Variance at Completion (VAC)

Variance at Completion (VAC) is a projection of the budget surplus or deficit. It is expressed as the difference of the Budget at Completion (BAC) to the Estimate At Completion (EAC).  This project management concept is the difference between the expected or baseline cost of the project and the current estimated cost.

Interpreting the result of the Variance At Completion (VAC) is simple. For instance, if the VAC is a positive integer, it is a clear sign that the project is under budget. If the result is negative, then it means that the project will be over budget.  The greater the distance between the VAC value and zero, the higher the margin of error in the budget calculations. Thus, it is ideal for the VAC value to approach zero which means that the estimate is accurate. It also indicates that the project manager need not plan for any contingencies.

This project management concept describes projection. It has a similar function with the Cost Variance formula but it is used on a macroscopic level thus it is used as a status snapshot by many project managers.

Formula for VAC

$$VAC=BAC-EAC$$

• Budget at Completion (BAC): The total planned budget for the project.
• Estimate at Completion (EAC): The current forecast of the total cost of the project based on actual performance.

Interpreting VAC Results

1. Positive VAC:
   • Indicates the project is projected to finish under budget.
   • Example: A VAC of +$50,000 suggests the project will cost $50,000 less than planned.
2. Negative VAC:
   • Indicates the project is projected to finish over budget.
   • Example: A VAC of -$50,000 suggests the project will exceed the budget by $50,000.
3. Zero VAC:
   • Indicates the project is on track to meet the budget exactly.
   • This is the ideal scenario, demonstrating accurate planning and forecasting.

Significance of VAC in Project Management

1. Forecasting Budget Outcomes:
   • VAC helps project managers identify potential budget shortfalls or surpluses early, enabling corrective action.
   • Example: If a project shows a negative VAC early, the manager can optimize resources, cut costs, or seek additional funding.
2. Decision-Making Tool:
   • A significant negative VAC can trigger discussions about project scope adjustments, renegotiations with stakeholders, or funding reallocations.
3. Risk Management:
   • VAC provides insights into budget risks, allowing project managers to plan contingencies for potential overruns or surpluses.
4. Performance Evaluation:
   • VAC is a useful metric for assessing how well the project is adhering to the planned budget, reflecting the effectiveness of cost control measures.

Practical Examples of VAC Usage

Example 1: Construction Project

• Scenario: A company is building a commercial complex.
• Planned Budget (BAC): $10,000,000.
• Forecasted Cost (EAC): $9,500,000.
• VAC Calculation:

$$VAC=BAC-EAC=10,000,000-9,500,000=+500,000$$

Interpretation: The project is expected to finish $500,000 under budget. The project manager can reallocate funds or retain the savings.

Example 2: IT Software Development

• Scenario: A software development team is working on a new app.
• Planned Budget (BAC): $200,000.
• Forecasted Cost (EAC): $250,000.
• VAC Calculation:

$$VAC=BAC-EAC=200,000-250,000=-50,000$$

Interpretation: The project is expected to exceed the budget by $50,000. The project manager may need to prioritize features, renegotiate timelines, or secure additional funding.

Example 3: Marketing Campaign

• Scenario: A company launches a marketing campaign for a new product.
• Planned Budget (BAC): $500,000.
• Forecasted Cost (EAC): $500,000.
• VAC Calculation:

$$VAC=BAC-EAC=500,000-500,000=0$$

Interpretation: The campaign is on track to meet the budget exactly. This indicates accurate cost forecasting and proper cost control measures.

How VAC is Used in Cost Forecasting

1. Early Warning System:
   • VAC provides an early signal of budget performance, enabling proactive measures.
   • Example: If VAC is -$100,000 mid-project, the project team can analyze the root cause, such as material cost increases or scope creep, and take corrective action.
2. Trend Analysis:
   • By monitoring VAC over time, project managers can identify trends (e.g., whether the EAC is consistently increasing) and make strategic adjustments.
3. Stakeholder Communication:
   • VAC is an important metric for reporting financial health to stakeholders. It provides a concise summary of whether the project is financially on track.
4. Incentivizing Cost Control:
   • Positive VAC outcomes can incentivize teams to find cost savings and improve efficiency.

Comparison with Other Metrics

• VAC vs. Cost Variance (CV):
  • Both indicate budget performance but differ in scope.
  • CV: Focuses on current project performance (work completed to date).
  • VAC: Projects the final budget surplus/deficit (future-focused).

Conclusion

VAC is a critical metric in project management that bridges planning with reality, offering a snapshot of whether the project is on track financially. By providing insights into budgetary performance, VAC enables project managers to make informed decisions, manage risks, and maintain stakeholder confidence. With its straightforward formula and intuitive interpretation, VAC is an indispensable tool for forecasting costs and ensuring project success.