What is Cost Performance Index (CPI) in Project Management?

Performance is crucial for project managers. To ensure that all of their initiatives are successful, businesses commit time, money, and human resources to them. One method is to use the Cost Performance Index(CPI). This metric can provide valuable insights into the state of the projects.

Also, funding is necessary for projects. To determine if the project is worth the money is the most difficult task. The last thing interested parties want to hear is that the project isn’t profitable. The cost performance index is useful in this situation too to be used as a savior.

The cost performance index is a way to measure the financial performance of a project. It may also contribute to the cost-effectiveness of the resources that you have budgeted. The project’s cost performance indicates whether or not it actually remains within budget. The cost of a project is variable and can change time to time. The project budget is merely an approximation of the total cost determined by the project team. However, once approved, the budget controls the expenses of the project whole time while the project is going on. The project may not succeed if the budget is exceeded. Thus, monitoring the project’s cost performance across its whole life cycle is crucial for project management. Using the cost performance index makes it easier to monitor project expenses and to check whether they will be finished under budget or not.

The following formula can be used to determine a project’s cost-effectiveness and financial efficiency using the Cost Performance Index (CPI) method:

CPI = Earned value (EV) / actual cost (AC)

In project management, the cost performance index is a fantastic tool for realizing the full potential of your work. You can direct each project to come as close to the 1.00 CPI target as feasible by using the appropriate project controls and performance signals using CPI. You can get insights into each stage of your project with the help of the cost performance index. Ultimately, CPI assists you in reaching decision-making clarity when solving problems so that your projects are consistently successful.

To calculate the cost performance index, you’ll first need to understand the earned value and the actual cost formulas.

1. Earned Value (EV)

Earned value, as used in project management, is the difference between the quantity of work that has been accomplished so far and the amount that was expected to be finished at that stage of the project. In order to determine the earned value of a project, multiply the percentage of work completed by the proportion of the project’s overall budget, often known as the budget at completion (BAC).

Earned Value (EV) = Percent of Work Completed x Budget at Completion(BAC)

2. Actual Cost (AC)

The actual cost is exactly what it sounds like—the whole amount you have spent on the project up to that moment when you want to calculate. This is just the total amount of money spent on the project up to that moment, thus there’s no formula to calculate this. It is employed in the computation of cost variance as well as the cost performance index.

3. Cost Performance Index Formula

Cost Performance Index (CPI) = Earned Value (EV) / Actual Cost (AC)

When a project’s CPI ratio is more than 1, it means that its financial performance is good. When a project’s CPI value is 1, it means it is operating within budget. When a project’s CPI value is less than 1, it is considered over budget.

• Project Management: Project managers can pinpoint areas for improvement in the planning, execution, and control processes of their projects by routinely reviewing variances and monitoring the CPI. This makes it possible for project management techniques to continuously develop.
• Team Communication: CPI offers a uniform metric for informing clients, and team members on the cost performance of a project. It makes it easier to communicate the project’s financial health openly and efficiently.
• Project Planning: Project managers look at the Cost Performance Index to determine if a project is following the schedule or if corrective actions must be taken. It also helps to indicate if the budget (also known as “planned value”) is being used effectively and efficiently.
• Risk Management: CPI also helps in identifying risk in the project. If its value is less than 1, it might point to possible dangers including scope expansion, ineffective resource use, or unforeseen cost increases. Project managers can detect and reduce hazards before they become more serious by keeping an eye on CPI.
• Cost-benefit Analysis: It helps project managers to allocate resources more effectively. By identifying the most cost-effective strategies and allocating resources accordingly, you can ensure your project is completed within budget and on time. This level of analysis only strengthens the findings as more research is performed on the state of outcome for the project that provides better support for strategic planning endeavors.
• Resource Allocation: The CPI sheds light on how well the project team uses its resources. A CPI less than 1 implies that expenses are higher than anticipated, i.e., inefficiency, whereas a CPI larger than 1 indicates efficient resource utilization.
• Future Scope: Future project costs can be predicted using the CPI. Project managers can determine if the project is likely to stay within budget or whether corrective action is required to prevent cost overruns by examining changes in CPI over time.

Cost Performance Index fluctuates depending on various reasons. It is anticipated that a natural variation will be seen, depending on the period that is being utilized to analyze cost performance. Also, many variables, including personnel, equipment, and weather, that affect a project’s cost performance are the cause of this variation. Cost performance experiences peaks and troughs as a result of these elements changing over time.

