Variance Analysis Procedures
Document Type: Procedure
Version: 1.0
Last Updated: February 2026
Distribute To: CFO, Controller, Project Managers
Purpose
Establish procedures for analyzing variances between budgeted and actual performance to identify issues early, improve future estimates, and drive continuous improvement.
Why Variance Analysis Matters
Benefits:
- Early problem detection
- Improved estimating accuracy
- Informed decision making
- Accountability
- Continuous improvement
Without Analysis:
- Problems discovered too late
- Repeat same estimating errors
- No performance accountability
- Missed improvement opportunities
Types of Variances
Financial Variances:
| Variance Type | Formula | Meaning |
|---|---|---|
| Revenue | Actual - Budget | Over/under billing |
| Cost | Budget - Actual | Over/under spending |
| Gross Profit | Actual - Budget | Margin performance |
| Overhead | Budget - Actual | Expense control |
| Net Profit | Actual - Budget | Bottom line |
Job Cost Variances:
| Variance Type | Formula | Meaning |
|---|---|---|
| Quantity | (Actual Qty - Budget Qty) × Budget Rate | More/less work |
| Rate/Price | (Actual Rate - Budget Rate) × Actual Qty | Higher/lower costs |
| Mix | Effect of work type changes | Different than planned |
| Efficiency | Labor productivity variance | Better/worse performance |
Monthly Financial Variance Report
Format:
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MONTHLY FINANCIAL VARIANCE REPORT
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Period: _______________ Prepared by: _______________
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| MONTH | YTD |
| Budget | Actual | Var | Budget | Actual | Var |
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REVENUE | | | | | | |
DIRECT COSTS:
Labor | | | | | | |
Materials | | | | | | |
Subcontractors | | | | | | |
Equipment | | | | | | |
Other direct | | | | | | |
TOTAL DIRECT | | | | | | |
GROSS PROFIT | | | | | | |
Gross Margin % | | | | | | |
OVERHEAD:
Salaries/wages | | | | | | |
Facilities | | | | | | |
Insurance | | | | | | |
Professional | | | | | | |
Technology | | | | | | |
Marketing | | | | | | |
Other overhead | | | | | | |
TOTAL OVERHEAD | | | | | | |
OPERATING PROFIT | | | | | | |
Operating Margin %| | | | | | |
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Variance Analysis Narrative:
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VARIANCE ANALYSIS NARRATIVE
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REVENUE VARIANCE:
Month: $___________ (___%)
YTD: $___________ (___%)
Explanation:
___________________________________________________________
___________________________________________________________
Impact on full-year forecast:
___________________________________________________________
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GROSS PROFIT VARIANCE:
Month: $___________ (___%)
YTD: $___________ (___%)
Breakdown:
Volume variance (revenue-driven): $___________
Rate variance (margin-driven): $___________
Explanation:
___________________________________________________________
___________________________________________________________
Contributing jobs:
| Job | Budget GP | Actual GP | Variance | Cause |
|-----|-----------|-----------|----------|-------|
| | | | | |
----------------------------------------------------------------
OVERHEAD VARIANCE:
Month: $___________ (___%)
YTD: $___________ (___%)
Significant items:
| Line Item | Budget | Actual | Variance | Explanation |
|-----------|--------|--------|----------|-------------|
| | | | | |
Controllable vs. non-controllable:
Controllable: $___________
Non-controllable: $___________
----------------------------------------------------------------
RECOMMENDED ACTIONS:
1. ___________________________________________________________
2. ___________________________________________________________
3. ___________________________________________________________
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Job Cost Variance Analysis
Project Variance Report:
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PROJECT VARIANCE REPORT
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Project: _______________________ PM: _______________________
Contract: $_________________ Period: _______________________
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SUMMARY:
| Original | Current | Actual | Projected |
| Budget | Budget | to Date | Final |
----------------------------------------------------------------
Contract value | | | | |
Direct costs | | | | |
Gross profit | | | | |
Gross margin % | | | | |
Variance from original: $_____________ (____%)
Variance from current: $_____________ (____%)
================================================================
COST CODE DETAIL:
| Cost Code | Description | Budget | Actual | EAC | Variance |
|-----------|-------------|--------|--------|-----|----------|
| | | | | | |
| | | | | | |
| TOTAL | | | | | |
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SIGNIFICANT VARIANCES (over 5%):
Cost Code: _________________
Budget: $_________________ Actual: $_________________
Variance: $_________________ (____%)
Type of variance:
☐ Quantity (more/less work than estimated)
☐ Rate (higher/lower cost than estimated)
☐ Scope change (document CO status)
☐ Estimating error
☐ Productivity (better/worse than planned)
☐ Other: ________________________________________________
Root cause:
___________________________________________________________
Impact:
___________________________________________________________
Corrective action:
___________________________________________________________
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Labor Variance Analysis:
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LABOR VARIANCE ANALYSIS
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Project: _______________________ Period: _______________
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HOURS ANALYSIS:
| Cost Code | Budget Hours | Actual Hours | Variance | % |
|-----------|--------------|--------------|----------|---|
| | | | | |
| TOTAL | | | | |
Hours variance: _________ hours (____%)
Productivity factor: ______ (Actual ÷ Budget)
over 1.0 = Over budget (less productive)
under 1.0 = Under budget (more productive)
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RATE ANALYSIS:
Average budgeted rate: $________/hour
Average actual rate: $________/hour
Rate variance: $________/hour (____%)
Causes of rate variance:
☐ Different labor mix (skill levels)
☐ Overtime premium
☐ Wage rate changes
☐ Crew composition
☐ Other: _______________________________________________
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COST VARIANCE:
