The Cost Performance Index, or CPI, provides insight into the accuracy of the predicted project cost and is a measure of cost efficiency. In basic terms, the CPI shows how well the project is sticking to the planned budget. It’s one of many key metrics used in Project Management.
The CPI formula is defined in A Guide to the Project Management Body of Knowledge (PMBOK® Guide) as follows:
“The Cost Performance Index (CPI) is a measure of the cost efficiency of budgeted resources, expressed as a ratio of earned value to actual cost.”
The calculation displays how closely the project cost is progressing compared to the initially estimated budget.
The CPI formula is calculated with the Earned Value (EV) and Actual Cost (AC) and is simply the ratio of Earned Value to Actual Cost.
Earned Value = the percentage of work completed to date, multiplied by the entire project budget.
Actual Cost = the amount spent to date on the project.
Using the formula CPI = EV / AV, you quickly get a result that is one of the following:
- Equal to 1: the project is on budget.
- Less than 1: the project is over budget.
- Greater than 1: the project is under budget.
Here’s a simple example:
Let’s suppose your scheduled project budget is $200,000 for the two-month project.
Scenario 1: After one month, 40% of the planned work is completed, and $100,000 has been spent.
CPI = EV / AV = $80,000 / $100,000 = 0.8. The project is over budget.
Scenario 2: After one month, 50% of the planned work is completed, and $100,000 has been spent.
CPI = EV / AV = $100,000 / $100,000 = 1.0. The project is on budget.
Scenario 3: After one month, 60% of the planned work is completed, and $100,000 has been spent.
CPI = EV / AV = $120,000 / $100,000 = 1.2. The project is under budget.
The CPI gives us insight into assessing the accuracy of the planned budget as the project progresses. In addition, it can be beneficial for highlighting issues before they get worse.
However, it doesn’t necessarily indicate the root cause for the budget variance and often doesn’t offer any clues as to the needed or possible mitigation.
Depending on what the CPI shows, we may want or need to:
- Rethink how the budget baseline was created.
- Make mid-project corrections and revise the budget.
- Revise our budgetestimation techniques going forward.
- Consider changing requirements, redistributing workloads or costs, or making other adjustments that would allow us to reach the initially targeted budget.
The CPI is most effective when calculated at regular intervals throughout the project. Since going over budget can often be a significant cause of project failure, tracking the CPI is a simple and proactive way to stay informed and aware of needed attention.
The frequency of calculating the CPI is also a function of the total budget and the type of project. The most crucial aspect is calculating it regularly and then taking action when the numbers are not indicative of successful on-budget completion.
As with any measurement methodology, results need to be carefully evaluated in context.
CPI can’t distinguish whether completed expenses to date accurately reflect what is yet left to spend; it only looks at the amount spent to date. Therefore, it would be possible to have a good CPI when looming high expenses have not been paid, even though other smaller expenses were paid earlier in the project.
CPI calculations are only as good as the data collected throughout the process. The CPI calculation won’t be helpful when you haven’t correctly identified all costs or have been sloppy in tracking data.
CPI doesn’t work as a metric in isolation. CPI values must be considered part of a larger package to give a more complete and accurate story. Another factor to be considered would be Schedule Performance Index (SPI).
At Thurman Co., we embrace the PMI certification principles and core metrics such as CPI as part of the foundational framework driving how we operate and interact with clients, suppliers, and partners.
We help businesses manage projects to significantly impact their success and growth. When you’re ready to put your project in the hands of a trusted professional organization, contact us to learn more about working together.