We’ll continue our discussion of Earned Value Reporting by looking at Cost Performance Index in this article. The Cost Performance Index refers to how the project is performing based on the actual spending of the project budget.
Much of the following information came from Newell and Grashina’s book entitled “The Project Management Question and Answer Book.”
What is the cost performance index?
The cost performance index or CPI is a measure of how well the project is doing in terms of spending the project budget. It is a comparison of the actual expenditures to the work that was accomplished. The index is a value that allows projects of different sizes to be compared.
The cost performance index is like the cost variance discussed previously with one important difference. When we calculated the cost variance, the result was a figure in dollars. If the dollars were a negative number, the variance was considered bad, and if the dollars were positive, the variance was considered good. The problem with this method is that it is difficult to compare projects of different sizes to one another. It would be better to have a measure that gave the health of the project regardless of its size. For this purpose we will use indexes.
Instead of subtracting the actual cost of work performed from the budgeted cost of work performed as we did when we calculated the cost variance, we will divide the same two numbers.
CPI = BCWP / ACWP
CPI = EC / AC
We can see that if the project is following its plan, the amount of work accomplished and the amount of money spent to accomplish it are the same, and the resulting value will be one. So, an index of one means that the project is following its project plan.
If the actual cost is greater than what is being accomplished, the denominator in the fraction will be larger than the numerator, and the resulting value will be less than one. This is generally considered to be a bad condition. If the actual cost is less than what is being accomplished, the resulting number will be greater than one and this is considered to be good. Of course any deviation from the project plan is bad even if the deviation is considered favorable. We should investigate to determine why this condition exists.
Example:
Two projects have their cost performance index calculated. Both projects are 10 percent over budget at the time of the calculation. Project One has a budget of $1,000,000, and Project Two has a budget of $10,000. These budget figures are the amounts that should have been spent as of today’s date. We will assume that the project is on schedule at this point in time. What is the cost performance index for each?
Project One is over budget by 10 percent of its budget or $100,000.
Project Two is also over budget by 10 percent of its budget or $1,000.
CPI = BCWP / ACWP
The BCWP is $1,000,000 for Project One.
The ACWP is $1,100,000 for Project One ($1,000,000 + $100,000).
The BCWP is $10,000 for Project Two.
The ACWP is $11,000 for Project Two ($10,000 + $1,000).
CV = BCWP – ACWP
The cost variance for Project One is $1,000,000 ? $1,100,000 or ? $100,000. The cost variance for Project Two is $10,000 ? $11,000 or $1,000 The CPI for Project One is $1,000,000 / $1,100,000 or 0.909. The CPI for Project Two is $10,000 / $11,000 or 0.909.
Notice that the size of the project does not make any difference in the calculation of the index. Projects that are each behind 10 percent have the same value for their cost performance index. This makes assessing the health or sickness of projects of different sizes much easier.