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 Earned Value in project management.
The cost performance index(CPI) is a component of the techniques of Earned Value variance analysis which are part of the “control cost” process of a project, according to PMI methodology. Cost Performance Index 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 on 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.
Analyzing Earned Value
Earned value analysis is another cost performance index analysis. According to the PMI, EVA looks at the relationship between the CPI & SPI, including such factors as the cost and schedule variances, to judge how a project is doing. It often involves graphing Cost Performance Index and Schedule Performance Index over the life of a project. In a nutshell, the closer the numbers are to 1, the more likely it is that a project will be completed on budget and on time.
While keeping one or both values above 1 is a worthwhile goal, it may indicate original assumptions were unrealistically rosy. The worst scenario is to have one or both numbers under 1 over an extended period of time. The lower those numbers are under 1 and the longer the project duration, the less likely it is that the project can recover from such the deficit. It may also mean that not enough money and time were originally scheduled.