Cost Performance Index (CPI)

Cost Performance Index (CPI): A Comprehensive Guide

What is Cost Performance Index (CPI)?

Cost Performance Index (CPI) is a critical metric in Earned Value Management (EVM) that measures the cost efficiency of a project. It's calculated by dividing the Earned Value (EV) by the Actual Cost (AC):

CPI = EV / AC

When CPI = 1, the project is exactly on budget
When CPI > 1, the project is under budget (favorable)
When CPI < 1, the project is over budget (unfavorable)

Why is CPI Important?

CPI provides project managers with essential insights into project cost performance:

- It quantifies cost efficiency in a single, easy-to-understand value
- It serves as an early warning system for budget issues
- It enables forecasting of final project costs
- It facilitates data-driven decisions about corrective actions
- It provides stakeholders with objective progress information

How CPI Works in Practice

Let's consider an example:

A software development project has a budget of $100,000 and should be 40% complete. However, the team has only completed 30% of the work while spending $50,000.

EV = $100,000 × 30% = $30,000 (value of work completed)
AC = $50,000 (actual money spent)
CPI = $30,000 / $50,000 = 0.6

With a CPI of 0.6, for every dollar spent, the project is only getting $0.60 of value. This indicates serious cost overruns that require management attention.

Interpreting CPI Values

- CPI = 0.8: The project is achieving 80% cost efficiency, spending $1.25 for every $1.00 of earned value
- CPI = 1.0: Perfect cost efficiency, spending exactly as planned
- CPI = 1.2: The project is 20% more cost-efficient than planned, getting $1.20 of value for every $1.00 spent

Using CPI for Forecasting

CPI helps forecast the final project cost through the Estimate at Completion (EAC) formula:

EAC = BAC / CPI

Where BAC is the Budget at Completion (original budget).

For our example with BAC = $100,000 and CPI = 0.6:
EAC = $100,000 / 0.6 = $166,667

This suggests that if current cost performance continues, the project will cost approximately $166,667 instead of the planned $100,000.

Exam Tips: Answering Questions on Cost Performance Index (CPI)

Calculation Questions:

1. Memorize the formula: CPI = EV / AC
2. Remember what each variable represents:
- EV = Earned Value (budgeted cost of work performed)
- AC = Actual Cost (actual cost of work performed)
3. Practice calculating CPI with different values to build confidence

Interpretation Questions:

1. CPI > 1 = Good (under budget)
2. CPI < 1 = Bad (over budget)
3. The further CPI is from 1, the more significant the variance

Application Questions:

1. Connect CPI to management actions:
- Low CPI might suggest reviewing resource allocation, refining estimates, or implementing cost-cutting measures
- High CPI could indicate overestimation or scope reduction
2. Understand how CPI relates to other EVM metrics like SPI (Schedule Performance Index)
3. Know how to use CPI in forecasting formulas, especially EAC = BAC / CPI

Common Exam Traps:

1. Confusing CPI with SPI or other performance indices
2. Misinterpreting what good/bad CPI values mean
3. Forgetting that EV and AC must use the same time period
4. Using incorrect formulas for forecasting

Quick Tips for Exam Success:

1. First identify what values are given (EV, AC, PV, BAC, etc.)
2. Draw a clear formula and substitute values carefully
3. Show your calculations step by step if required
4. Always interpret what the CPI result means for the project
5. Consider what actions a project manager should take based on the CPI value