In project management, getting an early indication of problems is the silver bullet that allows the project manager to correct the problems before they start.
The Cost Performance Index, usually abbreviated as CPI, is one of the fundamental outputs of the Earned Value Management System. It tells the project manager how far ahead or behind the project is at the point of analysis (usually right now).
Formula
Where:
- CPI = Cost Performance Index
- EV = Earned Value (dollars, euros, etc.)
- AC = Actual Cost (dollars, euros, etc.)
Interpretation of Results
- If CPI is less than 1, the task is over budget.
- If CPI is one, the task is on budget.
- If CPI is greater than 1, the task is under budget.
For example,
- CPI = 0 means the project work has not started.
- CPI = 0.5 means the project has spent twice the amount that it should have at this point.
- CPI = 1.0 means the project is on budget.
- CPI = 2.0 means the project has spent half the amount that it should have at this point.
Background
The Cost Performance Index represents the relative amount that the task is over or under budget. For example, the task Build Fence has a budget of $4,000. and the cost performance index is 1.25. This would represent a task that is 25% under budget.
The underlying Earned Value (EV) and Actual Cost (AC) must be calculated on a task by task basis and summed to determine the overall project’s CPI.
It must have a time point of reference, in other words, it is a “snapshot” at a certain point in time. The cost performance index is always changing, and the project is getting more over or under budget as time goes on and as work is performed.
Related Earned Value Metrics
The cost performance index should be analyzed in conjunction with the Schedule Performance Index (SPI), which tells you how far ahead or behind schedule the project is.
- CPI and SPI are both greater than 1.0: The project is under budget and ahead of schedule (hooray!)
- CPI is greater than 1.0 and SPI is less than 1.0: The project is under budget but behind schedule. In other words, the tasks performed were efficient, but more of them should have been performed by now.
- CPI is less than 1.0 and SPI is greater than 1.0: The project is over budget but ahead of schedule. In other words, the tasks performed are over budget, but more of them have been performed than scheduled.
- CPI and SPI are both less than 1.0: The project is over budget and behind schedule (boo!)
The Cost Variance (CV) is similar to CPI but gives you the absolute, rather than relative, amount the project is over or under budget.
Cost Baseline
In order to calculate the CPI, the project must initially be divided into tasks and each task must be assigned the following data:
- Start and Finish Dates
- Budget
This is called the cost baseline, and it gives the project manager something to track against. This planning step is part of Project scheduling which is one of the fundamental aspects of project management.
Earned Value (EV)
Also known as Budgeted Cost of Work Performed (BCWP), Earned Value is the amount of the task that is actually completed. It is calculated from the project budget.
For example, if the actual percent complete is 75% and the task budget is $4,000, EV = 75% x $4,000 = $3,000.
Actual Cost (AC)
Also known as Actual Cost of Work Performed (ACWP), Actual Cost is the amount that has been spent on the task. It should include values for labor, materials, equipment, and any other item of cost that was necessary to complete the task.
For example, if the actual cost is $500 for lumber and $2,000 for labor, AC = $500 + $2,000 = $2,500.
Example
Let’s say we have a project with two tasks, building a fence and laying sod. The initial cost baseline is:
| ID | Task | Start date | End Date | Budget |
|---|---|---|---|---|
| 100 | Build Fence | Feb. 10 | Feb. 20 | $4,000 |
| 200 | Lay Sod | Feb. 12 | Feb. 25 | $3,000 |
| TOTAL | $7,000 | |||
Let’s say it’s Feb. 15. Determine the Cost Performance Index for the project.
Step 1: Determine the percent complete for each task. Since this is not a real project we will assume the tasks are 75% and 10% complete, respectively.
We will add a percent complete column to the table.
| ID | Task | Start date | End Date | Budget | % Complete |
|---|---|---|---|---|---|
| 100 | Build Fence | Feb. 10 | Feb. 20 | $4,000 | 75% |
| 200 | Lay Sod | Feb. 12 | Feb. 25 | $3,000 | 10% |
| TOTAL | $7,000 | ||||
Step 2: Determine Earned Value (EV)
Task 100 is 75% complete, therefore EV = 75% x $4,000 = $3,000.
Task 200 is 10% complete, therefore EV = 10% x $3,000 = $300.
Next we will add a column called EV.
| ID | Task | Start date | End Date | Budget | % Complete | EV |
|---|---|---|---|---|---|---|
| 100 | Build Fence | Feb. 10 | Feb. 20 | $4,000 | 75% | $3,000 |
| 200 | Lay Sod | Feb. 12 | Feb. 25 | $3,000 | 10% | $300 |
| TOTAL | $7,000 | |||||
Step 3: Determine Actual Cost (AC).
Again, since this is not a real project we will have to assume that Task 100 has an actual cost of $2,500, and Task 200 has an actual cost of $400.
Now we will add a column called AC.
| ID | Task | Start date | End Date | Budget | % Complete | EV | AC |
|---|---|---|---|---|---|---|---|
| 100 | Build Fence | Feb. 10 | Feb. 20 | $4,000 | 75% | $3,000 | $2,500 |
| 200 | Lay Sod | Feb. 12 | Feb. 25 | $3,000 | 10% | $300 | $400 |
| TOTAL | $7,000 | ||||||
Step 4: Determine Cost Performance Index (CPI)
CPI = EV / AC.
| ID | Task | Start date | End Date | Budget | % Complete | EV | AC | CPI |
|---|---|---|---|---|---|---|---|---|
| 100 | Build Fence | Feb. 10 | Feb. 20 | $4,000 | 75% | $3,000 | $2,500 | 1.20 |
| 200 | Lay Sod | Feb. 12 | Feb. 25 | $3,000 | 10% | $300 | $400 | 0.75 |
| TOTAL | $7,000 | $3,300 | $2,900 | 1.14 | ||||
The overall project cost performance index, CPI = 1.14, therefore the project is 14% under budget. Even though the second task is over budget, the first task is under budget by a greater amount, therefore the project is in good shape overall.
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