Follow These 3 Steps to Validate a Variance

 

By Lynda Bourne

As you may know, any monitoring and control process has three components. The first is establishing a baseline that you plan to achieve, the second is comparing actual progress to the plan to see if there are any differences, and the third is taking corrective or preventative action. Corrective actions fix existing problems, while preventative actions stop problems from occurring in the future.

This post looks at the middle phase. Before taking action to bring performance into alignment with the plan, make sure the variance you are seeing in the control systems is real. Corrective and preventative actions take time and usually involve costs, and there is no point in expending effort where it is not needed. 

The variance is the difference between two imprecise elements: the planned state and the actual situation. The plan is based on estimates and assumptions made some time ago about what may occur in the future. All plans and estimates have a degree of error built in; it is impossible to precisely predict the future of a complex system such as a project. Similarly, the measurement of the actual situation is prone to observational errors; key data may be missing or the situation misinterpreted.

So how do you decide if the measured variance is real and significant enough to warrant corrective action? I suggest considering the following:

1. Does the reported variance line up with your expectations?

2. Is the variance significant?

3. Is a solution viable?

Let’s explore these in depth.

Does the reported variance line up with your expectations?
If a cost report says there is a profit of US$10,000 in a work package where you expected to see a loss, there’s a high probability some of the actual costs have been missed. It’s likely either your expectations were misplaced or the measurements contain data errors. You need to resolve this question before moving on. When the variance and your expectations agree, you can be reasonably confident the information as measured is correct.

Try looking at a couple of different monitoring systems, such as cost and time. Do the two systems correlate, or are they giving you very different information on the same group of activities? If they correlate, perhaps your expectations are misplaced. If they are giving you different information, there may be data errors.

Is the variance significant?
Next, look at the significance of the difference. Point measurements are prone to error simply because you have to assume a lot. For example, you may be sure a 10-day activity has started, and equally sure it has not been completed. But if the work is about half done should you record it 40%, 50% or 60% compete?   

If the predicted slippage on the completion date for a key milestone over a series of reports is bouncing around, any single measurement within the noise factor is likely to be insignificant.

Trends, on the other hand, highlight issues. Sensible control systems have range statements that indicate the variance is too small to worry about if it is inside the allowed range. This general rule is modified to take trends seriously and to require action to correct negative variances close to a milestone or completion.

Is a solution viable?
This third question looks at viability. Can you take action to resolve the variance for a sensible cost? Some issues are simply outside your control, such as changes in the exchange rate. Risk planning and mitigation may have been able to minimize the issue in the past, but if you need the import this month, for example, you have no option but to pay the current price. 

Other situations are simply not worth the cost. There is no point in spending US$10,000 to correct a -US$5,000 variance. However, this decision has to take into account any effect on the client and your organization’s reputation. Cost overruns are generally internal, whereas late delivery and quality issues may have a significant reputational cost, affecting stakeholder perceptions.

Where a viable option exists to correct negative variances, corrective and preventative actions need to be planned, prioritized and implemented.  There is no point wasting time on a controls system that does not generate effective controlling actions.  

Closing Thoughts
I’ll leave you with two final thoughts. First, don’t forget about positive variances. Similar questions need to be asked in order to amend the plan to lock in gains. If your supplier is going to deliver some equipment three weeks ahead of schedule, can you reorganize the plan to make sure the installers are available three weeks sooner? If this is viable, make sure it happens in order to lock in a three-week gain. If you fail to take action, the installers will turn up on schedule and the gain generated by your supplier will be lost.

Second, implementing corrective and preventative actions requires the resources working on the project to do something different. Variances don’t correct themselves, and simply telling someone to catch up is unlikely to have any effect. Sensible management action, decisions and leadership are needed to physically change the situation so there is a correction in the way work is performed. This is a core skill of every effective manager.

I’d love to know: How do you deal with variances in your projects? Please share below.