Variance at Completion (VAC): Formula, Components, Examples

Projects often operate in extremely volatile environments, and even with agile ways of working, there is often an impact on project baselines of scope, schedule, cost, and quality due to the ever-changing market demands and conditions. No two projects can be alike due to the time factor. However, organizations often apply lessons learned to learn from past mistakes or avoid pitfalls faced in past projects. One such important and useful technique in the hands of project management is variance at Completion, which is a part of the earned value management family of tools and techniques to manage projects effectively. In this article today, I am here to take you through all about this wonderful technique, how it helps the project management function and ways in which it finds its usage in the day-to-day life of a project manager.

What is Variance at Completion (VAC)?

Variance at Completion, or VAC, is a forecasting tool under variance analysis that is used to forecast the total expected project budget at the point of project completion. It gives a projection of whether the project will be over budget or under budget compared to the planned original project budget. VAC hands out a perceptible status summary for project managers to understand if corrective actions are mandated and to what extent. To cite an example, if VAC shows a momentous budget surplus or a deficit, it gives a clear projection of the fact that the current planned project path will lead to the project being under budget or over budget so that the project manager can take the necessary steps to address the gaps and optimize the project budget outcomes to meet planned thresholds. To summarize, VAC represents the action project managers must take or the size of the budget they must request depending on the budget variance observed. Take the Project Management online training today to understand how the concept of earned value management helps establish project cost control best practices.

Variance at Completion (VAC) Formula

Having understood the concept of variance at Completion in project management, let me walk you through how to calculate variance at Completion.

VAC formula = BAC – EAC

Where,

BAC = Budget at Completion, i.e., the total planned cost for the project

EAC = Estimate at Completion, i.e., the expected total cost of the project based on performance so far

This formula unveils the difference between the original budgeted project cost and the current forecasted cost to complete the planned project activities. Thus, the VAC project management formula can also be calculated as the difference between the old or the initial budget and the new or the current budget. The PMP prep course from KnowledgeHut helps you prepare for this and many other PMP formulas in a simple yet effective manner; sign up today to learn more.

Uses of Variance at Completion (VAC)

VAC calculations or the VAC PMP formula represent the expected budget usage at the end of the project. It is used to forecast whether the project budget will be fully utilized, underutilized, or over-utilized at the end of the project. VAC is always used with the assumption that the factors that have caused the cost variance today will continue to exist and cause a similar variance in the future, too. In simple terms, its usage is similar to a projected cost variance as it follows identical elements and calculations. VAC, however, is a very powerful tool when rightly applied to get a sense of where projects are heading and how cost control measures can help bring projects from deep red to green and normal in terms of reporting. New to project management or learning the basics - take up the renowned PRINCE2 Foundation and practitioner course online to understand how VAC and other techniques are applied with hands-on project scenarios.

Components of Variance at Completion

Variance at Completion is an important project metric used for the assessment of the project's financial performance. It bases its calculation on two essential components - budget at Completion (BAC) and estimates at Completion (EAC). Let us go through these 2 components in detail:

• Budget At Completion (BAC): this is the first and foremost component of the VAC calculations, which refers to the total planned costs for completing project activities. It is the total project budget derived during project planning and helps create the baseline for financial tracking.
• Estimate At Completion (EAC): the second component in calculating VAC is the total cost of completing project activities from the current stage. It considers the actual project costs incurred up to the current point in time and the required changes or adjustments. EAC involves creating a prediction of future performance based on the current performance. Calculation of EAC helps project managers identify potential unknowns, consider cost changes, and necessitate required changes to keep progress on track.

These 2 components, BAC and EAC, help provide a projection of the variance projects may encounter to course-correct and get things back on track.

When to Use VAC in Project Management?

The VAC formula project management is used as a key performance indicator to determine the estimated budget at the end of the project. Irrespective of the project size or type, any project that sways away from the planned baselines or activities is always a cause of concern for the organization. Hence the calculation of VAC becomes paramount to be tracked at any time till the end of the project.

