What is Cost Performance Index? - Definition & Formula

Instructor: Saranya Ramachandran

Saranya has a Bachelors in Science focused on Electronics and Telecommunication and a Masters in Business Administration. She has 8 years of Project Management Experience and is PMP Certified.

This lesson explains the concept of cost performance index which is commonly referred as CPI. CPI can help a project manager assess if the project is on budget and gives a sense of how efficiently costs are allocated.

Introduction

A budget is allocated to a project before it begins. The budget is the sum of all the costs likely to be incurred during the life of the project. The project manager's goal is to stay within the budget and make sure the project is successful. There are several indicators of the efficiency of the project. These indicators also point out if the project is progressing according to plan or if any corrective actions are needed. Cost performance index is used as a performance indicator.

Definition and Formula of Cost Performance Index

Cost performance index (CPI) is calculated using the following formula:

CPI = (earned value) / (actual cost)

Earned value is abbreviated as EV and actual cost as AC.

Earned value denotes how much money should be spent at a particular point in the project whereas Actual Cost indicates the actual expenditure on the project at that point. Consider a project budget of $100,000. The project allocates the budget as follows:

  • Design - $25,000
  • Build - $50,000
  • Close out - $25,000

At the end of the design phase the project is estimated to be 25% complete. This actual cost of the project at 25% completion is $30,000. This is calculated by adding all the expenses incurred on the project up until this point. The earned value is $25,000 and is essentially the budgeted value at 25% completion. Note that the earned value can be calculated before the project initiation at various stages.

In the example above, if the project is 80% complete at the end of the build state, the earned value of the project (at 80%) is $75,000 ($50,000 + $25,000). Let's apply this to our cost performance index formula:

CPI = (25,000) / (30,000)
CPI = 0.833

The cost performance index is less than one which indicates that the project is over budget at this stage. Generally, while calculating the cost performance index, if the value is exactly one the project is on budget and if the value is greater than one the project is under budget.

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