Cost Performance Index (CPI) Explained with Examples

Cost Performance Index (CPI) can be calculated by dividing the earned value (EV) by the actual cost (AC). It can be determined by measuring the ratio of the ... Skiptocontent WhatisCostPerformanceIndex? Thecostperformanceindex(CPI)isanindicatorofaproject’sfinancialperformanceandefficiency.Thereareplentyofindicatorsoftheproject’sperformanceandCPIisdeemedasoneofthecommonperformanceindicators.Thisindicatoroftenshowswhethertheprojectisgoingaccordingtotheplannedscheduleorwhetherthereisaneedforanycorrectiveaction.CPIcanassistaprojectmanagertoevaluateiftheprojectisonbudgetandprovidesasenseofhowthecostisexpendedeffectively. Inparticular,CPIreferstoamethod,chart,orothertoolsthatareappliedforthepurposeofdeterminingandmeasuringtheactualcost-effectivenessofaproject.Foreveryunitofcostexpended,itreflectstheamountofcompletedwork.ItisoneoftheessentialfindingsoftheEarnedValueManagementSystemasitinformstheprojectmanagementprofessional(PMP)ofhowfaraheadofscheduleorbehindscheduletheprojectisatthetimeofreview. TheCostPerformanceIndex(CPI)isalsoimplementedtocalculatehowmuchataskisoverorundertheexpectedbudget.Itmusthaveareferencepointintime,orinotherwords,itisa“snapshot”atacertainpointintime.Thecost-efficiencyindexiscontinuallyevolving,andastimepassesandworkisdone,theprojectmaybecomeexceedorundertheactualbudget.Toassesstheoverallproject’scostperformanceindex,theinherentEarnedValue(EV)andActualCost(AC)mustbemeasuredonataskbytaskbasisandsummedup.Thecostperformanceindexcanbealteredinaccordancewithhowtheearnedvaluesandactualcosthaveshiftedoverthecourseofaproject. CostPerformanceIndexinProjectManagement Inprojectmanagement,theestimatedandmanagementofthebudgetisdeemedasoneofthemostcrucialaspects.Ingeneral,sincebudgetrestrictionsarecentral,thisalsorepresentsoneofthemostimportantissuesinprojectstatusreportinganddiscussionswithprojectsponsorsandparticipants.Inprojectmanagement,theCostPerformanceIndex(CPI)andSchedulePerformanceIndex(SPI)aredeemedimportantastheyallowtheprojectmanagementprofessional(PMP)toassesstheproject’sperformanceandeffectivenessoftheprojectmanagement.Foranydeviationsfromthebaseline,PMPoftenconcernswiththesecriteriainprojectmanagementsincedeviationsfromthebaselinecancostalot.Itisimportant,therefore,tounderstandtheseconceptswell. Thetwomostcriticalparametersofprojectmanagementarescheduleandcost-efficiency.Thecostperformanceindex(CPI)isanelementofEarnedValue(EV)varianceanalysistechniquesthat,accordingtoPMImethodology,arepartofthe“controlcost”phaseofaprojectwhichenhancescost-efficiency.Thecostperformanceindexisusedatatimeoroverseveralprojectcyclestomeasurecostsandearnedbenefits.Foreverymoneyspentontheproject,itdetermineshowmuchoneearns,thus,revealsjusthowwelltheprojectstickstothebudget.Italsoassiststheprojectmanagementprofessionaltodeterminewhethertheirperformanceinprojectmanagementisuptostandardbyconductingacost-performanceanalysis. x ToviewthisvideopleaseenableJavaScript,andconsiderupgradingtoa webbrowserthat supportsHTML5video WhyShouldWeHireYou?5BestAnswers HowtoCalculateCostPerformanceIndex? CostPerformanceIndex(CPI)canbecalculatedbydividingtheearnedvalue(EV)bytheactualcost(AC).Itcanbedeterminedbymeasuringtheratiooftheearnedvaluetotheactualcost.Inordertoassesstheoverallproject’sCPI,theunderlyingearnedvalueandactualcostmustbemeasuredonataskbytaskbasisandsummedup. Eachtaskmustbeassignedwiththedataonthestartandfinishdates,aswellasthebudgetoftheproject.Thisisknownasthecostbaseline,anditsetsabenchmarkfortheprojectmanagertocompareagainst.Projectschedulingisoneofthemostcriticalaspectsofprojectmanagement,andthispreparationphasethatinvolvescalculatingtheCPIisapartofit. ThesumofthetaskthatisactuallyperformediscalledEarnedValue.ItisalsocalledasBudgetedCostofWorkPerformed(BCWP).Itiscomputedfromthebudgetoftheproject. EV=PercentComplete(actual)xBudgetoftasks ActualCostistheamountpaidonthetask.ItisalsoknownasActualCostofWorkPerformed(ACWP). Itmustincludethelabour,supplies,facilities,andanyothercostitemvaluesthatwerenecessarytocompletethetask.Forinstance,iftheactualcostoflumberis$700andlabouris$2,300,AC=$700+$2,300=$3,000. Therearefourmajorstepsthatshouldbedoneinordertocalculatethecostperformanceindexwhichislistedbelow: