Written by Marijn Overvest | Reviewed by Sjoerd Goedhart
Fact Checked by Ruud Emonds | Our editorial policy
Cost Performance Index (CPI) — Explanation and Example
What is a cost performance index?
- CPI is a crucial project management metric that gauges financial efficiency by comparing earned value to actual cost.
- Natural variations in CPI, influenced by factors like human performance, create an acceptable operating range.
- In procurement, CPI assesses cost efficiency. A CPI above 1 is positive and below 1 signals cost overruns, aiding issue identification and improvement.
What isCost Performance Index?
The cost performance index (CPI) is a metric used to indicate how a project is doing concerning financial performance and efficiency throughout its lifetime.
It is a ratio of the actual cost of work performed to the planned cost of work scheduled, expressed as a percentage.
Additionally, it is a tool used to determine a project’s cost-effectiveness, which can be presented as a method, tool, or chart.
From a mathematical perspective, the CPI shows the amount of completed work per unit of cost spent. It is most usually found in the Earned Value Management System (EVMS), which provides information to project managers about a project’s current status regarding the schedule.
The CPI can also indicate whether a specific task is exceeding the budget or not, providing a snapshot of its cost efficiency. As the CPI constantly fluctuates as more work is done, projects may be unstable between going over and under budget.
Why DoesCost Performance Index Fluctuate?
When you are examining cost performance over a long period of time, it is typical to observe natural fluctuations caused by various factors that affect a project’s cost performance, such as people, equipment, and weather.
These factors change over time and can result in peaks and troughs in cost performance. For instance, an employee may not perform at 100% efficiency throughout the day.
They may experience periods of high energy that allow them to accomplish more than anticipated, which balances out during times of fatigue that result in lower performance.
These fluctuations are normal and create a sequence of peaks and troughs referred to as the operating range.
CPI: Its Role in Procurement
Project management within procurement recognizes that effective project control procedures, such as estimating and managing a project’s budget, are crucial to ensuring its success.
In the context of project procurement, the Cost Performance Index (CPI) can be used to assess the efficiency and effectiveness of procurement processes and activities. It helps evaluate the project’s ability to control costs related to procurement.
The CPI in procurement is calculated by comparing the value of work performed (earned value) related to procurement activities to the actual cost incurred for those activities. It provides insights into the cost performance specifically within the procurement aspect of the project.
A CPI greater than 1 indicates that the project’s procurement activities are performing better than expected in terms of cost efficiency. On the other hand, a CPI of less than 1 suggests that the project’s procurement activities are experiencing cost overruns or inefficiencies.
By monitoring the CPI in procurement, project managers and procurement professionals can identify potential cost issues, assess the effectiveness of procurement strategies, and make informed decisions to improve the overall cost performance of procurement activities within the project.
Cost Index Performance Operating Range
The CPI operating range is figured out by unpredictable factors that affect a project. Ideally, the range should be consistent and should not fluctuate too much.
For example, a project conducted in a controlled setting, such as an office, would probably have a narrower operating range than one carried out offshore. The Schedule Performance Index (SPI) works in a similar manner.
Since projects involve teams, stakeholders, and clients who want to be kept informed, project management teams and stakeholders should agree on these ranges before commencing work.
These ranges are established based on previous project performance, expert input, and industry standards.
Once the operating range is agreed upon, the project manager’s job is to work towards achieving a CPI of 1.00.
This involves making minor adjustments to reduce downtime or repetitive tasks to achieve a cost-effective CPI and a narrower operating range.
How to Calculate Performance Index?
To calculate the Cost Performance Index (CPI), the Earned Value (EV) is divided by the Actual Cost (AC). Therefore, the CPI is determined by assessing the ratio of Earned Value to Actual Cost.
CPI = EV/AC
Where:
- Earned Value (EV) is the value of the work completed to date, as per the project schedule
- Actual Cost (AC) is the total amount spent to date on the work completed
The result of this calculation will give you a ratio that indicates the efficiency of the project’s cost performance.
If the CPI is greater than 1, it means the project is under budget, while a value less than 1 indicates that the project is over budget. For example, if the CPI is 0.9, it means that the project has spent $0.90 for every $1 of work that was scheduled to be completed.
Conclusion
In conclusion, the Cost Performance Index (CPI) is a crucial metric in project management, representing the efficiency of a project’s cost performance. It assesses the ratio of earned value to actual cost, indicating whether a project is on budget or facing overruns. The CPI fluctuates naturally due to factors like human performance, equipment, and external conditions. In procurement, the CPI helps evaluate the efficiency of procurement processes, with a value greater than 1 indicating favorable cost efficiency. The CPI operating range, influenced by project-specific factors, should ideally remain consistent, and calculating the CPI involves dividing earned value by actual cost. Monitoring and adjusting the CPI can enhance overall cost performance.
Frequentlyasked questions
What is the cost performance index?
It is a metric used to indicate how a project is doing concerning financial performance and efficiency throughout its lifetime.
Why is it critical in project management?
It is critical in project management as it allows project management professionals to understand how well a project is performing financially
What does it mean if the CPI is greater than 1?
If the CPI is greater than 1, it means that the project is under budget, and costs are being managed effectively.
About the author
My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.
