What Is Cost Performance Index?
Cost performance index (CPI) measures how much budgeted value a project has earned for every dollar it has actually spent. The formula is CPI = EV / AC, where EV is earned value and AC is actual cost. A CPI above 1 means the work done so far cost less than budgeted, below 1 means it cost more, and exactly 1 means spend is tracking budget.
This metric is more than just a measure of the budgeted value of completed work compared to actual costs. CPI is 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.
How Do You Calculate CPI?
Arriving at this pivotal number is fairly straightforward. Cost performance index is determined by using a single 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.
Why Does CPI Fluctuate Through a Project?
One thing you’ll notice as you monitor the cost performance index is that it will ebb and flow like a wave throughout the capital 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. If you can trace a swing back to what moves cost performance index on a live job, you have turned a number you are watching into a decision you can act on.
What Counts as an Acceptable CPI Range?
There is no single acceptable CPI range that applies everywhere — it is set per project, based on how exposed that project is to things that move cost.
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 at 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.
Why a High CPI Deserves as Much Scrutiny as a Low One
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. A prolonged high CPI also invites three readings from anyone looking at your numbers, and none of them are flattering:
- Costs were miscalculated or missed altogether, which reads as inattention to detail.
- Tasks were overlooked and never completed, which reads as a lack of thoroughness and shows up as an artificially low spend.
- Budgeted costs were overstated on purpose, which leads to a question about 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 them 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.
What to Do with CPI After the Project Closes
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.
What to Look for in a System That Reports CPI
Of course, your cost performance index shines 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. Where reporting tends to let teams down isn’t the arithmetic method, it’s what feeds it. Here is what to look for:
- Actual cost calculated from committed cost rather than invoices received, so your CPI isn’t flattered by a slow accounts payable cycle.
- Percent complete measured against quantities actually claimed in the field, rather than estimated by whoever is writing the report.
- CPI and SPI pulled from the same cut of data. If you read them out of two systems on two refresh cycles, you’ll spend the meeting arguing about the numbers instead of acting on them.
- Trend over time rather than a single point value, so you can see your operating range and spot a genuine departure from it.
InEight Report & Explore builds automated reports from your live project data across those measures, so you’re reading cost and schedule performance from one source at one point in time.
