How to Calculate Cost Performance Index with Examples

The cost performance index (CPI) measures a project’s financial performance and efficiency. There are several measures of the project’s performance, and CPI is considered one of the typical performance indicators. This indication often reveals whether the project is proceeding according to plan or if corrective action is required. The cost performance index may aid PMPs in determining whether the project is within budget and offers a sense of how efficiently costs are used.

“CPI” refers to a process, diagram, or other instrument used to assess and gauge the project’s real cost-effectiveness. It shows how much work was performed for each unit of money spent. One of the fundamental conclusions of the Earned Value Management System (EVM), it tells the project management professionals how far the project is ahead of schedule or behind schedule at the time of review.

Cost Performance Index in Project Management

Budget estimation and management are considered to be some of the essential factors in project management. Budget constraints are a significant factor in many projects; therefore, it stands to reason that this would be one of the most crucial topics to address with sponsors and other stakeholders. The Schedule Performance Index (SPI) and Cost Performance Index are key project management metrics because they enable project management professionals (PMP) to evaluate the efficiency of the project management process and performance.

CPI- Cost Performance Index Definition
Cost Performance Index Definition

Due to the high costs associated with departures from the baseline, project managers often focus on these factors while managing projects. Therefore, it’s critical to have a firm grasp of these ideas. Schedule and cost-efficiency are the two most important project management criteria. 

According to PMI methodology, a project’s “control cost” phase, which improves cost-efficiency, includes the cost performance index, a component of Earned Value (EV) variance analysis tools. The cost performance index is used to calculate expenses and earned benefits for a single project cycle or across numerous project cycles.

It calculates how much one makes for every dollar spent on the project, demonstrating how closely the project adheres to the budget. A cost-performance analysis also helps the project management expert assess if their project management performance is up to par.

Cost Performance Index Formula

One of the most important components of project management is project scheduling, which includes the preparatory stage when the cost performance index is calculated.

CPI Formula
CPI Formula

CPI formula – the earned value is divided by the actual cost to get the cost performance index, which may be computed as follows:

Where:

  • CPI: Cost Performance Index
  • EV: Earned Value 
  • AC: Actual Cost 

How to Calculate Cost Performance Index

The project manager can calculate Cost Performance Index by dividing the Earned Value (EV) by the Actual Cost (AC). The actual earned value and real cost must be calculated on a task-by-task basis and added together to determine the cost performance index for the whole project. The project managers may use this as a benchmark to measure costs by referring to it as the cost baseline.

Calculate the Completion Percentage of each task

Each task would of being defined and estimated in the work breakdown structure. Each task should be reviewed to determine the percentage complete and aggregated to determine the amount of work still to do and completed.

Calculate the Earned Value (EV)

Earned Value refers to the completed work. It is often referred to as the Budgeted Cost of Work Performed (BCWP). It is calculated using the project’s budget.

EV = Actual percentage of completion * Budget at completion (BAC)

Calculate the Actual Cost (AC)

The amount spent on the work is the actual cost. Other names for it are Actual Cost of Work Performed (ACWP). It must contain the labor, materials, facility, and other cost item values required to do the work. For instance, if labor costs $2,300 and lumber costs $700, then AC is equal to $3,000 ($700 + $2,300).

Calculate the Cost Performance Index (CPI)

Cost-performance-index-formula

CPI formula – the earned value is divided by the actual cost to get the cost performance index, which may be computed as follows:

Read CPI to Track Budget

CPI<1 means that the work is above budget, CPI=1 means the project is progressing exactly as planned and on budget, and CPI > 1 means the project is under budget. CPI = 0 means that the project execution has not yet begun. According to the CPI = 0.5 figure, the project has already spent twice as much as it ought to. When the CPI equals 1, the project is on schedule. If the CPI is equal to 2.0, the project has so far spent just 50% of what it ought to have.

Tools:

  • Earned Value (EV) from Project Schedule
  • Actual Cost (CV) from Project Budget

According to the calculation’s interpretation, If the CPI is more than one, it indicates that the project’s cost-effectiveness characteristics are favorable. It is also important to check whether all tasks are completed and per the required quality standards.

