Cost variance formula (CV): Calculate + CPI in projects

The cost variance formula is a project cost management tool that helps you keep projects within budget. "Cost variance" is the difference between the expected cost of the project (or the amount budgeted) and the actual cost of the project (or the amount spent). When this value is positive, it indicates that a project is under budget, while a negative variance indicates that a project costs more than what you budgeted.

When you're managing a project, calculate the cost variance periodically to determine whether it's staying on or under budget. You can even calculate individual variances for different budget categories, such as labor or supplies, to identify the areas most likely to push a project over budget.

What is cost variance?

Cost variance (CV) is the difference between what you budgeted for a project and what you actually spent. The formula is: CV = Earned Value (EV) – Actual Cost (AC). A positive result means you're under budget, while a negative result means you've overspent.

Positive vs. negative cost variance

In an ideal world, cost variance would be zero, meaning budgeted and actual costs match exactly. In reality, this rarely happens.

A negative variance doesn't always mean your project is in trouble. It could indicate the original budget was too optimistic. Your team can use a cost comparison template to compare expenses and spot where adjustments are needed.

What causes cost variance?

Understanding the causes of cost variance helps you prevent budget issues before they occur. The most common causes include:

• Inaccurate cost estimates: Budgets that don't reflect realistic labor, material, and overhead costs create variance from day one.

• Scope creep: When project requirements expand without budget adjustments, costs inevitably rise.

• Schedule delays: Projects that run long cost more due to extended labor hours and potential price increases.

• Resource cost fluctuations: Market conditions can change material prices or contractor rates between planning and execution.

• Inefficient resource use: Time spent on low-priority tasks or duplicate work increases costs without progress.

By identifying these causes early, you can take corrective action and keep your project finances on track.

What is earned value management?

Earned value management (EVM) helps you track project progress by comparing the value of completed work to what you've spent. It uses three key metrics:

• Earned Value (EV): The budgeted cost of work actually completed

• Planned Value (PV): The budgeted cost of work scheduled to be completed

• Actual Cost (AC): The actual amount spent on work completed

Let's say you checked in on the graphic design project when 25% of the work was done. Your projected cost at this point should be $15,000, or 25% of your total budget.

But it took your designer 400 hours to get 25% done. The actual cost at the 25% mark was $20,000 (400 hours at $50/hour). Had you calculated cost variance at this point, subtracting actual cost ($20,000) from earned value ($15,000), you'd have discovered a -$5,000 variance early enough to adjust.

This process of performing a value analysis at regular intervals is called earned value management. Using a budget template makes it easier to track these figures and compare projected costs against actual spend.

Simple cost variance example

Cost variance is easier to understand when you see it in practice. Let's say you hire a graphic designer at $50/hour to create marketing materials and website design.

You expect the project to take two months, or 1,200 work hours. That means you should budget $60,000 for this project.

The project takes 10 weeks longer than expected, and the designer logs 1,600 hours total. The final cost is $80,000.

To calculate cost variance:

• Budgeted cost: $60,000

• Actual cost: $80,000

• Cost variance: $60,000 – $80,000 = -$20,000

A negative variance means the project went over budget by that amount.

In our example, you only calculated cost variance at the end of the project. Cost variance is more helpful when it identifies over-budget trends as they happen, giving you time to course-correct.

To catch issues early, you need to factor in earned value.

3 ways to calculate cost variance

There are three different methods of calculating variance in your cost accounting:

• Cumulative cost variance method

• Period-by-period cost variance method

• Variance at completion method

All three methods use the same formula, but they apply it differently to determine different things.

Cumulative cost variance method

The cumulative cost variance is calculated as the difference between the actual and expected cumulative costs of the project. This method can be used to get an overview of how much a project has deviated from its original budget.

In our example above, we used the cumulative cost variance method to determine how much the project's total cost had deviated from the budget up to that point.

Period-by-period cost variance method

Period-by-period cost variance measures the difference between actual and expected costs at a specific point in time or over a specific project phase.

For example, you could calculate the variance for the first and second quarters of your project separately. This tells you not only that something went wrong, but when it went wrong.

The benefit: with a narrower time frame, you can find and fix problems in your project schedule more easily.

