Cost Performance Index (CPI) is an important figure to calculate and understand if your organization is using earned value management methods.
But what exactly is it? This is your complete guide to CPI in project management, and we’ll start with making sure we’re clear on what the term means.
Here’s a definition of CPI:
CPI measures how much work has been completed on a project for the money spent.
It’s a way of tracking the efficiency and effectiveness of project performance by comparing the planned budget to the actual budget, taking into account what work has been delivered for that investment.
What’s the purpose of CPI?
Cost Performance Index is a useful way of combining progress with budget to give a straightforward numerical assessment of project performance. The end result of the calculation is a single number, and it’s easy to interpret too (more on that later). That makes CPI a helpful way to communicate status and to take the emotion and subjectivity out of conversations about progress.
The calculation helps you assess whether the project is on track or not, and if not, by how much. The variance is useful information to help you get the project back on track. It acts as an early warning signal for potentially larger problems, so you can act quickly to take corrective steps to adjust the project’s performance.
What do you need to calculate CPI?
To calculate CPI you need:
- The baselined project scope: use this to work out the activity that has been completed
- The baselined project budget: use this to work out the planned cost for the activity that has been completed
- The actual budget: use this to work out the actual cost of the activity that has been completed
Those measures give you the information you need to complete the calculation.
If your project doesn’t have data at that level of detail, start by improving the way you record and measure what the project is delivering. Documenting deliverables by work package, for example, and attaching a cost to a work package, is a step in the right direction.
How is CPI calculated?
CPI is presented as a ratio. It’s calculated by taking the budgeted cost of work completed (also known as the earned value or EV) and dividing it by the actual cost of work performed.
The CPI formula is:
CPI = EV / AC
That gives you a number, which in turn tells you how the project is performing financially. The number you get is only as accurate as the data you used for the calculation. If your project team aren’t accurately reporting progress in time for your analysis, for example, your CPI numbers will be out of date before you’ve even calculated them.
Assuming you’ve got good data and have completed the calculation, let’s look next at how to interpret the result.
What is a good cost performance index?
A CPI of 1 means that your budgeted cost of work completed is the same as the actual cost of work performed: in other words, your project is exactly on budget. That’s good news.
If your CPI is greater than one, your project is under budget. You’ve managed to do more work than you planned to do for the same money. This is also good news.
However, a CPI of less than one is where you need to dig into the project performance in more detail. That tells you that the project is over budget: you’ve spent more than you anticipated to get to the current point.
That might not be terrible news depending on the cause. Perhaps you introduced more scope items and haven’t yet updated your cost baseline, for example.
Whatever the CPI number for your project, there will be a reason for it. Numbers are helpful as they give you a starting point for understanding progress, but the narrative – the story – of the project will help flesh out that understanding and allow you to make better management decisions about your next steps.
How does CPI relate to SPI?
Schedule Performance Index (SPI) is another way of measuring the efficiency of a project. Cost performance only tells one part of the story: it gives you information about how well the project is controlling costs, but it doesn’t give you information about how well the project team is delivering on time. That’s what SPI does.
Together, SPI and CPI numbers give you a rounded view of project performance and plenty of information from which to review variances and make smart decisions about how to lead the project successfully to completion.
Earned value analysis as a whole provides a detailed way of looking at your project’s performance. It helps you identify trends and track progress over time in a measurable way. CPI is one part of the whole approach to earned value management, and now you know more about it, you can consider making the move to implementing earned value on your projects.