ClickHeretodownload3000+ProjectManagementDocuments:CompleteLibraryofProjectManagementTemplates,Processes,Plans,Checklists,Forms,Tools,PresentationSlidesandInfographics.SuitableForAllIndustries. Step1:Determinethepercentcompleteforeachtask. Step2:DeterminetheEarnedValue(EV) Step3:DeterminetheActualCost(AC) Step4:DeterminetheCostPerformanceIndex(CPI) CostPerformanceIndexFormula CostPerformanceIndexcanbecalculatedbydividingtheearnedvaluebytheactualcostbyusingthefollowingformula: CPI=EV/AC Where: CPI:CostPerformanceIndex EV:EarnedValue(Dollars,Euros,etc.) AC:ActualCost(Dollars,Euros,etc.) TheinterpretationofthecalculationisiftheCPIvalueislessthan1,itmeansthatthetaskisoverbudget.IftheCPIis1,thetaskisonbudget.Meanwhile,iftheCPIvalueisgreaterthan1,itshowsthatthetaskisunderthebudget.Iftheresultingvalueisgreaterthanone,itshowsthatthecost-efficiencyparametersfortheprojectaredeemedfavourable.Acorrespondingvalueoflessthanonemeansthatthecostefficiencyrequirementsfortheprojectaredeemedtobelessthanfavourable. Forinstance,ifCPI=0,itshowsthattheprojectworkhasnotstartedyet.TheCPI=0.5valueindicatesthattheprojecthasspenttwicetheamountthatitshouldhaveatthispoint.WhentheCPI=1.0,itmeansthattheprojectisonbudget.Meanwhile,iftheCPI=2.0,itmeansthattheprojecthasspent halftheamountthatitshouldhaveatthispoint. CostPerformanceIndexExamples ThefollowingsituationsdepictstheexamplesincalculatingtheCostPerformanceIndex(CPI)byusingthecostperformanceindexformula: Example1:YouhaveaprojectwithCompanyBthatmustbefinishedin12months.Thebudgetallocatedbythecompanyforthisprojectis100,000USD.Sixmonthshavepassed,and65,000USDhasbeenspent,butyoufindthatonly45percentoftheworkhasbeencompleteduponcloserinspection. FindtheCostPerformanceIndexforthisprojectanddeducewhetheryouareunderbudgetoroverbudget. ActualCost(AC)=65,000USD PlannedValue(PV)=50%of100,000USD =50,000USD EarnedValue(EV)=45%of100,000USD =45,000USD CostPerformanceIndex(CPI)=EV/AC =45,000/65,000 =0.69 Hence,theCostPerformanceIndex(CPI)forthisprojectis0.69 Thismeansthatforevery1USDspent,youreceive0.69USDbecausetheCostPerformanceIndex(CPI)islessthanone.Itmeansthatyouareoverbudget.Thevaluethatislowerthan1showsthatthecost-efficiencyparametersfortheprojectaredeemedtobelessfavourable. Example2:ProjectREDareassignedtoacompanywhereitneedstobecompletedin10months,andtheproject’sbudgetis150,000USD.5monthshavepassed,and80,000USDhasbeenusedinthisproject.Uponcloserreview,70%oftheworkforthisprojecthasbeencompleted. FindtheCostPerformanceIndexforthisprojectanddeducewhetheritisunderbudgetoroverbudget. ActualCost(AC)=80,000USD PlannedValue(PV)=50%of150,000USD =75,000USD EarnedValue(EV)=70%of150,000USD =105,000USD CostPerformanceIndex(CPI)=EV/AC =105,000/80,000 =1.31 Hence,theCostPerformanceIndex(CPI)forthisprojectis1.31 Thismeansthatforevery1USDspent,thecompanythathandleprojectREDearns1.31USD.SincetheCostPerformanceIndex(CPI)ismorethanone,thisdepictsthatthisprojectisunderbudget.Thevaluethatisgreaterthan1showsthatthecost-efficiencyparametersfortheprojectaredeemedfavourable. CostPerformanceIndexCalculator IncalculatingandcomputingtheCostPerformanceIndex(CPI),onemayusethecalculatorforCost/SchedulePerformanceIndex(CPI/SPI)andVarianceswhichgreatlyfacilitatetheprocessandmakeitmoreconvenient.Whenusingthecalculator,thestakeholderssuchasProjectManagementProfessionals(PMP)cansimplyfillintheactualcost,plannedvalueforaspecificperiodoroverallcostforthewholeproject.Thecostvariance(CV),theschedulevariance(SV),thecostperformanceindex(CPI),andthescheduleperformanceindex(SPI)canbecalculatedbythecalculator,wheretheinterpretationofthefindingswillbeprovided.Thecalculatorisavailableonlineathttps://project-management.info/calculator-cost-schedule-performance-index-cpi-spi-variances/ RecentPosts linktoTop25StatisticalAnalystInterviewQuestions&Answers[2021] Statisticalanalystscollect,analyzeandpresentdata,thusplayinganessentialroleinorganizationaldecisionmaking.Thisarticlewilllookatsomeofthequestionsyoushouldexpectina...ContinueReading linktoTop20SoftwareArchitectInterviewQuestions&Answers[2022] Tosucceedinasoftwarearchitectinterview,youneedtoinvestintransferableskillsandtechnicalknowledge.Thisarticlewilllookatsomeofthequestionsthatyoushouldexpectinasoftware...ContinueReading AboutUsProjectPracticalisaprojectmanagementandcareerblogthatwascreatedbytrueenthusiasts.Ourblogoffersvitaladviceandrecommendationsonhowtobeanefficientprojectmanagerbasedonindustrybestpractices. 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