Variance at completion method

Variance at completion (VAC) predicts how far your project will be over or under budget when it's finished. You can calculate it at any point using current progress data.

The formula: VAC = Budget at Completion – Estimate at Completion

When you evaluate your graphic design project at the 25% completion point and find that you'd already spent $20,000, your forecasted cost of the project at this point would be $80,000. By subtracting the forecasted cost from your original expected cost of $60,000, you can determine that the variance at completion, if the project continues at this pace, will be -$20,000.

The variance-at-completion method uses current pacing information to predict how far the project will have deviated from its budget at completion.

5 types of cost variance

The three categories above describe three different ways to calculate cost variance. Here, we'll go over the five types of cost variance that you can calculate.

Each of these formulas calculates the cost variance for a different budget category, enabling project managers to drill down and identify where costs are coming in under or over budget, and make adjustments accordingly.

Material cost variance

Material cost variance measures the difference between what you budgeted for materials and what you actually spent. Actual costs can differ from the budget if either the quantity or price of materials changes.

If material costs trend higher than expected, you may need to adjust your project scope or find funds from another budget category.

Labor variance

The labor cost variance is the difference between the budgeted and actual direct labor costs. Costs can deviate if the project requires more hours than planned or if wages increase.

How to respond to labor variance:

• Large positive variance: Redirect extra funds to budget categories with negative variances

• Negative variance: Investigate whether your team is underproducing or if the scope is greater than anticipated. Additional training or quality control measures can help reduce costs.

Sales variance

Sales variance measures revenue rather than expenses. It only applies to projects with a sales component.

The formula: Budgeted sales – Actual sales = Sales variance

Unlike other variances, a negative sales variance is good. If you budgeted $1,000 in sales but earned $2,000, your variance is -$1,000, meaning you exceeded expectations.

Variable overhead variance

Variable overhead costs increase or decrease based on your productivity. Examples include:

• Shipping costs

• Warehouse energy costs

• Machine maintenance

To calculate variable overhead variance, first find your "standard variable overhead rate per hour." For example, if you pay $2 per unit shipped and produce 10 units per hour, your standard rate is $20/hour.

Variable overhead variance is the difference between your standard overhead and actual overhead after factoring in price changes or hours worked.

Fixed overhead variance

Fixed overhead expenses remain constant regardless of how much work you do. Examples include:

• Rent

• Property taxes

• Software subscriptions

The formula: Standard overhead – Actual overhead = Fixed overhead variance

For example, say your fixed costs are rent ($10,000/month) and insurance ($500/month). For a six-month project, you'd budget $63,000.

If rent increases to $15,000/month halfway through, your actual cost becomes $78,000. Your fixed overhead variance would be -$15,000.

Cost performance index (CPI) and related formulas

While cost variance tells you the dollar difference between planned and actual costs, the cost performance index (CPI) shows how efficiently your project uses its budget.

Cost performance index formula

The formula for CPI is:

• CPI = Earned Value (EV) ÷ Actual Cost (AC)

For example, if your earned value is $15,000 and actual cost is $20,000, your CPI is 0.75. This means for every dollar spent, you're only getting $0.75 worth of planned work.

How CPI relates to cost variance

Cost variance and CPI measure the same financial performance but express it differently. Cost variance gives you a dollar amount, which is useful for understanding the absolute size of budget deviations. CPI gives you a ratio, which helps you compare efficiency across projects of different sizes.

Many project managers use both metrics together. If your cost variance is -$5,000 and your CPI is 0.75, you know both the dollar impact and the efficiency rate of your spending.

Use cost variance to keep project budgets on track

The key to keeping project costs under control is accurate initial estimates and regular monitoring. Follow these best practices:

• Collaborate early: Work with your project team and finance stakeholders to estimate realistic costs

• Calculate variance regularly: Check cost variance at each project phase, not just at completion

• Track by category: Monitor variance for materials, labor, and overhead separately to pinpoint issues

• Act quickly: Course-correct as soon as you spot unfavorable variance

Ready to take control of your project budgets? Get started with Asana to track your project costs in real time.

Frequently asked questions about cost variance