= Rs 500/sq ft x 9,600 sq ft = Rs 4,800,000
SR = Rs 500/sq ft
Actual Material Cost
= Σ(AR x AQ) - (UU x SR)
AQ = 20 houses x 9 windows/house x = Rs 800/sq ft x 8,640 sq ft = Rs 6,912,000
48 sq ft/window = 8,640 sq ft

AR = Rs 800/sq ft Material Cost Variance

= Planned Material Cost – Actual Material Cost
Q unused = NA in this case = 4,800,000 - 6,912,000 = - Rs 2,112,000

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Example 2
Material Paint Putty: On a certain construction project of 22 houses, putty base is to
be applied on internal walls after plaster. Area of Internal Walls is 8,000 sq ft per
house. Putty coverage is 5 kg per 100 sq ft wall area. Putty comes in 40-kg drums for
which the Standard Rate is Rs 12,000 per drum. 120 drums of putty are purchased @
Rs 11,500 per drum and 80 drums @ Rs 13,000 per drum. On completion of the
activity, 7 drums of putty remain unused. Carry out Variance Analysis

SQ = 22 houses x 8,000 Planned Material Cost (BL Cost)

sqft/house x 5 kg/100 sqft = SR x SQ
= 8,800 kg = 220 drums = Rs 12K/drum x 220 drums = Rs 2,640 K

SR = Rs 12K/drum Actual Material Cost

AQ1 purchased= 120 drums
AR1 = Rs 11.5K/drum
AQ2 purchased= 80 drums
AR2 = Rs 13K/drum
Material Cost Variance
Quantity unused = 7 drums
27
= Σ(AR x AQ) - (UU x SR)
= 120 drums x Rs 11.5K/drum
plus
80 drums x Rs 13K/drum = Rs 2,336K
minus
7 drums x Rs 12K/drum
= Planned Material Cost – Actual Material Cost
= Rs 2,640 K - Rs 2,336K = Rs 304K

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Example 3
The HR planned for a 120-day long project are 20 skilled workers @ Rs 3,000 per day
and 100 unskilled workers @ Rs 1,500 per day. During project execution, 15 skilled
workers and 75 unskilled workers were actually provided @ Rs 3,100 per day and Rs
1,600 per day respectively. The skilled workers worked on the project for 140 days and
the unskilled workers for 150 days. Carry out Variance Analysis for Labour Costs

SE1 = 20 men x 120 days Planned Labour Cost (BL Cost)

= 2,400 man-days = (SLR1 x SE1) + (SLR2 x SE2)
SLR1 = Rs 3,000/man-day = (Rs 3000/man-day x 2400 man-days) + (Rs 1500/man-day x
SE2 = 100 men x 120 days 12000 man-days) = Rs 25,200,000
= 12,000 man-days
Actual Labour Cost
SLR2 = Rs 1,500/man-day
= (ALR1 x AE1) + (ALR2 x AE2)
= (Rs 3100/man-day x 2100 man-days) + (Rs 1600/man-day x
AE1 = 15 men x 140 days 11250 man-days) = Rs 24,510,000
= 2,100 man-days
SLR1 = Rs 3,100/man-day Labour Cost Variance
SE2 = 75 men x 150 days = Planned Labour Cost – Actual Labour Cost
= 11,250 man-days = Rs 25,200,000 - Rs 24,510,000
SLR2 = Rs 1,600/man-day = Rs 690,000

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Example 4 (Unsolved)
Project & Scope: Lay terrazzo (marble chips) flooring in a housing project of 140
houses. Flooring requirement in each house unit is 5,000 sq ft.
Standard Rates & Quantities: Terrazzo comes in bags of 50 kg @ Rs 2,000 per bag. 1.5
kg covers 1 sq ft area.
Standard Labour Rates & Effort: The company estimates 40 man-days of work in each
housing unit and labour cost @ Rs 1,000 per day per worker (per man-day)
Actual Materials: The company procures 12,000 bags of terrazzo @ Rs 2,060 per bag
from one source and 8,000 bags @ Rs 2,100 per bag from another source. 500 bags of
terrazzo is already available ex-stock which was purchased @ Rs 1,800 per bag.
Actual Labour: The company hires 50 workers on T&M contract @ Rs 1,200 per man-
day.
Project Completion: The project completes in 90 days, with 200 bags of terrazzo
unused.

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Example 5 (Unsolved)
A flooring company wins a project to lay tiles on the flooring in a housing project of 19
houses. Flooring requirement in each house is 2,000 sq ft.
100 units of tiles cost Rs 8,000, and 2 units cover 1 sq ft of floor.
The company procures 45,000 units of tiles @ Rs 7,000 per 100-units from one source,
and 40,000 units @ Rs 9,500 per 100-units from another source. At the end of the
project, 1,000 units of tiles remains unused.
Find the financial effect of this effect on the Cost Baseline.

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