Cost Performance Index Formula: Here's the right CPI formula
What is the cost performance index formula used for?
Cost performance index (CPI) is one of the most important earned value management metrics, being a crucial input to many earned value calculations and integral to one of the two core earned value pillars: cost.
Project success is defined massively by cost, because every one participating in a project is working towards a specific budget and conducting the project to meet this budget or make margin (money) from the project. Increasing costs and the same revenues or cash inflows - which is often the case for project-based companies - means less profit.
On large scale projects, this budget or margin often dictates whether a company wins more mega projects and has a sound reputation amongst potential clients and other key parties. On small scale projects, cost overruns can result in insolvency very quickly.
The cost performance index or 'CPI' is a relied upon project management tool for measuring the financial efficiency of a project to date - so that project managers and companies can see how they are performing and make more informed decisions about how to improve.
The backbone of cost performance index is the cost performance index formula. We work out our cost performance index by using the simple formula, which in a few digits tell us whether we are underperforming, on track or performing really well form a financial efficiency perspective.
Let's take a deeper look at the cost performance index formula, and a real project management example of its application.
The cost performance index formula
The cost performance index formula is a simple one, and anyone who is familiar with earned value management calculations will be right at home using the CPI formula.
To get our cost performance index, we just need to have our earned value and our actual costs - which can be easier said than done when these metrics aren't monitored and available in real-time.
Our actual costs number is simply the costs incurred on the project so far, or up to the time when we are looking to calculate our CPI.
To arrive at our earned value, we just need to multiple our % of work completed by our budget at completion.
For a project 50% completed, with a total project budget of $1,000,000, the earned value would simply be $500,000.
Let's take a look at a proper example of using the cost performance index formula below.
Using the CPI formula for project management
Many project-based companies use the CPI formula during the course of their projects, and some of the most heavily project-based companies out there are construction companies.
Let's imagine that a construction project involves building 4 apartments. The expected budget at completion or expected total costs in finishing these 4 apartments is $4,000,000. It's expected that the project will run for a total of 2 years.
At the 6 month mark, the company director goes to the project manager and asks him how actual costs are tracking compared to planned costs - and what this means for the rest of the project and their profits. At the 6 month mark, the company has spent $1,100,000 and completed 1 apartment - or 25% of the project.
So the project manager pulls her cost performance index formula and earned value hat out and gets to work.
Firstly, she validates that the actual costs incurred so far does turn out to be the proposed $1,100,000.
Secondly, she's going to calculate the projects earned value at the 6 month mark:
Now that we have our actual costs and earned value, we can calculate our cost performance index using the CPI formula:
What does the result of our cost performance index formula mean?
If our CPI ratio of less than 1 (one) is not great, because it means we are behind on the budget. In the case of this project, we are on schedule, having completed 25% of the project at the 6 month mark - but we have spent more than planned to get here.
If the result of our cost performance index formula above was greater than 1, say 1.1, then we are ahead of budget. This is what we want to see. And if our ration is exactly 1, then we are on budget.
This number alone is useful, because it shows us how efficiently we have spent money to date, to get to this stage of the project, but we can also use it to forecast a new estimate at completion - which may replace our initial budget forecast if we don't foresee being able to get back under or on budget.
We can also pull in our TCPI formula (to complete performance index) to understand the new cost performance index which will enable us to get the project back on track.
Here's more information about how to use the estimate at completion formula.
Other smart ways to improve project cost tracking
Being disciplined with our key macro level stats and metrics is crucial to good project management and ultimately delivering on time and on budget - but it's crucial that project managers and companies understand and control the levers impacting efficiency on the ground or in the field too.
One of the easiest ways in which project managers can simultaneously improve worker efficiency and the quality and speed of their own project tracking activities is to digitise how work is being documented and how information is being moved.
In many industries, workers in the field are still entering critical project data manually, reconciling that data into personal spreadsheets, and then emailing it to project managers.
This takes time away from doing engineering or productive work in industries like construction - and also increases the chance that there are errors and delays in the final information being used in the cost performance index formula and other calculations.
Digitising these workflows today is really easy and there are plenty of free to try softwares. Trading in paper, PDFs and spreadsheets for smart automated apps and systems is a no brainer for project managers looking to improve their cost performance index - as well as for workers who are sick of doing time-consuming admin.
People in 100+ countries use this software to better track project financials and other processes more effectively.