PMP Exam Prep: Variance at Completion (VAC)
Variance is the amount of change from the original plan. In the project management context, a variance can be a problem or risk, with an impact on the schedule and budget. Calculating “Variance at Completion” (VAC) is a way for project managers to forecast cost variance (CV) at the end of the project. Project Managers need to know how to calculate VAC and how to interpret the results to better determine any needed corrective action during the project. Additionally, VAC is a concept included in the Project Management Institute (PMI)’s Project Management Professional (PMP)® certification exam. Whether preparing to take the PMP® exam or as part of ongoing project management efforts, understanding the VAC is beneficial.
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Variance at Completion (VAC) Defined
Project managers are typically responsible for creating the original budget, managing spending during the work, requesting additional funds, identifying budget overruns, and reporting budget shortfalls. Within this budget and cost work, PMP credential holders know the variance at completion formula and calculation provides the expected cost overrun or underrun; knowing that in advance of project completion can help manage variance to reach a successful outcome.
The PMI’s Project Management Professional (PMP)® certification exam may include questions reflective of the official VAC definition.
|VARIANCE AT COMPLETION|
A projection of the amount of budget deficit or surplus expressed as the difference between the budget at completion and the estimate at completion.
– Source PMI.org Lexicon https://www.pmi.org/pmbok-guide-standards/lexicon
Note some informal resources may use the terms: VAC formula PMP, VAC PMP, or Variance at Completion PMP. Regardless of the inclusion of “PMP” in the name, the concept of variance at completion is the same and in fact, is one of twelve earned value metrics. Preparation for the PMP® certification exam should be inclusive of all earned value concepts, including but not limited to the future projection terms below.
- EAC (Estimate at Completion): The final project budget. This includes funds spent to date.
- ETC (Estimate to Complete): The amount of funds necessary to finish the project. This does not include funds spent to date.
- TCPI (To-Complete Performance Index): The Cost Performance Index (CPI) that must be achieved to allow the project to complete on budget.
- VAC (Variance at Completion): The expected final Cost Variance (CV) assuming the efficiency level experienced throughout the project thus far.
Understanding VAC includes the definition, the connection to other earned value tools, the formula, and the calculation of it.
Variance at Completion (VAC) Formula
The VAC formula is a simple subtraction formula resulting in a monetary value.
It shows the total cost planned (budget at Completion or BAC) minus the total cost now predicted (Estimate at Completion or EAC).
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Variance at Completion (VAC) Interpretation
A key to the VAC value as a project management tool is in knowing the formula can result in positive values, negative values, or even a value of zero. For VAC calculations, not only is the numerical value of importance, but the positive or negative status of that value is as well.
- A positive VAC indicates the project will not fully use all of the planned budget by completion.
- A value of 0 for VAC indicates that by project completion all of the planned budget will be used.
- A negative VAC indicates the project will exceed the planned budget by completion.
In short, the VAC is the amount of expected budget overrun or underrun at the end of the project. Note what is sometimes called “VAC calculation PMP” is a projection not the budget variance for the present state (which is cost variance). Consider VAC as a future projected Cost Variance.
VAC is Positive
If the VAC value is positive, that indicates the project will complete under budget. The project manager may seek to maintain this if incentives are attached to bringing a project to completion under budget. Other options may include using the expected available funds to pursue additional features or deliverables. Be careful when making decisions using projected available funding, as it is a future state and things may change before the project is completed which would change your VAC or funding.
VAC is Negative
If the VAC value is negative, that indicates the project will finish over budget. A Project Manager with an active PMP® credential knows a negative VAC can trigger multiple actions including communicating the expected budget overrun to stakeholders, adjusting the project scope to better stay on budget by completion, and/or requesting additional funding to reach the planned scope at completion without a budget shortfall. A stakeholder may ask if there is a negative “VAC PMP” or was the “VAC calculation PMP” completed if they know project management fundamentals. A project manager should not attempt to hide or manipulate data to prevent a negative VAC; that is not ethical and will not change the budget situation.
VAC is Zero
The perfect state is one in which the variance at completion calculation is zero. The closer to zero the value, or if zero itself is achieved, the closer to the planned budget at project completion is expected. A calculation resulting in zero for VAC indicates an accurate project estimate and work plans are being closely followed.
Here is a generic project budget example to highlight the formula and how to interpret calculations.
- project approved budget (BAC) $50,000
- current EAC $53,000
- BAC – EAC = VAC $50,000 – $53,000 = – $3,000
Using the VAC formula, the result is a negative value of $3,000. This indicates the project will likely exceed the planned budget by $3,000 at project completion.
For a home remodeling project, the budget is coming out of your account. Likely you are very motivated to stay on budget. Consider these figures:
- project approved budget (BAC) $10,000
- current EAC $8,500
- BAC – EAC = VAC $10,000 – $8,500 = + 1,500
Using the VAC formula, the result is a positive value of $1,500. This indicates the project will likely complete with the planned budget by $1,500. It is an opportunity to use the expected available funding for more work or to complete under budget and save the funds for other needs later.
PMP® Certification Exam Example Questions
|You are leading a large project for a weak matrix organization. You have been challenged with resource issues throughout the project and are concerned about your schedule and cost performance. You have used EVM to calculate data throughout your project and need to report on the financial health of you project. You know that PV = 470, AC = 430, EV = 480, EAC = 500, and BAC = 525. What is VAC?||45||20||25||30|
|You are managing a large project for a hospital. You meet with stakeholders regularly, and they appear to be pleased. You received minor changes to the requirements, but you have some significant risk events in the future. Also, you are concerned that the schedule has some resource constraints that may be challenging to overcome. You received a short work stoppage due to a minor labor dispute, but this variance is atypical and should not occur again. You have the following measurements for one of your projects: EV = 145, PV = 162, AC = 138 and BAC = 200. What is the VAC?||0||7||9.5||62|
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- C. VAC is calculated as follows: BAC-EAC. Therefore, 525 – 500 = 25. This is a scenario where you are given more information that what’s needed to answer the question. The key is to understand each formula’s elements and what those elements represent for the project.
- B. First, you need to calculate the EAC since the formula for VAC is BAC-EAC. The EAC formula for this question, since variances are atypical, is: EAC = AC + (BAC – EV). Plugging in the numbers from the question, you get 138 + (200-145) = EAC of 193. VAC = BAC – EAC, therefore 200 – 193 = 7.
The VAC calculation is a projection based on data in a given point of time with a monetary value. It is not an indicator of a probability of budget changes nor is VAC an input in any other standard PMP exam formula. A VAC calculation close to zero or at zero indicates work going according to plan. A negative VAC indicates straying away from the plan and potential future funding issues. A positive VAC indicates a weak estimate that did not align with the actual budget. The greater the distance between the VAC value and zero, the greater the margin of error in the planned budget calculations.
The variance at completion is one of many PMP exam earned value formulas. It is a means to anticipate the difference between planned budget and estimated budget at completion so project managers can make budget recommendations, changes, and/or requests in support of a successful outcome.