Factors That Can Impact Your
Cost Performance Index
July 05, 2021
Factors That Can Impact Your Cost Performance Index
There are plenty of performance metrics by which to evaluate the progress and success of construction projects. Cost performance index (CPI) is one such metric. It’s a popular one used by contractors and project managers to monitor how well their projects are adhering to established budgets.
Like any other metric, its value changes in response to external and internal factors that affect the project. But simply monitoring the CPI value isn’t enough. It’s what you do with that ongoing performance metric that makes the difference.
External factors affecting CPI
There are always going to be circumstances beyond the immediate project that are generally outside of your control. The longer it takes to build your project, the more opportunity there is for your project to be susceptible to any of these. It’s part of working in the construction industry. While you may be at the mercy of these factors, one thing you can control is how you plan to account for and work around them. And that can help you manage your costs and keep your cost performance index within operating range.
- Rise (and fall) of material and equipment pricing as well as labor costs — Fluctuations can be due to the time of year or increased demand for materials causing reduced supply. All these resource costs have mostly been on an upswing year over year, so you could figure in the annual averages over the length of your project into your estimate.
- The environment — From extreme heat and cold to high winds and flood-inducing storms, the environment can deliver conditions that threaten the physical safety of site crews; damage structures or the site itself; stall equipment; affect the quality of materials or impede timely delivery of supplies. The unplanned outlay for repairs, rework, site clean-up, and equipment replacement can put quite a ding in the budget. Even if you work in areas vulnerable to these weather events and have grown to anticipate their occurrence, there’s no way to predict how long or severe they’ll be. However, having risk contingency plans in place to reduce the length of inevitable delays and protect physical structures and equipment can help alleviate some of the financial impact.
- Supply issues, from shortages to supply chain delays — You can anticipate rush fees for procuring materials from another vendor, or premium pricing for materials with limited availability. Pre-order at the beginning of the project when your need isn’t imminent and there’s room to negotiate, or consider pre-fabricated materials. Both give you more control over your resource costs.
- Economic conditions — Inflation, sudden or trending market volatility, or a global pandemic, for example, can all directly impact your project’s budget. The unpredictability of the duration of these larger forces, especially as we saw with the pandemic, can have a cascading effect on other project expenses. These may be among the most challenging to plan around.
Internal factors affecting CPI
Within your purview, however, there are influences within your company or project over which you do have some level of control.
- Overlooked risk contingencies during estimating — When there aren’t backup plans for working around or through the external factors, the risk to your project budget goes up even more. Those plans are ideally developed during the estimating phase as outside risks are identified, not as they’re occurring when time is short, tensions are high, and resources are limited. They can lessen the likelihood, or at least the severity, of cost overruns that show up in your cost performance index value.
- Scope creep — It’s not unusual for new features to be added as a project unfolds. It’s when they’re unaccounted for in the estimate that leads to cost overruns. An effective way to rein in this practice is to assess the impact of requested changes on the original budget and allow the change if it doesn’t dramatically increase costs.
- Labor productivity — One reason for a decrease in productivity levels, and therefore skewed CPI, could be a result of inaccurate staffing. When doing the initial estimate, look to past projects to more accurately forecast labor needs. Did overtime result from a task being understaffed? Or did the opposite happen, where there were too many underutilized craftspeople? Another reason for reduced productivity numbers: insufficient tracking of labor costs. In this case, adopting construction timesheet software can help better track labor rates, job costing and workloads.
- Your current CPI calculation method — If the method you’re using tends to be unreliable or inaccurate, it might be due to calculating CPI manually using spreadsheets, and/or inadvertently using outdated or incorrect data. Software with performance reporting capabilities represents a step up from this, doing all the CPI math for you and giving you more cost certainty.
While some of these factors directly affect the estimate rather than the cost performance index itself, it’s the estimate that provides the source values for calculating that CPI that helps you monitor the ongoing financial efficiency of your project once it’s begun.
Track your CPI regularly
Treat your CPI metric as a warning system that something is amiss, so you have the time and opportunity to address it. But don’t wait for your CPI to wave a red flag to give it the attention it needs. Even when your cost performance index is relatively stable (within the CPI operating range determined at the outset of your project), it’s a good idea to continue tracking it often. Why? Because keeping an eye out for swings within that range enables you to recognize emerging conditions that could lead to possible cost overruns.
You may gain some insights into the value of ongoing tracking by reviewing past projects and asking some honest questions.
- What factors did occur that threatened or actually affected your project budget?
- What was the impact on the project budget?
- Were you monitoring your CPI regularly?
- Were there any overlooked signs that, in hindsight, indicated something might happen?
- How did you remedy any trends that you did notice that did/could impact your CPI?
- Did you have contingency plans already in place? If so, how well did they work?
- Did you calculate CPI using construction software that identifies cost trends?
Construction software can help you answer some of these questions about your cost performance index. A solution that gives you more control over your project performance, like InEight Report, is effective in helping you analyze your key metrics through real-time reporting that spots issues so you can address them immediately. Request a demo to see how Report can help you more closely and accurately track all your project performance.