How to find the cause of a job cost variance

What does a job cost variance actually tell you?#

A job cost variance measures the difference between actual cost and the allowed cost for the same completed scope. It does not explain the cause. Start with one work package, such as ground-floor partitions, rather than a whole-job total that can hide opposing differences.

The early signs that a job is losing money tell you where to look.

Use this sign convention throughout: adverse cost variance = actual cost minus comparable allowed cost. A positive result means adverse cost variance. A negative result means favourable cost variance.

This reverses the earned value management convention. The AACE 86R-14 sample guidance defines cost variance as earned value minus actual cost, or EV minus AC. In that convention, a negative result is adverse. Label your report clearly. AACE describes a recommended practice, not a standard.

Establish a comparable basis before naming a cause#

Choose a cut-off date. Measure completed output against the agreed specification at that date. Then calculate the allowed cost for that output from the estimate. Do not compare partial actuals with the full-job budget as proof of performance.

Keep the basis consistent. Compare costs excluding VAT if the estimate excludes VAT. Use the same treatment of labour burden and site overheads on both sides. Record these choices beside the package reference so another person can repeat the calculation.

Check the evidence before asking the supervisor to explain a loss. Match time records to work dates. Reconcile material consumption with deliveries, returns and stock left on site. For subcontractors, match incurred cost to measured completed work, not merely the payment date.

An unpaid invoice can represent incurred cost. A purchase order for future work is a commitment, not actual cost. Show commitments separately when estimating the cost to finish. Include incurred but unposted costs through your normal accounting process, then prevent duplication when invoices arrive.

Approved scope needs its own allowance. Use the written approval and its cost build-up, not the extra selling price. If the record is missing, follow the process for recording variations agreed on site. Keep disputed scope visible rather than quietly treating it as approved.

Reconcile the package before splitting materials#

This invented example concerns a completed partition package within an unfinished fit-out. All figures exclude VAT. All package output is complete at Friday's cut-off, including an approved extra section, with no unused material stock or unposted incurred cost.

The original allowance for this completed output was £10,000. The approved addition has a separate cost allowance of £800. Recorded actual cost is £12,000, but £300 belongs to another package.

Reconciliation step	Amount
Recorded actual cost	£12,000
Remove cost coded to the wrong package	−£300
Correct actual cost	£11,700
Original allowed cost	£10,000
Add approved scope allowance	£800
Comparable allowed cost	£10,800
Adverse cost variance	£900

The raw £2,000 difference is therefore not a £2,000 performance loss. It contains a £300 coding error and an £800 scope allowance adjustment. The coding correction moves cost elsewhere; it does not reduce total job cost.

Now reconcile the corrected package by cost type. Keep the approved addition separate so its costs do not enter the original materials calculation.

Cost type	Comparable allowed cost	Correct actual cost	Actual minus allowed
Original-scope labour	£4,000	£4,200	£200
Original-scope materials	£4,000	£4,400	£400
Original-scope subcontractors	£2,000	£2,300	£300
Approved addition, all costs	£800	£800	£0
Total	£10,800	£11,700	£900

Nothing remains unexplained arithmetically. The timing adjustment is zero because the cut-off review found no missing costs, but that does not prove why labour or materials cost more.

Build a materials quantity and price bridge#

Start with the original completed partitions only. Use the material allowance from the estimate and the consumption reconciled to that same output. Exclude the approved addition. Its allowance and actual cost already sit together in a separate row, so neither belongs in this bridge.

Use boards of the same grade and dimensions. Treat delivery charges consistently in both unit prices before you calculate either effect. Do not use total purchases in place of consumption when unused stock remains on site or materials have moved to another package.

In this example, the verified allowance is 250 boards at £16, and actual consumption is 220 boards at £20. Both quantities relate to the same completed original scope. The allowance totals £4,000; actual materials cost totals £4,400.

Bridge component	Calculation	Effect
Quantity effect at allowed price	(220 − 250) × £16	−£480
Price effect on actual quantity	(£20 − £16) × 220	£880
Net adverse materials cost variance	−£480 + £880	£400

Lower consumption partly offsets a higher unit price, but the net figure hides both changes. Calculate quantity at the allowed price and price on actual quantity. This counts their interaction once; do not add another interaction charge.

These are arithmetic drivers, not proven root causes. Fewer boards might reflect better cutting or an inflated allowance. A higher unit price might reflect late ordering, a changed specification or an estimating error. Check comparable board grades and units before accepting either explanation.

Use a cause-and-action ledger to test the explanation#

Create one investigation row per driver. Include the decision, evidence, action, owner and forecast effect. Give unresolved rows a due date. Do not replace missing evidence with a confident label such as “poor productivity”.

In this ledger, which continues the invented example, each forecast instruction applies only to work that remains, not to costs already incurred.

Driver or check	Decision and evidence	Action	Owner	Forecast effect
Labour: £200 adverse	Extra hours proven; cause open pending daily records	Compare access restrictions with work dates	Site manager	Re-estimate remaining hours after review
Materials quantity: £480 favourable	Consumption reconciled; improved cutting not proven	Check cutting records against allowance	Estimator	Do not repeat the saving yet
Materials price: £880 adverse	Order history proves expired quote used in estimate	Obtain current prices for remaining boards	Buyer	Replace stale unit prices
Subcontractors: £300 adverse	Agreed valuation proves extra attendance after access failure	Confirm next access date before booking	Contracts manager	Price any further attendance once
Timing: £0	Cut-off review reconciles incurred costs	Retain reconciliation	Accounts lead	No timing adjustment
Coding: £300 removed	Source record identifies another package	Correct both package records	Accounts lead	No total-job saving
Approved scope: £800 allowance and actual	Approval and separate cost records agree	Retain separate scope reference	Quantity surveyor	No remaining work for this addition

A price difference proves what changed. The expired quote identifies an estimating error in this example, but does not explain the supplier's higher price. The quantity difference remains unexplained despite a complete reconciliation. Keep that distinction visible until the estimator tests the allowance.

Test the explanation. If a supervisor says blocked access caused extra hours, ask for dated records. These must connect the restriction to the affected crew and completed work. A general complaint cannot separate waiting time from rework, an incorrect allowance or time booked against the wrong package that week.

Leave the cause open when the records cannot distinguish between possible explanations. Name the person who must obtain the evidence before the next review. Do not invent certainty.

Change the forecast only where the evidence applies#

The GAO Cost Estimating and Assessment Guide includes documenting assumptions and updating estimates with actual costs. It addresses government programme estimates; it is not a mandate for builders. Its useful principle here is traceability: show why each remaining allowance changes.

AACE also connects root cause analysis, corrective action and the estimate to complete. Apply that sequence to this ledger. Add corrected actual cost to a fresh estimate of remaining work. Include commitments within that remaining estimate without counting them again as actual cost.

Do not spread the £900 across the unfinished job by percentage. The expired price may affect future orders; completed extra attendance may not recur. Record an expected recovery only when the action and its cost effect have support.

Korrel can compare recorded time and costs with estimates. Keep this materials investigation in a separate ledger; do not assume automatic purchasing or quantity-price analysis. The cost-tracking guides cover the wider review process.

To track recorded time and costs against your estimates, create a Korrel account.