Cost Performance Index (CPI):
What It is and Why It Matters
May 21, 2021
Do you know what your cost performance index (CPI) is telling you about your project’s financial efficiency? This metric is more than just a measure of the budgeted value of completed work compared to actual costs. It’s what project managers and contractors rely on to not only inform decisions about how to improve project performance, but to spot potential or real risks that could lead to budget overruns.
Arriving at this pivotal number is fairly straightforward. Cost performance index is determined using a simple equation: CPI = EV/AC, where EV is the earned value and AC is the actual cost (aka, burned costs). The EV and AC figures are broken down as follows:
- Earned value answers the question “How much work was done?” either so far or by the end of the project. Its formula is EV = % actually complete X BAC (the project’s total Budget at Completion determined during the estimation stage)
- Actual cost tells you “How much did the work cost in a given period?” There’s no equation outside of adding up the spend. So, AC = Actual dollars spent. For your CPI to be most effective in helping you gauge your project’s financial health, accurate numbers — all the relevant ones — must be included in the actual costs. Guesstimates will be of no use here and will skew your metrics.
A resulting CPI value from the equation that is greater than 1 is below budget, less than 1 is over budget, and “1” is on budget.
One thing you’ll notice as you monitor the cost performance index is that it will ebb and flow like a wave throughout the project life cycle. This is normal. What are those fluctuations telling you about your project? just like any other efficiency metric, CPI responds to outside factors and forces. It could be things like weather that delays construction progress or influences supply chain delivery of materials; project scope changes; and fluctuations in direct costs of materials, labor or equipment. These natural ups and downs are the CPI’s operating range.
Sometimes it may go outside that range. But how much is too much, and when should you worry? For example, you could have a CPI of .85 and wonder if it’s acceptable or cause for concern; likewise, if a value of 1.2 is reassuring or an anomaly. The acceptable operating range is something that will be unique to each project. Why? Consider the range and degree of factors that could affect it. An indoor project might have a narrower operating range because weather and other environmental factors are far less likely to impact progress. But a massive build taking months or years to construct will be susceptible not only to the forces of Mother Nature but to other potential forces that can occur in such an extended time, like economic downturns, labor disputes and materials shortages. Those who have roles in managing the project can arrive at an acceptable range given the likely factors that could impact project costs.
While lower cost performance index values will understandably require some extra attention, higher values, believe it or not, must be examined, too. Why look into something that’s seemingly so good? Because you could be missing a particular scope of work that has to be done later — causing that once enviably high CPI to later dip dramatically due to higher labor and material costs. And, interestingly, a prolonged high CPI could raise suspicions that costs were miscalculated or missed altogether (indicating lack of attention to detail), tasks were overlooked and not completed (interpreted as lack of thoroughness and reflected in an artificially low spend), or original budgeted costs were intentionally overstated (suggesting lack of integrity). Even if none of these were actually true, its mere appearance may not bode well for future bids.
Interestingly, these variations can be of benefit to the project. How? Because they serve as a warning system that something is amiss. By noticing these swings early on, it gives you the opportunity to address it sooner. And that cost performance index will get back to its more stable operating range. So those prolonged or extreme values may only be a bad thing if there’s no analysis as to why they’re occurring and therefore no attempt to course correct.
Keeping track of the factors influencing unexpected CPI swings in either direction can serve as valuable post-mortem learnings that can be applied to future projects. You’ll be more likely to anticipate what factors can influence the financial health of your project and account for them accordingly, whether they’re mistakes to learn from or unforeseen situations to better plan for. This subjective assessment after the fact adds valuable context to your project performance as reflected in your CPI and similar metrics.
Of course, your cost performance index shines the light on only one part of your project’s story. Used in tandem with metrics like schedule performance index (SPI), cost variance, schedule variance, critical path method, and more, they can give you a more complete picture of your project’s health. InEight Report can help make sense of all these metrics for you. This software solution lets you create automated reports reflecting real-time data so you can better identify and address critical issues through all phases of your build, saving you valuable time and money. Request an InEight Demo today.