What is Cost Performance Index (CPI)?
The forecasting and management of costs is an important aspect of project management. In reality, this also represents one of the most important issues in the reporting on project status and discussions with project sponsors and participants since budget constraints are essential. The Cost Performance Index (CPI) is useful and comparatively simple tool for project management.
The cost performance index is a component of the techniques of variance analysis which are part of the “control cost” process of a project, according to PMI methodology. CPI is used for the purpose of comparing costs and earned value at a time or over several project periods.
The Cost Performance Index determines how much you earn for every dollar spent on the project. It shows just how well the project is sticking to the budget.
Calculation of Cost Performance Index
You can calculate the Cost Performance Index by dividing the earned value by actual cost.
Cost Performance Index = (Earned Value) / (Actual Cost)
CPI = EV / AC
- 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.
Example of the Cost Performance Index (CPI)
Project ABC to be completed in 12 months, and the budget of the project is 200,000 USD. 6 months have passed, and 120,000 USD has been spent, but upon closer review, you find that only 40% of the work has been completed.
Find the Cost Performance Index for this project and deduce whether you are under budget or over budget.
The following information is given in the question:
Actual Cost (AC) = 120,000 USD
Planned Value (PV) = 50% of 200,000 USD
= 100,000 USD
Earned Value (EV) = 40% of 200,000 USD
= 80,000 USD
Cost Performance Index (CPI) = EV / AC
= 80,000 / 120,000
Hence, the Cost Performance Index is 0.67
This means you are earning 0.67 USD for every 1 USD spent since the Cost Performance Index is less than one. This means you are over budget.