Here are some reasons due to which CPI fluctuates:

• Inaccuracies: Inaccuracies in cost estimates made during the project planning stage may be the cause of fluctuations in the CPI.
• Employee’s Performance: An employee wouldn’t be expected to work at full capacity all day, for instance. Workers may occasionally have energy surges that enable them to perform better than anticipated, which counteracts poorer performance during moments of exhaustion. And also, there are some days when the employee’s performance is increasing at high extent. So, by this factor also CPI fluctuates. The operational range is a range of peaks and valleys produced by these normal oscillations.
• Resource Allocation: Changes in resource usage might cause fluctuations in the CPI. Inefficient use of resources or delays in their availability can result in cost overruns or underruns, which have an impact on the CPI.
• Time Management: Deviations from the intended schedule may cause the CPI to change. Project activity delays or task acceleration can have an impact on cost performance and resource utilization, which can alter the CPI.
• Other variables: External variables that can affect project costs and CPI include modifications to the market, advances in technology, and changes in regulatory requirements. To sustain cost performance, project managers should keep an eye on these variables and make any necessary adjustments to project plans.

Example 1:

Let’s say your project group is preparing for a product release. Forty percent of the intended work has been accomplished, and the project has a budget of $100,000. After your team has already invested $70,000 in project activities, you would like to be sure that the expenses match the original budget. Calculate CPI of your project.

Solution:

First, to determine the earned value (EV):

EV = % work completed x budget
EV = 50% x 100,000
EV = 50,000

The actual cost (AC) is $40,000 — the sum already spent on project activities.

To calculate cost performance index, divide the earned value (EV) by the actual cost (AC).

CPI = EV / AC
CPI = $50,000 / $70,000
CPI = 0.71

The cost performance index (CPI) value is 0.71, which means you are overspending.

Example 2

You have been given a $100,000 budget for a project that will last six months. You have actually spent $50,000 after three months. Nevertheless, when you review your project milestones, just forty percent of the work is finished. What is your CPI of the project?

Solution:

EV    =  40% x 100000    
EV = 40000
Now CPI = EV / AC

The actual cost (AC) is $50,000 — the sum already spent on project activities.

So, CPI = $40,000 / $50,000 
CPI= 0.80. 

This means that your project is over budget.

The cost performance index is an important economic tool that benefits more than just project management.

• Project Cost Forecasting: Project managers can forecast whether the project is likely to stay within budget or whether changes are required to prevent cost overruns by looking at patterns in the CPI.
• Decision-making process: The quantitative information on cost performance provided by CPI assists informing decision-making processes.
• Project Management: Project managers can utilize CPI to help them make well-informed decisions regarding changes to the scope, schedule, and allocation of resources.
• Risk Management: CPI assists in identifying and reducing the risk of cost overruns. Project managers can proactively address concerns and use risk mitigation methods to ensure project success by routinely monitoring CPI.
• Performance Management: By pointing out opportunities for process optimization in project design, execution, and control, CPI helps in making efforts towards continuous improvement. Project teams can improve performance in upcoming projects by studying CPI deviations and drawing lessons from previous experiences.
• Budget Management: Budget concerns can be a difficult obstacle to overcome with project status reporting and the conversation that follows with sponsors, participants, and stakeholders because budget constraints are crucial. For this reason, schedule performance index (SPI) and cost performance index (CPI) are important metrics in project management since they let PMs know how a project is doing financially (much like cost variance does). Costs can readily increase if there is any departure from the baseline, which is definitely not acceptable.

Related Articles:

• Cost Performance Index (CPI) – Software Engineering
• Difference between Cost Performance Index (CPI) and Schedule Performance Index (SPI)

Although cost performance indices are an excellent way to assess the health of a project, they also hold other information that may be accessed by hiring a project controls specialist. By doing this, you can be confident that the reports will condense the data in a way that will accurately impact choices and facilitate the safe and effective completion of the project.

Q: What is the Cost Performance Index?

The Cost Performance Index is a metric used to determine if tasks within a project use up more or less of the budget assigned to that project. If CPI is over 1.00 it means it’s under-budgeted, and if it’s below 1.00 it’s over-budgeted.

Q: What is a good Cost Performance Index?

In general, a CPI above 1.00 would be considered favorable and cost-efficient, whereas a CPI under 1.00 indicates that the organization is losing money, at least at the time when it was calculated.

Q: How is the Cost Performance Index calculated?

The formula is a project’s Earned Value divided by its Actual Cost. The resulting number represents a project’s CPI.

Q: Assume your team is in charge of game production and you are in charge of project management for video games. Fifty percent of the intended work has already been accomplished, and the project has a budget of $150,000. The actual cost (AC) is $40,000. Then what will be the CPI of the project?

EV = % work completed x budget
EV = 50% x $150,000
EV = $75,000
The actual cost (AC) is $40,000, which is the sum already spent on project activities.
cost performance index is calculated by earned value (EV) ratio to actual cost (AC).
CPI = EV / AC
CPI = $75,000 / $75,000
CPI = 1
The cost performance index (CPI) value of 1 means project costs are as planned.