Expect the Unexpected! Although this sounds like an excellent movie punchline, it is the biggest lesson I have learned in project management.

As a project manager, I have been involved in various projects and have learned that even when plans are created as wisely as an owl, unexpected changes always sneak in. One of the surprising changes I faced as a Project Manager is variance completion, which means the inevitable gap between what is initially envisioned and what unfolds during a project. 

I initially believed that thorough planning would be sufficient to keep everything moving forward. However, experiences have shown me that “the proof of the pudding is in the eating”; that is, a plan may appear flawless on paper, but its actual effectiveness is only revealed through execution. 

The most meticulous schedules, financial plans and resource allocations cannot account for every exception. The forthcoming changes to the original agreement include budget adjustments, deadlines, and potential roadblocks. This is where variance comes into play. It involves more than merely identifying these disparities; it also requires actively attempting to bridge them.

What is Variance Completion?

Variance completion involves recognising when a project has deviated from its plan, understanding the reasons, and taking the necessary actions to bring it back on track. It combines proactive decision-making, flexibility, and problem-solving. 

It requires a calculated approach to course correction rather than merely reacting to problems as they arise, ensuring that these deviations do not jeopardise the project as a whole. Therefore, VAC (Variance Completion) in project management is an evaluative tool for measuring the budget surplus or deficit. 

Simply put, the results of VAC calculations summarise the outcome, indicating whether the project will experience an excess or a shortage and the scale of the change.

This quantitative indicator reflects the deviation from the original projected budget at the project's conclusion. However, it does not consider cost variance. Furthermore, the VAC will not reveal the disparity between your earned value and actual expenditures. 

Nevertheless, there are some practical similarities between VAC and a cost variance formula.

The optimal VAC value is close to zero since the more significant the gap between zero and the VAC value, the larger the margin of error. This is true regardless of whether your positive or negative outcome will determine the budget overrun or deficit.

BAC vs EAC

Two crucial indicators in project management are BAC (Budget at Completion) and EAC (Estimate at Completion). They are used to determine the Variance at Completion (VAC) and evaluate project performance. Although they relate to project costs, they have different uses in budget tracking and forecasting.

What is BAC?

A project's expected budget, or BAC, is established during the planning phase using the Work Breakdown Structure (WBS). It represents the total of all projected expenses required to complete the project. The BAC serves as a standard against which actual project costs are evaluated. However, practical considerations may necessitate revisions as the project evolves, leading to the introduction of EAC.

What is EAC?

The EAC, based on ongoing work and unforeseen costs, is a dynamic budget projection that reflects the project's overall anticipated expenditure. It provides a more realistic estimate of the project's final cost than the BAC, as it accounts for unexpected expenses, changes in scope, and inaccurate initial projections.

A project manager must continually monitor the BAC and EAC to ensure cost-effectiveness and provide stakeholders with valuable information. By comparing these figures, project teams can identify budget variances early and take corrective action to keep projects on track.

When should you Implement VAC in project management?

A budget overrun, regardless of size, is always unacceptable. For this reason, every project manager considers VAC as a performance indicator to determine the project's expected final budget.

The discrepancy between the Estimate at Completion (EAC) and the Budget at Completion (BAC) is referred to as a Variance at Completion. As a result, this cost management technique can be utilised until the project's conclusion. The current execution costs are subtracted from the original budget to produce the predicted outcome.

During project execution, the VAC calculation indicates how well the project aligns with the budget. The estimated value is deemed correct if the result reaches zero, allowing you to proceed with the project. Conversely, if the findings reveal a budget overrun, you may need to revamp the framework and adjust the project plans. 

 Calculating VAC in Project Management 

Variance at Completion Formula (VAC)

Budget at Completion (BAC) and Estimate at Completion (EAC) are two essential parameters needed to compute Variance at Completion (VAC). 

The equation is:

VAC = Starting Budget – Present Estimated Budget or VAC = BAC – EAC

A positive VAC indicates a budget surplus, whereas a negative VAC shows an overspend. Because project costs vary, the EAC is regularly updated to reflect current expenditures and projected future costs.

How to Determine VAC?

Once you know your BAC and EAC, calculating VAC is easy. Since projected and actual expenses are equal at the beginning of a project, VAC is zero. However, internal and external influences could affect costs as the project develops, changing VAC.

Review BAC frequently to guarantee precise computations. Although the initial budget is estimated, changes are often necessary due to actual circumstances. When the initial budget is found to be inaccurate, EAC is revised to account for predicted and actual costs.

How to Analyze VAC Results?

1. Positive VAC (+) – The project is under budget.
2. Negative VAC (-) – The project has exceeded the budget.
3. Zero VAC (0) – The project aligns with initial cost estimates.

Most of the projects go over budget due to unexpected adjustments. Although remaining under budget is desirable, a VAC of zero is optimal since it validates the correctness of the original financial strategy.

After establishing the VAC, the results should be collated and shared with stakeholders to improve financial supervision and decision-making.

Benefits of VAC Project Management 

VAC has many advantages when it comes to project management.

First, the VAC's interpretation is straightforward. Thus, project manager can grasp the significance of various approaches and software tools without becoming experts in them.

Performing the VAC calculations at the beginning of the project helps stakeholders make funding decisions, enhancing the project's planning. Furthermore, getting in touch with stakeholders about the variation is simple. You can also reduce resource costs and modify resources to fit the budget.

It is important to remember that not all deviations are detrimental; in fact, sometimes project modifications are necessary and beneficial, even when the VAC values are negative.

Design modifications might occasionally be advantageous since they guarantee the product's accuracy. Thus, the result can be applied to future projects that are similar, like historical data.

Limitations of VAC in Project Management

While VAC is a valuable metric for tracking budget performance, it has its drawbacks:

1. Inaccuracy: Any mistakes in the original budget could produce deceptive outcomes because VAC depends on the Budget at Completion (BAC).
2. Pay Attention to Macro-Level Variance: VAC provides a broad overview but overlooks more subtle, micro-level variations. These minor differences can accumulate over time, leading to significant project delays and cost overruns if overlooked.
3. Dependency on Real-Time Data: Real-time field data is necessary for accurate VAC computations. If projections are made using only general schedules and activity estimates, the budget is more susceptible to overruns as the project draws closer.

Project managers must consistently monitor both macro- and micro-level variations and ensure their calculations are grounded in current, empirical data to mitigate these risks.

VAC in Project Management: What PMP Aspirants Need to Know

Delivering the project within the budget allotted is one of the most essential duties of a project manager. Therefore, they frequently use cost-estimating techniques to help them stay within the budget.

With VAC Project Management, a project manager must ensure they have all the necessary funds to complete the job. The project manager must also establish the framework, allocate adequate funding, and deliver the project while upholding the specified standards.

Given its significance in financial planning, a solid understanding of VAC is essential for PMP certification. Mastering this concept can enhance your project management skills and improve your chances of passing the PMP exam. Enrol in Star Agile’s PMP certification course for a structured study plan, expert guidance, and valuable insights to help you succeed.

Final Words 

Every project manager must manage expenses and adhere to the planned spending framework. A practical method for achieving this is through project management. It enables you to enhance projects by identifying areas for improvement and meeting stakeholder expectations. Thus, regardless of whether you hold a PMP Certification, as a project manager, you should know how to calculate your project's VAC.