Project variance analysis Standard costs
• Absence in the construction industry
o Leads to lack of control
o Leads to inability to increase productivity • Approach
o How construction method should be accomplished o How much construction method should cost • Advantages
o Allows comparison among alternative methods o Permits effective analysis of cost data
o Emphasizes budget control
o Promotes cooperation between production and estimating staffs
Types of standard costs
• Ideal
o Represents level of performance achieved under best possible conditions o Maximum possible output at minimum possible cost
o Practically unattainable • Normal
o Represents level of performance, in general, over complete business cycle o Does not take into account economic effects within the cycle
o Deviations may represent economic effects • Expected
o Represents level of performance based upon current economic conditions o Short-run: revised as necessary
o Deviations may represent inefficient operations o Attainable
Material standards
• Factors
o Quantity of material to be used o Price or cost of the material • Determining quantity standards
o Average all past data
o Average best and worst performances
o Develop a range: determine probabilities of reaching various points within
the range and their corresponding risks and benefits
• Determining cost standards
o Median of recent purchases o Other cost estimating
Material variances
• Usage variance results from using more or less materials than was anticipated due to:
o Variations in material yield
o Variations in job-operation efficiency o Variations in waste, spoilage, etc. o Use of substitute materials
• Price variance results from paying more or less for materials than was anticipated due to:
o Unforeseen purchase contracts or terms o Unforeseen market changes
o Unforeseen changes in delivery costs o Unforeseen timing of material purchases
Material variance computation
Actual units Actual units Standard units x x x
Actual price Standard price Standard price
Price variance Usage variance (fav, unf) (fav, unf)
Total variance (fav, unf)
Material variance example
• Pouring a concrete slab
o Standard quantity = 190 cy o Actual quantity = 200 cy o Standard price = $70 o Actual price = $65
Actual units Actual units Standard units x x x
Price variance Usage variance
Total variance
Labor standards
• Factors
o Quantity of labor to be used o Price or cost of the labor • Determining quantity standards
o Average past performances on similar work
o Make time-and-motion studies of various operations o Use professional judgment
• Determining cost standards
o Union contracts
o Average wage based upon a composite crew
Labor variances
• Efficiency variance results from using more or less labor than was anticipated due to:
o Variations in equipment support o Variations in material flow o Variations in working conditions o Variations in economic climate
• Rate variance results from paying more or less for labor than was anticipated due to:
o Union contract changes o Composite crew changes
Labor variance computation
Actual hours Actual hours Standard hours x x x
Actual rate Standard rate Standard rate
Rate variance Efficiency variance (fav, unf) (fav, unf)
Labor variance example
• Forming a concrete wall
o Standard efficiency = 0.025 hrs/sf o Actual quantity = 70 hrs for 3000 sf o Standard rate = $20/hr
o Actual rate = $21/hr
Actual hours Actual hours Standard hours x x x
Actual rate Standard rate Standard rate
Rate variance Efficiency variance
Total variance
Job (variable) OH standards
• Factors
o Quantity applied as a function of a base o Rate applied as a function of the same base • Determining standards
o Historical data
o Professional judgment
Job OH variances
• Efficiency variance results from using more or less labor than was anticipated
• Spending variance results from realizing higher or lower variable OH than was anticipated
Job OH variance computation
Actual units Actual units Standard units x x x
Actual rate Standard rate Standard rate
Total variance (fav, unf)
Job OH variance example
• Base is project labor hours
o Standard quantity = 1950 hrs o Actual quantity = 2000 hrs o Standard rate = $4/hr o Actual OH = $8200
Actual units Actual units Standard units x x x
Actual rate Standard rate Standard rate
Spending variance Efficiency variance
Total variance
General (fixed) OH standards
• Factors
o Quantity applied as a function of a base o Rate applied as a function of the same base • Determining standards
o Historical data
o Professional judgment
General OH variances
• Volume variance results from supporting more or less field labor than was anticipated
• Budget variance results from realizing higher or lower fixed OH than was anticipated
General OH variance computation
Budget variance Volume variance (fav, unf) (fav, unf)
Total variance (fav, unf)
General OH variance example
• Base is monthly labor hours
o Standard quantity = 10,000 hrs o Actual quantity = 12,000 hrs o Standard OH = $50,000 o Actual OH = $62,000
Actual units Standard units Actual units x x x
Actual rate Standard rate Standard rate
Budget variance Volume variance
