Understanding Cost Performance Indexes | ProEst

The Cost Performance Index measures the earned value of a project against the actual cost incurred. When the CPI is equal to 1, the project's ... Breakingnews-ProEstisnowpartofthefamily- ReadMoreHere TableofContents Whatisacostperformanceindex?Theformula Cancostperformancefluctuate?Whatistheoperatingrange?CostPerformanceIndexvs.SchedulePerformanceIndexConclusionHome/Construction/Process/UnderstandingCostPerformanceIndexesUnderstandingCostPerformanceIndexesPublishedonSeptember13,2021TheCostPerformanceIndex(CPI)isametricthatinfluencesconstructionmanagementdecisionsglobally.However,alowCPIdoesnotnecessarilymeanthataproject'sperformanceispoor.Thereareadditionalcriterianecessarytoconsiderbeforemakingdecisionsonaproject'sviability.ThesealsotakeintoaccounttheCPIoperatingrange. Withoutfurtherado,letusdemystifytheCostPerformanceIndexanditsimpactonconstruction.TableofContents Whatisacostperformanceindex?Theformula Cancostperformancefluctuate?Whatistheoperatingrange?CostPerformanceIndexvs.SchedulePerformanceIndexConclusionWhatisacostperformanceindex?TheCostPerformanceIndexmeasurestheearnedvalueofaprojectagainsttheactualcostincurred.WhentheCPIisequalto1,theproject'sperformanceisontarget;ifitisgreaterthan1,theprojectperformanceisbetterthanexpected.IftheCPIvalueislowerthanone,theproject'simplementationislowerthanexpected.Inconstruction,weexpresstheCPIasaratiobetweenthecostofthebudgetedworkandtheactualcostoftheworkperformed.Theformula WeexpresstheformulaforcalculatingCPIinanyprojectas:CostPerformanceIndex=EarnedValue/ActualCostTheearnedvaluereferstotheauthorizedprojectbudget,whiletheactualcostreferstotheexpensesaccruedonaproject.KnowingyourCostPerformanceIndexisparamountasitshowsyouwhetheryouareoperatingwithinbudgetorneedtocomeupwithcost-savingmeasures.Forexample,sayyouhaveaprojectwithacontractsumof$60,000forsixmonths.However,yourealizeyouhavealreadyspent$38000andcompleted40%oftheworkbythethirdmonth.Inthiscase,theCPIwillbe:ActualCost=$38,000EarnedValue=40%of$60,000=$24,0000CPI=$24,000/$38000=0.63Thismeansthatforeverydollarspent,theprojectgivesback$0.63andshowsthattheprojectisoperatingoverbudgetandtheprojectteamneedstotakeefficiencymeasures.Cancostperformancefluctuate?TheCostPerformanceIndexfluctuatesthroughouttheproject'slifecycle.Thisisduetofluctuationsintheactualprojectcostsasitdrawstoaclose.Themostsignificantfactorsthatcausedifferencesinactualexpensesarelaborrates,weather,andpurchaseprices.Forinstance,anemployeeisnotexpectedtoworkat100%efficiencycontinually.Sometimestheemployeemayhaveasuddenenergyboostandcompleteataskfasterthanexpected.Inothercases,fatiguekicksin,andtheemployeestakelongerthanexpectedonajob.Thiscreatesanimbalancethatfluctuates,startingaseriesofpeaksandvalleysthatdenotetheoperatingrange.ThecostfluctuationsarereferredtoasCostVarianceandasdenotedbytheformulabelow:CostVariance=EarnedValue–ActualValue.ThefluctuationincostvarianceleadstochangesintheCostPerformanceIndex.AfavorablecostvarianceleadstoafavorableCPI.Whatistheoperatingrange?Eachprojectisunique,anddifferentfactorsaffecttheoutcomesofaproject.Theexpectedfluctuationsonthecostperformanceindexthroughoutaproject'slifecyclearereferredtoasoperatingrange.Aprojectinawell-controlledenvironmenthasanarrowoperatingrangecomparedtoaprojectrunninginanunpredictablebackground.Itisprudentfortheprojectmanagementteamtoagreeonanoperatingrangebeforeworkcommences.Weevaluatethisrangethroughpastperformanceinprojects,expertopinions,andindustrybenchmarks.Oncetheprojectteamhassettledonanoperatingrange,theyshouldimprovethroughoutitslifecycletoensurethattheCPIstayswithinlimits.WhentheCPIdeviatesoutsidethelimit,itisaredflagfortheteam.Cancostperformancefalloutsideoftheoperatingrange? PricefluctuationsovertimeleadtoalotofdeviationsintheCostPerformanceIndex.AsmuchasthisisperfectlynaturalinconstructionprojectswhenthechangespushtheCPIoutsidetheoperatingrange,itshouldbeacauseofconcern.WhentheCPIisoutsidetherange,itisacrucialindicatorofinefficienciesinaproject.Onmostoccasions,alowCPIindicatesanincreasedscopeofworkintheproject,reducedlaborefficiency,orincreasedcostofmaterials.However,alowCPIdoesnotalwaysmeanthattheprojectisinefficient.SometimestheexcessspendingthatdrivestheCPIlowmightbecrucialandnecessaryforacompany.MoneyspentonservicingandmaintainingequipmentmightpushtheCPIbelowtheoperatingrange,butitissignificantasitextendstheequipmentlife.Ontheotherhand,whentheCPIishigherthanthetopoftherange,itdoesnotnecessarilymeanthattheprojectperformsexceptionally.Thismightmeanthattheprojectteampoorlyevaluatedanaspectintheprojectleadingtooverachievementforeverymonetaryunitspent.Forexample,ifacompanycastsconcreteinplacewhenitismissinghalftherebar,itwouldreflectahighCPI,buttheextensivescopeofworkhasbeenoverlookedintherealsense.Thecastconcretewillhavetobedemolishedandreconstructed,whichwillcostmoreinthelongrun.Inothercases,acompanymightspendlittlemoneyonprojectaspectssuchascustomerserviceandemployeetraining.ThiswilllowertheexpenditurecostsandincreasetheCPI,butitisdetrimentaltothecompanyandprojectsuccess.Ifaconstructioncompanydoesnotmissthescopebutalwaysendsupwithoverperformingprojects,itwillhaveabadrapportwiththeclients.Thisisbecausetheclientswillthinkthatthecontractorinflatedbudgetedcostsbeyondtherealexpectedvalue.WhattodoifCPIfallsoutsidetheoperatingrange?OverrunsinprojectCPIarefamiliarinconstruction.Keepingprojectswithintheoperatingrangeisessentialforaproject'sprofitabilityandemployeemorale.Thereareseveralmeasuresonecanassesstorectifyoverrunsintheoperatingrange.ThemainreasonwhyCPImovesbeyondtheoperatingrangeisscopecreep.Scopecreepreferstouncontrolledchangesinaproject'sscope.Theprojectmanagershouldcreateaframeworktoassesstheproject'ssizewhilekeepingtheendgoalinmind.Theprojectteamshouldrectifyanydiscrepanciesinthescopetosteertheproject'sCPIwithintheoperatingrange.Theproject'sstaffisthemostvaluableasset.However,assessingaproject’sprofitabilityisn’teasyifthestaff'sworkinghoursarenotcloselymonitored.Oncetheproject'sCPIstepsoutsidetheacceptablerange,itisnecessarytotrackthestaff'sworkinghours.Withtherighttrackingsoftware,itiseasytofollowthestaff'sworkinghours.Anotherwaytobringprojectsbackontrackwithintheoperatingrangeisusingsoftwaresolutions.Softwaresolutionsprovidegreatinsightsintoprojectmanagementandaccounting.ThesesoftwaresolutionspinpointwhenaprojectisrollingoverbudgetandgivetheprojectmanagersstrategicremediestobringbacktheCPIwithintheacceptablerange.Sometimes,smalldecisionsovertimecauseasignificantimpactonaproject'sbudgetandadeviationoftheCPIfromtheacceptablerange.Thiscanberectifiedusingprojectaccountingpractices.Projectaccountingpracticescollectvitaldatasuchasexpensesandinformationonaproject.Thisgivestheconstructioncompanyfinancialinsightsonwhattheyneedtorectifytothrive.CostPerformanceIndexvs.SchedulePerformanceIndexManypeopleconfusethetermCostPerformanceIndexanduseitinterchangeablywithSchedulePerformanceindex.However,theyrefertodifferentthings.TheCPI,asdiscussedearlier,isthemeasureofthebudgetedworktotheactualincurredcosts.TheSchedulePerformanceIndexistheratiobetweenthecurrenttimeyouexpectedtobeinaprojectatthattime.Itisameasureoftheproject'sefficiencyagainsttheschedule.WedenotetheSchedulePerformanceIndexbytheformulabelow:SchedulePerformanceIndex=EarnedValue/PlannedValue.LikeintheCPI,whentheSPIisequaltoone,theprojecthasbeencompletedrightonschedule.IftheSPIislessthanone,thefinishedworkisfarlessthanearlierplanned.AnSPIofaboveonemeansthatthecompletedworkisfarbeyondtheworkthatthispointhadplannedforintime.YoumaywanttoexclusivelyusetheSPIandignoretheCPItodetermineaproject'ssuccess.However,thesenumbersarenecessarywhendecidingwhetheraprojectislaggingorperformingwellinbudgetandtime.Itiseasiertoimplementchangeswhenyouknowwhereexactlyyouaredragging.ConclusionItiscrucialtohaveanallocatedbudgetandtimebeforestartingaproject.However,stickingtothebudgetandprojectedtimealwaysappearschallenging.Therefore,itisnecessarytotrackwhetheraproject'sspendingisinlinewiththebudget.TheCPIandSPIarekeyperformanceindicatorsfortrackingwhethertheprojectisontherighttrack.Theyhelpyouknowhowfaraheadorbehindyouareinyourproject.Projectmanagementprofessionalscandevelopsystemsthatrecordtheproject'sprogressatdifferentstagesofconstruction.Whenoneisequippedwithsuchinformation,itiseasytoaccountfordifferencesandrectifyanyissuesthrowingtheprojectoff-course.Itiseasyfortheprojectcontrolteamtoidentifydiscrepanciesontime.This,therefore,easiertomakedecisionsthatpositivelyinfluencethesuccessfuldeliveryofaprojectontime. [helpful]SHAREAbouttheAuthorJeffGerardiPresident&CEOJeffGerardiistheowner,PresidentandCEOofProEst,aCalifornia-basedtechnologycompanythatdevelopsestimatingsoftwarefortheconstructionindustry.Bornintoafamilyofbusinessowners,Jeffhaslonghadanentrepreneurialspirit.That’swhy,in1992,hewelcomedtheopportunitytotakeoverthesmallestimatingsoftwarecompanywhereheworked,andbuiltitintothecompanyherunstoday--anorganizationwith8,000+clientsandofficelocationsaroundtheworld.RelatedPosts Creating&ManagingAConstructionBudgetThe5TypesOfConstructionConstructionmanagement:Salary,Skills&TheRoleHowtofindconstructionsubcontractorsHowToSuccessfullyBidaConstructionJobConstructionSites:Types,safety&tipsConstructionProcurementProcessExplainedBidLeveling:Whatisit?Isitimportant?GettingstartedwithBuildingPermitsWhatisConstructionPlanning:ThestepsforsuccessTheUltimateGuideToConstructionAccountingSubstantialCompletionCommonConstructionContractTypesExplainedThekeyprinciplesofleanconstructionBuildingaCommercialBuilding:FromstarttofinishThe6StagesofConstructionMasterTheConstructionBiddingProcessChangeorders:Whatarethey?Post-constructionphase:WhattoexpectPre-constructioncostsWhatarepre-constructionservices?Pre-constructionplanningphaseWhatispre-construction?Theconstructionphase:Whathappens?5ConstructionRiskSolutionsforYourEstimationTeamWhatIsProcoreConstructionSoftware?JOINOURMAILINGLISTTOSTAYUP-TO-DATESignuptodayandbethefirsttogetindustrynews,updates,guidanceandadvicedelivereddirectlytoyourinbox. 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