Budget labor cost: $_________________
Actual labor cost: $_________________
Total variance: $_________________
Decomposed:
Hours variance: _______ hrs × $_______ budget rate = $_________
Rate variance: _______ actual hrs × $_______ rate diff = $_________
Total: $_________________
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Material Variance Analysis
Material Cost Variance:
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MATERIAL VARIANCE ANALYSIS
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Project: _______________________ Period: _______________
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| Material | Budget | Budget | Actual | Actual | Variance |
| | Qty | Price | Qty | Price | |
|----------|--------|--------|--------|--------|----------|
| | | | | | |
| | | | | | |
| TOTAL | | | | | |
----------------------------------------------------------------
VARIANCE DECOMPOSITION:
Price variance:
(Actual Price - Budget Price) × Actual Qty = $_________________
Quantity variance:
(Actual Qty - Budget Qty) × Budget Price = $_________________
Total variance: $_________________
----------------------------------------------------------------
CAUSES:
Price variance causes:
☐ Market price changes
☐ Different vendor
☐ Rush orders
☐ Specification changes
☐ Other: _______________________________________________
Quantity variance causes:
☐ Waste/damage
☐ Theft
☐ Design changes
☐ Estimating error
☐ Field conditions
☐ Other: _______________________________________________
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Variance Thresholds
Reporting Thresholds:
| Variance Level | Monthly | YTD | Required Action |
|---|---|---|---|
| Minor | under 3% | under 2% | Note in report |
| Moderate | 3-5% | 2-4% | Explain cause |
| Significant | 5-10% | 4-7% | Explain + action plan |
| Critical | over 10% | over 7% | Escalate + immediate action |
Dollar Thresholds:
| Company Revenue | Monthly Threshold | YTD Threshold |
|---|---|---|
| under $5M | $5,000 | $15,000 |
| $5-20M | $10,000 | $35,000 |
| $20-50M | $25,000 | $75,000 |
| over $50M | $50,000 | $150,000 |
Root Cause Analysis
Five Whys Method:
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ROOT CAUSE ANALYSIS
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Variance identified: ________________________________________
Amount: $_________________ (____%)
WHY #1:
Q: Why did this variance occur?
A: ________________________________________________________
WHY #2:
Q: Why did that happen?
A: ________________________________________________________
WHY #3:
Q: Why did that happen?
A: ________________________________________________________
WHY #4:
Q: Why did that happen?
A: ________________________________________________________
WHY #5:
Q: Why did that happen?
A: ________________________________________________________
ROOT CAUSE: ________________________________________________
Systemic or one-time: ☐ Systemic ☐ One-time
Corrective action:
___________________________________________________________
Preventive action:
___________________________________________________________
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Common Root Causes:
| Category | Common Causes |
|---|---|
| Estimating | Incomplete plans, bad historical data, missed scope |
| Field | Low productivity, rework, weather, coordination |
| Materials | Price increases, waste, theft, wrong orders |
| Labor | Overtime, skill mismatch, turnover, learning curve |
| Subcontractors | Change orders, delays, quality issues |
| External | Owner changes, design issues, site conditions |
Trend Analysis
Variance Trending:
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VARIANCE TREND ANALYSIS
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Category: _______________________
| Period | Budget | Actual | Variance | % | Trend |
|--------|--------|--------|----------|---|-------|
| Month 1 | | | | | |
| Month 2 | | | | | |
| Month 3 | | | | | |
| Month 4 | | | | | |
| Month 5 | | | | | |
| Month 6 | | | | | |
Trend direction: ☐ Improving ☐ Stable ☐ Worsening
Pattern observed: ☐ Random ☐ Seasonal ☐ Systematic
If systematic, cause:
___________________________________________________________
Action required:
___________________________________________________________
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Corrective Action Tracking
Action Item Log:
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VARIANCE CORRECTIVE ACTION LOG
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| ID | Variance | Root Cause | Action | Owner | Due | Status |
|----|----------|------------|--------|-------|-----|--------|
| | | | | | | |
| | | | | | | |
| | | | | | | |
Status: Open, In Progress, Closed, Overdue
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Forecasting Impact
Update Forecast Based on Variances:
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FORECAST REVISION
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Original full-year budget: $_________________
YTD actual: $_________________
YTD variance: $_________________
Remaining budget: $_________________
Adjustments based on variance analysis:
| Item | Original Forecast | Revised Forecast | Change |
|------|-------------------|------------------|--------|
| | | | |
REVISED FULL-YEAR FORECAST: $_________________
Change from original: $_________________ (____%)
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Estimating Feedback Loop
Post-Project Analysis:
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ESTIMATING FEEDBACK
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Project: _______________________
Original estimate: $_________________
Final cost: $_________________
Variance: $_________________ (____%)
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ESTIMATING ACCURACY BY COST CODE:
| Cost Code | Estimated | Actual | Variance | Feedback |
|-----------|-----------|--------|----------|----------|
| | | | | |
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LESSONS LEARNED:
What was estimated correctly:
___________________________________________________________
What was underestimated:
___________________________________________________________
What was overestimated:
___________________________________________________________
Changes to estimating practices:
___________________________________________________________
Database updates needed:
___________________________________________________________
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Related Documents
- Budget Preparation
- Job Costing Procedures
- Financial Reporting
- Estimating Standards
Template provided by support.construction. You can't improve what you don't measure—and understand.