This forecast helps the project manager not only inculcate the required corrective actions but also acts as a communication mechanism to the project stakeholders to be aware of the changes and uncertainties surrounding the project to act swiftly in the wake of challenges. Any actions requiring a reassessment of the approach stem from the VAC result to protect project objectives and meet required outcomes.

Interpreting your VAC

I am sure you now understand how to calculate VAC in the project and when to use the VAC results. Let me now explain how these results are interpreted in the project.

1. Positive VAC

A positive VAC means project costs are completed within the planned budgets. In the case of projects that have a positive VAC, it is a signal that the costs incurred so far on the project are lower than the estimated project cost, i.e., signaling that projects are running under budget, which is a positive performance indicator for any project. Having a positive VAC on a project means that the costs that are being saved can be reinvested or planned towards contingencies, additional resources, or technological advancements - eventually improving project performance and value delivery to stakeholders.

2. Zero VAC

A zero or neutral VAC means the project costs equal the planned budgets. It is a near-perfect state at which there is no variance in forecasted costs and planned budgets at Completion, signaling that project estimates are accurate and activities are executed thoroughly as planned.

3. Negative VAC

A negative VAC means project costs exceed the planned budgets. For projects that have a negative VAC, the costs incurred are already higher than the estimated project costs, drawing attention (more flak, less attention) from stakeholders regarding project performance. Negative VAC raises eyebrows on project performance management and requires the identification of causes and measures to reduce variance. These measures may include reevaluating project scope, allocating resources, and/or signing contracts, which must be communicated and taken up in collaboration with project stakeholders.

How to Calculate Variance at Completion (VAC)? [Step-by-Step]

Calculating the difference between budgeted at Completion or BAC and estimated at Completion, EAC helps project managers make sound financial decisions concerning project costs and activities. Here is the 3-step approach project managers must apply to find out the variance at Completion for any project.

1. Obtain the BAC: The first step towards calculating VAC is to obtain the Budget At Completion or BAC, which is the total planned budget and includes all the components of the individual project cost.
2. Calculate the EAC: The next step is determining the second component involved in the VAC calculation, i.e., the Estimate At Completion or EAC, which signifies the total cost of completing the project activities. It considers current costs, costs for remaining work, and any anticipated scope or budget changes while calculating costs to give a near-realistic number in calculations.
3. Determine the VAC: Once we have the BAC and EAC, the next step is subtracting the BAC from the EAC to determine the remainder, which becomes the VAC. VAC can be a positive number signaling under budget or a negative number signaling the project is over budget.

VAC calculations help project managers employ decisive actions to meet deviations from planned budgets and are integral to project cost monitoring and control.

Examples of VAC with Calculation

Scenario-1: Construction project with positive VAC

Aryan is running a construction project with a BAC of $150,000, project status at 50% completion, actual costs at $40,000, and earned value of $70,000. What will be the variance at Completion in this case?

Answer: Here, to calculate VAC, let us first calculate EAC

 EAC = AC + (BAC - EV) = 40000 + (150000-70000) = 120000

 VAC = BAC - EAC = 150000-120000 = 30000

In the above scenario, the stakeholders are truly satisfied with Aryan as the project performance is under budget by $30,000, a positive indicator of project costs.

Scenario-2: Multi-vertical project having negative VAC

Lee is in charge of a multi-vertical project. He determines the budgets from all verticals to be $350,000; however, due to certain delays and technology challenges, the estimated cost at Completion is $ 430,000. What is the variance at Completion?

Answer: VAC = BAC-EAC = 350000-430000= -80000

Lee has a negative VAC of -$80,000 indicating that the project is over budget and needs to course correct to avoid further out-of-pocket expenses instead of revenues from the project.