If the CPI number is less than one indicates that the cost efficiency criteria for the project are judged unfavorable, and some of the tasks are pending, which causes the increase in cost.

Sometimes CPI falls outside the operating range. Scope creep is the primary cause of CPI going over the operational range. Unapproved modifications to a project’s scope are called “scope creep.” The project manager should develop a framework to gauge the project’s magnitude while keeping the ultimate result in mind. To keep the project’s CPI within the operational range, the project team should correct any scope inconsistencies.

The most important resource for the project is its crew. However, determining a project’s profitability is difficult if the employees’ working hours are not carefully supervised. The staff’s working hours must be tracked after the project’s cost performance index exceeds the allowable range. It is simple to monitor the staff’s working hours with the correct monitoring software.

Using software solutions is another approach to getting projects back on track while staying within operational parameters. Software solutions provide great insights into project management and accounting. These software programs identify when a project is going over budget and provide the project managers with tactical corrections to pull the CPI back within tolerable limits.

Cost Performance Index vs Schedule Performance Index

Cost Performance Index vs Schedule Performance Index
CPI Vs SPI

Calculate Cost Performance Index Examples

Examples of how to calculate the Cost Performance Index using the cost performance index formula are shown in the following scenarios:

CPI Example 1

You and Company B are working on a project that has a 12-month completion deadline. The corporation has set aside $110,000 for this initiative. You look more closely and discover that just 45% of the work has been finished after six months, and 70,000 USD has been spent.

Determine if you are under or over budget for this project by finding the Cost Performance Index.

Actual Cost (AC) = 70,000USD

Planned Value (PV) = 50% of 110,000 USD = 55,000 USD

Earned Value (EV) = 45% of 110,000 USD = 49,500 USD

Cost Performance Index (CPI) = EV / AC = 49,500 / 70,000

Cost Performance Index (CPI) = 0.70

Hence, the Cost Performance Index for this project is 0.70

Since the Cost Performance Index (CPI) is below 1, you get 0.70 USD for every USD spent. It indicates that your spending is excessive. A number less than 1 indicates that the project’s cost-efficiency criteria are thought to be less attractive.

CPI Example 2

Cost performance index

CPI Example 3

A corporation has been given Project RED, with a 10-month completion deadline and a $160,000 budget. This project has consumed 90,000 USD over five months. Upon closer inspection, it seems that 70% of the project’s work has been finished.

Determine the project’s Cost Performance Index to determine if it is on or over budget.

Actual Cost (AC) = 90,000USD

Planned Value (PV) = 50% of 160,000 USD = 80,000 USD

Earned Value (EV) = 70% of 160,000 USD = 112,000 USD

Cost Performance Index (CPI) = EV / AC = 112,000 / 90,000

Cost Performance Index (CPI) = 1.24

Hence, the Cost Performance Index for this project is 1.24.

Accordingly, the organization in charge of project RED makes 1.24 USD for every USD invested. The fact that the Cost Performance Index is greater than one shows that the project’s budget has been met. A result that is higher than 1 indicates that the project’s cost-efficiency characteristics are judged favorable.

CPI FAQs

What is Cost Performance Index in PMP?

The Cost Performance Index is a ratio of earned value to actual cost that serves as a measure of the cost-effectiveness of allocated resources.

What does a CPI of 0.5 means?

A CPI of 0.5 means that the project has already spent twice as much amount as it should have.

What does a CPI value greater than 1.0 indicate?

If the ratio is greater than 1, it means the project is succeeding in comparison to the budget.

What if SPI is less than 1?

If the SPI is 1, then the project is proceeding precisely according to plan. If the SPI is less than 1, it indicates that the project is behind schedule.

How do you interpret CPI and SPI?

The project is over budget if the CPI is less than 1. The project is behind schedule if SPI is less than 1. The project is under budget if the CPI is larger than 1. The Project is ahead of schedule if SPI is greater than 1.

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