How to Calculate Cost Performance Index
Master Cost Performance Index (CPI) to accurately assess project cost efficiency and maintain financial control.
The Cost Performance Index (CPI) is a project management metric for evaluating a project’s financial efficiency. It compares the monetary value of work accomplished against the actual costs incurred. This index helps project managers assess whether a project is progressing under or over its allocated budget in relation to the physical work completed.
Key Components for Calculation
Calculating the Cost Performance Index requires two inputs: Earned Value (EV) and Actual Cost (AC). These components represent distinct financial aspects of a project’s progress.
Earned Value (EV) represents the budgeted cost of the work that has been physically completed at a specific point in time. It is not simply the amount spent, but rather the planned value of the work that has been performed. This value can be determined by taking the Budget at Completion (BAC) for the entire project and multiplying it by the percentage of the project’s work that has been finished. Alternatively, for individual tasks, EV is the planned value assigned to those tasks once they are fully completed.
Actual Cost (AC) is the total amount of money expended for the work performed up to a given reporting date. This figure encompasses all direct and indirect expenses associated with the project’s activities. It includes costs such as labor, materials, equipment, and any other expenditures that have been incurred.
Performing the Calculation
Once the Earned Value (EV) and Actual Cost (AC) have been determined, calculating the Cost Performance Index is a straightforward process. The formula for CPI directly relates these two financial measures.
The formula used to compute the Cost Performance Index is: CPI = Earned Value (EV) / Actual Cost (AC). This division yields a numerical result that can then be interpreted to understand the project’s cost performance.
For example, if a project has completed work with an Earned Value of $100,000, and the Actual Cost incurred to achieve that work is $80,000, the calculation would be CPI = $100,000 / $80,000. Performing this division results in a CPI of 1.25.
Understanding the Results
Interpreting the calculated Cost Performance Index provides immediate insight into a project’s financial health. The resulting CPI value indicates whether the project is operating within, under, or over its budget relative to the work achieved.
A CPI value greater than 1 signifies that the project is performing more efficiently than planned from a cost perspective. This means the actual cost incurred for the work completed is less than the budgeted cost for that same work. For instance, a CPI of 1.25 indicates that for every dollar spent, $1.25 worth of work was earned.
When the CPI equals 1, it indicates that the project is performing exactly on budget. In this scenario, the actual cost incurred aligns precisely with the budgeted cost for the work performed. This suggests optimal cost efficiency without being either under or over budget.
A CPI value less than 1 signals that the project is over budget and is operating inefficiently. This means the actual cost spent to complete the work is more than what was budgeted for that work. For example, a CPI of 0.80 suggests that for every dollar spent, only $0.80 worth of work was earned.