What is consultant cost variance?

Consultant cost variance measures the difference between budgeted and actual consultant costs on a project, distinguishing between rate variance (a different hourly rate than planned) and efficiency variance (different hours than planned). For professional service firms, this analysis reveals whether project labor costs are on track and identifies specific causes when they are not.

Key characteristics

• Measures the budget to actual labor cost difference

• Separates rate and efficiency variances

• Rate variance from cost per hour differences

• Efficiency variance from the hours differences

• Enables targeted corrective action

• Should be tracked on significant projects

Why it matters for professional service firms

Labor cost is the largest project expense. Understanding variances helps control future projects. Rate variance (using more expensive consultants than planned) requires a different action than efficiency variance (taking more hours than planned). Professional service firms should analyze consultant cost variance on significant projects to understand performance and improve future estimates.

Real-world example

Tom managed a project budgeted at $85K in labor costs (850 hours at a $100 blended rate). Actual: $94K. A simple analysis showed a $9K overrun. Variance analysis: actual hours 920 (70 hour efficiency variance at $100 equals $7K unfavorable), actual blended rate $102 (rate variance 920 hours times $2 equals $1.8K unfavorable), minor rounding. Root causes: efficiency variance from scope creep (client-added requirements), rate variance from using a senior consultant when a junior was planned. Actions for the future: tighter scope management and discipline in resource planning.