Last month we provided an overview of variance analysis as well as a discussion of items to consider when preparing to write the monthly variance analysis report (VAR). This month we expand on the topic and look at the elements of an effective variance analysis report.
It is imperative that the Control Account Manager (CAM) write a clear, precise, and accurate VAR to inform internal management of issues affecting project performance.
Keys to an Effective Variance Analysis Report
A well-written VAR provides this critical information for external customers to understand the current status and future projections of the project. The goal is to write a quality VAR, one that clearly explains the issues that are causing schedule and cost variances and what steps are being taken to correct those issues.
A VAR is required when the established thresholds for deviations from cost, schedule and at-completion objectives are exceeded. However, since the VAR is an excellent communication tool, the project manager may want to consider also having VARs developed for account variances just below these thresholds.
An analysis of the trends, especially those that are negative, may indicate the potential for future problems. This proactive “getting ahead of the game” approach will save time and avoid playing catch up once an issue arises.
When developing the monthly VAR, both the current period data as well as the cumulative data (i.e., since contract start) will be reviewed. Typically, the current data will show greater fluctuations from period to period than the cumulative data. This is normal. The cumulative data tends to smooth out these large fluctuations over time and thus presents a more useful trend line.
Cost, schedule and at-completion variances, assuming they exceed the established thresholds, are addressed each month for both current and cumulative data. VAR thresholds vary from project to project, are developed in conjunction with the customer, and are expressed in a fixed dollar amount and/or a percentage of the control account value.
A typical VAR form (CPR/IMPR Format 5) clearly identifies these three separate areas. (Refer to DI-MGMT-81861 A) On most projects, the contractor will use a VAR checklist to provide guidance to the CAM as to what data to address.
Major components of the VAR (Format 5)
- Define the issue(s)/problem(s) – Identify what happened. Is there a cost variance, schedule variance, or both? Are the identified variances for the current period, the cumulative date, or both? Cost variances are expressed in terms of a dollar amount and/or percentage. Schedule variances should be expressed in both dollar impact and duration expressed in days, weeks, or months.
- Define the root cause(s) – Identify why the issues happened. Depending on the complexity of the project, identifying the root cause(s) can be a daunting task. It is critical that the root cause(s) are accurately identified. A six-sigma process, using the “5 Whys” technique in conjunction with Ishikawa Fishbone Diagrams have proven to be very effective to identify the true root cause(s). Misidentified root cause(s) will result in ineffective corrective action plans. Thus, cost/schedule variance issues will continue.
- Articulate the impact – The impact of variances, depending on the severity, may affect the control account, related control accounts, the project or the entire program. The CAM must be aware of the situation with his/her control account and of the situation with related control accounts. Likewise, the CAM must be aware of his/her role within the project and how control account issues may affect the entire project.
- Define an implementation plan for correction(s) – Once the root cause(s) have been correctly identified, the next step is to develop an implementation plan that will address the what, who, and when. Identify what needs to be done to eliminate or mitigate the root cause. Identify who is the responsible party for managing the what to completion Clearly identify a time line and date for when the corrective action is expected to be completed. At this point, the what, who, and when are recorded in the corrective action log.
- Address the status of outstanding corrective action(s) – As long as the corrective action is still outstanding, the CAM must report the status of that item in the monthly VAR. An outstanding corrective action for several reporting periods is a good indication that the root cause(s) were incorrectly identified or the corrective action was not properly implemented.At this point, the CAM will evaluate the implementation process to determine if it is working properly. Additionally, with concurrence from the project manager, the CAM will re-evaluate the root cause(s) (Step 2 above) to correctly identify the issues and what needs to be done to correct them. Thus, a new root cause will be developed.