What is Cost Performance Index?
The cost performance index (CPI) is an indicator of a project’s financial performance and efficiency. There are plenty of indicators of the project’s performance and CPI is deemed as one of the common performance indicators. This indicator often shows whether the project is going according to the planned schedule or whether there is a need for any corrective action. CPI can assist a project manager to evaluate if the project is on budget and provides a sense of how the cost is expended effectively.
In particular, CPI refers to a method, chart, or other tools that are applied for the purpose of determining and measuring the actual cost-effectiveness of a project. For every unit of cost expended, it reflects the amount of completed work. It is one of the essential findings of the Earned Value Management System as it informs the project management professional (PMP) of how far ahead of schedule or behind schedule the project is at the time of review.
The Cost Performance Index (CPI) is also implemented to calculate how much a task is over or under the expected budget. It must have a reference point in time, or in other words, it is a “snapshot” at a certain point in time. The cost-efficiency index is continually evolving, and as time passes and work is done, the project may become exceed or under the actual budget. To assess the overall project’s cost performance index, the inherent Earned Value (EV) and Actual Cost (AC) must be measured on a task by task basis and summed up. The cost performance index can be altered in accordance with how the earned values and actual cost have shifted over the course of a project.
Cost Performance Index in Project Management
In project management, the estimated and management of the budget is deemed as one of the most crucial aspects. In general, since budget restrictions are central, this also represents one of the most important issues in project status reporting and discussions with project sponsors and participants. In project management, the Cost Performance Index (CPI) and Schedule Performance Index (SPI) are deemed important as they allow the project management professional (PMP) to assess the project’s performance and effectiveness of the project management. For any deviations from the baseline, PMP often concerns with these criteria in project management since deviations from the baseline can cost a lot. It is important, therefore, to understand these concepts well.
The two most critical parameters of project management are schedule and cost-efficiency. The cost performance index (CPI) is an element of Earned Value (EV) variance analysis techniques that, according to PMI methodology, are part of the “control cost” phase of a project which enhances cost-efficiency. The cost performance index is used at a time or over several project cycles to measure costs and earned benefits. For every money spent on the project, it determines how much one earns, thus, reveals just how well the project sticks to the budget. It also assists the project management professional to determine whether their performance in project management is up to standard by conducting a cost-performance analysis.
How to Calculate Cost Performance Index?
Cost Performance Index (CPI) can be calculated by dividing the earned value (EV) by the actual cost (AC). It can be determined by measuring the ratio of the earned value to the actual cost. In order to assess the overall project’s CPI, the underlying earned value and actual cost must be measured on a task by task basis and summed up. Each task must be assigned with the data on the start and finish dates, as well as the budget of the project. This is known as the cost baseline, and it sets a benchmark for the project manager to compare against. Project scheduling is one of the most critical aspects of project management, and this preparation phase that involves calculating the CPI is a part of it.
The sum of the task that is actually performed is called Earned Value. It is also called as Budgeted Cost of Work Performed (BCWP). It is computed from the budget of the project.
EV = Percent Complete (actual) x Budget of tasks
Actual Cost is the amount paid on the task. It is also known as Actual Cost of Work Performed (ACWP). It must include the labour, supplies, facilities, and any other cost item values that were necessary to complete the task. For instance, if the actual cost of lumber is $700 and labour is $2,300, AC = $700 + $2,300 = $3,000.
There are four major steps that should be done in order to calculate the cost performance index which is listed below:
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Step 1: Determine the percent complete for each task.
Step 2: Determine the Earned Value (EV)
Step 3: Determine the Actual Cost (AC)
Step 4: Determine the Cost Performance Index (CPI)
Cost Performance Index Formula
Cost Performance Index can be calculated by dividing the earned value by the actual cost by using the following formula:
CPI = EV / AC
CPI: Cost Performance Index
EV: Earned Value (Dollars, Euros, etc.)
AC: Actual Cost (Dollars, Euros, etc.)
The interpretation of the calculation is if the CPI value is less than 1, it means that the task is over budget. If the CPI is 1, the task is on budget. Meanwhile, if the CPI value is greater than 1, it shows that the task is under the budget. If the resulting value is greater than one, it shows that the cost-efficiency parameters for the project are deemed favourable. A corresponding value of less than one means that the cost efficiency requirements for the project are deemed to be less than favourable.
For instance, if CPI = 0, it shows that the project work has not started yet. The CPI = 0.5 value indicates that the project has spent twice the amount that it should have at this point. When the CPI = 1.0, it means that the project is on budget. Meanwhile, if the CPI = 2.0, it means that the project has spent half the amount that it should have at this point.
Cost Performance Index Examples
The following situations depicts the examples in calculating the Cost Performance Index (CPI) by using the cost performance index formula:
Example 1: You have a project with Company B that must be finished in 12 months. The budget allocated by the company for this project is 100,000 USD. Six months have passed, and 65,000 USD has been spent, but you find that only 45 percent of the work has been completed upon closer inspection.
Find the Cost Performance Index for this project and deduce whether you are under budget or over budget.
Actual Cost (AC) = 65,000USD
Planned Value (PV) = 50% of 100,000 USD
= 50,000 USD
Earned Value (EV) = 45% of 100,000 USD
= 45,000 USD
Cost Performance Index (CPI) = EV / AC
= 45,000 / 65,000
Hence, the Cost Performance Index (CPI) for this project is 0.69
This means that for every 1 USD spent, you receive 0.69 USD because the Cost Performance Index (CPI) is less than one. It means that you are over budget. The value that is lower than 1 shows that the cost-efficiency parameters for the project are deemed to be less favourable.
Example 2: Project RED are assigned to a company where it needs to be completed in 10 months, and the project’s budget is 150,000 USD. 5 months have passed, and 80,000 USD has been used in this project. Upon closer review, 70% of the work for this project has been completed.
Find the Cost Performance Index for this project and deduce whether it is under budget or over budget.
Actual Cost (AC) = 80,000USD
Planned Value (PV) = 50% of 150,000 USD
= 75,000 USD
Earned Value (EV) = 70% of 150,000 USD
= 105,000 USD
Cost Performance Index (CPI) = EV / AC
= 105,000 / 80,000
Hence, the Cost Performance Index (CPI) for this project is 1.31
This means that for every 1 USD spent, the company that handle project RED earns 1.31 USD. Since the Cost Performance Index (CPI) is more than one, this depicts that this project is under budget. The value that is greater than 1 shows that the cost-efficiency parameters for the project are deemed favourable.
Cost Performance Index Calculator
In calculating and computing the Cost Performance Index (CPI), one may use the calculator for Cost/Schedule Performance Index (CPI/SPI) and Variances which greatly facilitate the process and make it more convenient. When using the calculator, the stakeholders such as Project Management Professionals (PMP) can simply fill in the actual cost, planned value for a specific period or overall cost for the whole project. The cost variance (CV), the schedule variance (SV), the cost performance index (CPI), and the schedule performance index (SPI) can be calculated by the calculator, where the interpretation of the findings will be provided. The calculator is available online at https://project-management.info/calculator-cost-schedule-performance-index-cpi-spi-variances/