In project management, the Cost Performance Index (CPI) is a key metric used to measure cost efficiency.
The CPI is a method for calculating the cost efficiency and financial effectiveness of a specific project. It helps project managers understand if the project is under budget, on budget, or over budget relative to the work completed.
Understanding the CPI Formula
The CPI is calculated using the following formula, as defined:
CPI = earned value (EV) / actual cost (AC)
Let's break down the components:
- Earned Value (EV): This is the value of the work actually performed to date, typically measured in dollars. It represents the budget amount that should have been spent for the work completed.
- Actual Cost (AC): This is the total cost incurred for the work completed up to a specific point in time. It's the actual money spent.
Interpreting the CPI Value
The resulting CPI value provides immediate insight into the project's cost performance:
- CPI = 1: This indicates the project is exactly on budget. The value of work completed equals the actual cost incurred.
- CPI > 1: This means the project is under budget. The value of work completed is greater than the actual cost incurred, indicating cost efficiency.
- CPI < 1: This signifies the project is over budget. The value of work completed is less than the actual cost incurred, indicating cost inefficiency.
Practical Use and Insights
Project managers use CPI regularly to track performance, report to stakeholders, and make informed decisions. Monitoring CPI helps identify cost overruns early, allowing for corrective actions.
Here are some ways CPI is used:
- Performance Tracking: Regular calculation (e.g., weekly or monthly) provides ongoing visibility into cost health.
- Forecasting: CPI can be used to forecast the estimated cost at completion (EAC). A consistent CPI below 1 suggests the final cost will likely exceed the planned budget.
- Decision Making: A low CPI might trigger investigations into why costs are higher than planned (e.g., resource rates, rework, poor estimates).
- Stakeholder Reporting: CPI is a standard metric used to communicate project performance to clients and management.
Example
Imagine a project where, by a certain date, the planned budget for the work completed (EV) was $10,000, but the actual cost incurred (AC) is $12,000.
- CPI = EV / AC
- CPI = $10,000 / $12,000
- CPI ≈ 0.83
Since the CPI is 0.83 (which is less than 1), this project is currently over budget relative to the work completed.
CPI in Earned Value Management (EVM)
CPI is a core component of Earned Value Management (EVM), a project management methodology used to measure project performance and progress in an objective manner. Along with the Schedule Performance Index (SPI), CPI provides a comprehensive view of how the project is performing against its baseline in terms of both cost and schedule.
| Performance Indicator | Formula | Interpretation (>1) | Interpretation (=1) | Interpretation (<1) |
|---|---|---|---|---|
| CPI | EV / AC | Under Budget | On Budget | Over Budget |
| SPI | EV / PV | Ahead of Schedule | On Schedule | Behind Schedule |
Note: PV stands for Planned Value, the budgeted cost for work scheduled.
Tracking CPI is essential for maintaining financial control and delivering projects within budget constraints.