Pros and Cons of Variance at Completion

No project management technique is perfect and every technique may be apt situationally depending on the project's overall state, structure, and phase. Let us look at some pros and cons that this forecasting technique of variance at Completion has for the project:

Pros

• Simple to use and apply for project cost performance projections
• Helps decision-making for project funding and cost management
• Helps project manager stay on top of stakeholder communications
• Helps bring positive changes in the project to drive performance improvements

Cons

• It is a macro-level metric and may not give the accurate and complete picture
• Negative VAC tends to draw more flak than improvements
• This may be inaccurate due to BAC calculations

Necessary Tools and Techniques

Determining variance at Completion for a project is based on calculations as it is a part of the earned value management in project planning, which involves some formula-based tracking of projects. To facilitate an effective and transparent approach to project tracking with VAC, project managers may apply specific tools and techniques such as:

1. EVM methodology: EVM or Earned Value Management methodologies are based on integrating project baseline parameters, i.e., scope, schedule, and project cost. This parallel or in tandem calculation helps project managers effectively track the impact of changes/variances on baselines and project progress.
2. Project Management Systems: Software with built-in project management and financial management processes offers the necessary capabilities to automate tracking and calculations of a project's key performance indicators (KPIs). This helps save time and ensures the project manager's focus is not diverged by trivial factors affecting calculations.
3. Excel sheets: the age-old system of spreadsheets/excel files to perform and track costs helps visualize patterns and trends and track metrics effectively.

The suitability of a particular tool or technique is subjective to the project/organization's needs and the applicable governance maturity. While automated systems are always preferred, traditional ways help project managers focus on the nitty-gritty and keep an eye on the larger picture.

The Role of Variance at Completion in Forecasting

Computation of the variance at completion metric helps the project managers in several ways. It is a strategic indicator of the project's progress. It helps project managers realign plans in case any deviations from planned budgets or significant variances affect the project. This technique plays an effective role in project forecasting by:

1. Enabling predictability in project performance - VAC helps take into account the historical cost performance of the project to arrive at proven and more informed decisions on the project's future performance. It factors challenges faced in the past to prepare for potential hazards that may shadow project objectives and plan required adjustments in allocating resources, scope, schedule, and budgets.
2. Reducing probability and impact of risks - Keeping an eye on budgets and calculating VAC helps project managers effectively address risks by taking into account any changes that may affect project baselines and employ corresponding risk response strategies, remove potential impediments, reduce costs and delays. This eventually helps the project governance become proactive rather than reactive to issues. KnowledgeHut's Project Management training online prepares you to use VAC and many other techniques in projects, along with advanced teaching techniques from experts.

Cost Variance vs Variance at Completion (VAC)

Both cost variance and variance at Completion are earned value management metrics that help measure different aspects of the project budget and performance. Let us learn about a few differences to avoid confusion between the two:

Cost Variance (CV)	Variance at Completion (VAC)
Cost variance measures the difference between Earned Value (EV) and Actual Costs (AC)	Variance at Completion measures the difference between the Budget at Completion (BAC) and the Estimate at Completion (EAC)
Indicates the current budget status of the project	Indicates the future status at project completion
It is a status-reporting metric	It is a project forecasting metric
Identifies gaps in the current project costs and cost trends	Identifies budget surplus or deficit on project completion
Measures cost performance to date in the project	Measures projected cost performance at project end

Conclusion

Variance at Completion is one of the many earned value management metrics that are important not only for the PMP exam but also for project management overall. It is a method to calculate the difference between the planned and estimated budget at the end of the project. This metric is paramount and critical to be tracked not only to run projects effectively but also for project managers to review budgets and include any change requests or budget enhancement requests as needed much earlier in the project. A positive VAC means a project is under budget; a negative calculation means the project is over budget, while a zero variance at Completion means that the project is exactly on track in terms of budget. Utilizing VAC, project managers track and assess project performance to bring it back on track when it starts showing signs of getting off track or causing impacts to project baselines.