What Is the Formula for the Variance at Completion?
Uncover how Variance at Completion provides a crucial forecast of your project's final financial outcome, helping manage costs effectively.
The Variance at Completion (VAC) is a metric in project cost management, providing a forward-looking assessment of a project’s financial health. It helps to compare the planned total cost of a project against its estimated total cost. This comparison allows project stakeholders to understand the likely financial outcome and assess overall project performance.
Understanding Key Cost Management Terms
Understanding two fundamental cost management terms, Budget at Completion (BAC) and Estimate at Completion (EAC), is important for calculating Variance at Completion. These terms represent different aspects of a project’s financial targets and forecasts.
Budget at Completion (BAC) is the total planned budget for the entire project or a specific work package. It encompasses all anticipated costs, including labor, materials, equipment. BAC is established during the initial planning phase and serves as the original cost baseline against which project performance is measured. This figure remains static unless formally revised through a change control process.
Estimate at Completion (EAC) represents the projected total cost of the project. Unlike BAC, EAC is a dynamic forecast that considers actual costs and revises the estimated costs for the remaining work. EAC provides a more current and realistic picture of the project’s likely final cost, accounting for any deviations from the original plan. Project managers use EAC to reassess total costs, especially when unforeseen events or performance issues arise.
Calculating Variance at Completion
Calculating Variance at Completion (VAC) is straightforward once Budget at Completion (BAC) and Estimate at Completion (EAC) are known. The formula for VAC directly compares the initial budget to the updated cost projection. This calculation provides a clear financial indicator of the project’s anticipated budgetary standing.
The formula for Variance at Completion is:
VAC = BAC – EAC
For example, if a project had an original Budget at Completion (BAC) of $150,000, and its current Estimate at Completion (EAC) is $140,000, the calculation would be:
VAC = $150,000 – $140,000 = $10,000. This result indicates a positive variance.
If the same project had a BAC of $150,000, but the EAC has increased to $165,000 due to unexpected costs, the calculation would be:
VAC = $150,000 – $165,000 = -$15,000. This outcome reflects a negative variance.
Interpreting the Variance at Completion
Interpreting Variance at Completion (VAC) provides insights into a project’s financial performance. The VAC value indicates whether the project is expected to finish over or under its original budget. This metric acts as a forward-looking indicator, helping project managers understand the probable financial outcome at project completion.
A positive VAC indicates that the project is projected to finish under budget. This favorable outcome suggests that the project team has managed costs effectively, potentially completing work at a lower cost than initially planned. It signifies a budget surplus, allowing for potential reallocation of funds or creating a contingency.
Conversely, a negative VAC signals that the project is projected to finish over budget. This unfavorable result indicates a potential cost overrun, meaning the new estimated total cost exceeds the original budget. Such a variance highlights the need for project managers to identify the causes of the increased costs and consider corrective actions.
A VAC of zero means the project is projected to finish on budget. While a positive VAC might seem ideal, a zero or near-zero VAC can also indicate highly accurate initial planning and effective cost control throughout the project’s duration. This balanced outcome confirms that the project is on track with its financial targets.