A project manager’s responsibilities include planning a project around the budget and maintaining costs. And to do that, they are required to specialize in different analytical tools and master various PMP techniques. One of them is being able to calculate the Variance at Completion or VAC Project Management.
If you are an aspiring project manager wanting to learn more about it, then you are in the right place. Read on to know what VAC Project Management is and why you should learn it.
What is VAC Project Management
VAC Project Management is an analysis tool under Variance Analysis of Earned Value Management.
What is Earned Value Management, you ask? It is an estimation technique used to measure the project’s performance based on the integration of costs, schedule, and scope.
Now, before we dive in deep to discuss VAC project management, you must understand what the word Variance stands for as well. Variance in project management is what shows you the expected change from a standard or baseline.
So when we talk about VAC Project Management, we refer to an evaluating tool used to measure the budget surplus or budget deficit. Simply put, the outcome you receive from VAC calculations gives you an overview of what the result will look like, whether the project will have an excess or shortage and how big of a change it will be.
It is a quantitative indicator that shows the change at the end of the project from the initial planned budget. That said, VAC is not concerned with the cost variance of your project. That is, VAC will not show you the difference between your current earned value and actual costs.
However, VAC has a few functional similarities with a cost variance formula. Note that VAC is a status snapshot and not used in the Standard Project Management formula as an input.
Whether the outcome that you get is positive or negative will determine the budget overrun or deficit. The ideal VAC value is the one that approaches zero because the higher the difference between zero to the VAC value, the higher the margin of error.
BAC versus EAC in VAC Project Management
As we have discussed before, both BAC and EAC are needed to calculate VAC in project management.
BAC, which stands for Budget at Completion, is the total anticipated budget established for the project based on WBS or Work Breakdown Structure. In other words, BAC is the sum of all anticipated costs throughout the project. BAC gets calculated at the start of any project for planning it based on its components and project work. However, as the project progresses, the BAC budget may need to be recalculated based on the forecasted budget at the project’s end.
On the other hand, EAC, which stands for Estimate at Completion, is the budget forecast of the project in progress. Simply put, EAC is the current expected budget based on the total costs.
However, unlike BAC, variables such as unplanned costs and inaccurate early estimates are taken into account by EAC. One of the reasons to evaluate EAC in an ongoing project is to provide stakeholders enough time to make data-driven decisions.
A project manager’s responsibility consists of deriving VAC from BAC and EAC and effectively communicating with stakeholders about the necessary changes.
When to Use VAC in Project Management
No matter how big or small, a budget overrun is always a no-no. That is why every project manager uses VAC as a performance indicator to know the estimated budget at the end of the project.
A Variance at Completion is the difference between Budget at Completion (BAC) and Estimate at Completion (EAC). So this cost management technique can be used at any given time till the end of the project. The estimated forecast derives its results by subtracting the current execution costs from the initial budget.
When you calculate VAC during project execution, it gives you an idea of how much the project is within the allocated budget. If the result shows a value approaching zero, then the estimated value is accurate, and you can continue with the project. However, if the result shows budget overrun, then you can re-design the framework and plan the project accordingly.
How to Create VAC Project Management
VAC Project Management Formula
Once you gather EAC and BAC, all you need to do is use the formula. The formula of VAC Project Management is:
VAC = BAC – EAC
VAC = initial budget – current budget
Here, the cost is adjusted depending on whether or not the value of VAC is positive or negative. The EAC is modified to include the expenses incurred so far and the estimated cost of the remaining tasks (ETC).
Once you have calculated and gathered values from BAC and EAC, calculating VAC is a cakewalk.
The value of VAC is $0 at the start of any project when the baseline is adjusted. At the baseline, the scheduled cost and estimated cost both are the same. However, as the project progresses, the value for VAC also changes.
When you start calculating VAC, you must re-evaluate BAC because even though the initial budget is considered accurate, it is rarely the case. The EAC is created and calculated when the initial budget is no longer precise. The reasons can be plenty, such as internal and external values playing into the project’s delay. Thus, when you start with an inaccurate value, you land at an incorrect value for the Variance at Completion.
A budget surplus means your VAC is within the initial estimated BAC. And a budget overrun means your current estimated budget is over the initial BAC. At this rate, you might want to lower the cost rate of the remaining tasks or change the amount of work depending on the result.
The Variance at Completion is nothing but a forecasted Cost Variance at the end of the project. It is a projection rather than a probability. So the value can be either a positive or negative number and, in rare cases, a zero.
That said, since a project is always affected by internal or external factors causing it to change, most outcomes of VAC are budget overrun. The abnormal variable causes a delay in schedules causing the budget to increase simultaneously.
And even though an under budget is more appreciated than an overrun, the ideal outcome is zero because it shows that your initial estimations were accurate. Thus, an approximate zero-result gives more credibility to your initial assumptions.
Once you calculate the VAC, you can gather all the information and report it back to the authorities.
Examples of VAC Project Management
Following are some examples of VAC Project Management. Note that the following calculations are not deemed accurate and are demonstrated for your convenience only.
Imagine you work for ColourPop cosmetics, and they are launching a new lipstick line. Now, the project has a budget of $300,000. However, during the ongoing project, you calculate the estimated budget, and it’s $350,000. So, what is the Variance at Completion?
BAC = $300,000
EAC = $350,000
Therefore, VAC = BAC – EAC = -$50,000
The initial budget calculated for the remodeling of your entire house is $50,000. However, the estimated budget is $45,000. So, now you calculate the Variance at Completion and the result is $5,000. What does that mean?
Here, the estimated budget is less than the initial budget, so the VAC is also positive. That means the budget is surplus and the project is within the initial estimated cost.
Pros and Cons
Benefits of VAC Project Management
The benefits of using VAC in project management are plenty.
For starters, the interpretation of VAC is simple. So, it doesn’t require a project manager to master different techniques or software tools to understand its meaning.
When you do the VAC calculations at the start of the project, it helps stakeholders with funding decisions. So it helps improve the planning of the project. Not just that, you can easily communicate with stakeholders regarding the variance. On top of that, you can cut off on the cost of resources and adjust resourcing to meet the budget.
You have to remember that even if the values of VAC come out negative, not all variances are faulty, and sometimes the changes in the project are necessary and are for the best.
Sometimes, design changes are a good thing because it ensures the accuracy of the product. So the product can be used for similar projects in the future as historical data as well.
Disadvantages of VAC Project Management
One of the negative aspects of VAC is, as discussed previously, the inaccuracy of the results due to BAC.
VAC is a macro-level variance. Since higher discrepancies can form from small ones resulting in project delays and overruns, you need to pay close attention to micro-level deviations to keep the macro-variances low. So, as a project manager, you are required to collect real-time field data.
So if you do all your calculations based on generic time and activity, then your budget will be more vulnerable to overruns at the end of the project.
VAC Project Management for PMP
One of the crucial responsibilities of a project manager includes delivering the project within the allocated budget. So to meet the budget, they often take help from cost estimating tools.
A project manager has to ensure that she has all the necessary funding needed for the project’s completion. And with VAC Project Management, a project manager can structure the framework, allocate sufficient funds and deliver the project while maintaining the specified standard.
That is why learning VAC is an absolute necessity for PMP exams. To learn how you can pass your PMP certification exam in the next six weeks, sign up for a free class to get a study plan + valuable tips & tricks!
Every project needs to manage its cost and stay within the estimated budget. And VAC Project Management is a simplistic way to do that. It lets you improve your project by figuring out the areas of improvement and allows you to suffice the stakeholder’s expectations.
That is why PMP or no PMP, as a project manager, you should learn how to calculate the VAC of your project regardless.