The project cost is high. Everybody knows that. What’s more difficult to determine is whether the is worth the money. The last thing that stakeholders would like is to find that the project’s financial effectiveness isn’t there. That’s where the cost performance index comes in.
We’ll explain how the cost performance index is and how it works below. We’ll also share the formula for calculating the cost performance index in project management. We’ll give an example that will better demonstrate how it functions.
What Is the Cost Performance Index (CPI)?
Cost performance index is a method to assess the performance on the finances of an undertaking. It is also a way to improve the efficiency of your budgeted resources to make them more efficient in terms of cost. The cost performance will show whether the project is keeping within budget.
The project costs may vary. The budget for the project is our best guess of what costs it could cost. However, once approved, it determines your project’s cost. If you exceed the budget, your project may be a failure. So, monitoring the performance of your project’s costs when expenses fluctuate over its lifespan is a crucial aspect of managing a project.
Cost performance index of project management is a part of the overall earned value management strategy. Earned value management employs budget, schedule and scope to assess the project’s performance. It is based on the anticipated and actual value of these measures to anticipate the future and enable project managers to alter their projects to meet the needs.
Cost performance index can help monitor project expenses and improve the chance of them being completed within budget. Project management software is a different instrument for controlling project expenses. Project management software allows you to measure your projected costs with your actual expenses in real-time. Our Gantt chart is robust and allows you to establish an initial baseline once you have set up your projects, costs, and resources. You can now track the cost variation in real-time across our applications. Start using ProjectManager today for no cost.
Also read: 7 Ways to Reduce Software Development Costs
How to Calculate the Cost Performance Index
To determine the cost performance index, it is necessary to understand the earned value and costs in the actual formulas. They are both an integral part of the formula for cost-performance index which we’ll cover in the near future. Let’s first define what earned value and real cost are.
Earned Value (EV)
In project management, earned value is the amount of work being accomplished compared to what is scheduled to be completed at the time of the project. To determine the value earned in any project, simply determine the percentage of work completed and then multiply it by the percentage of the overall project budget (or the amount at the time of completion (BAC) that the company has set for its project.
Earned Value (EV) = Percent of Work Completed x BAC
Actual Cost (AC)
The real cost is just the same as you would imagine, that is, what you’ve invested in the project at a particular moment in time. There isn’t need to apply an equation to calculate this figure, it’s just the amount that has been invested at the time of the project. It’s used for calculating the cost performance index and the cost variation.
Cost Performance Index Formula
When you know the earned value and the real cost of your project, you can determine your cost-performance index. This is accomplished by dividing earned value times actual cost. If you have a cost performance index that is higher than one, that indicates that the project is doing effectively concerning its budget. Here’s the formula for cost performance index.
Cost Performance Index (CPI) = Earned Value (EV) / Actual Cost (AC)
What Does the CPI Result Mean?
In the past in the definition, cost performance index is used to help you determine if you’re right path financially. In the above cost performance index example, the result was one. If you’re able to remember the formula, a value of one means the project is running according to its budget. If the number is greater than one, you’re achieving better results than you expected. However, if the value is less than one, you’re paying more than you should at this stage in the project, and you’ll need to determine how to reduce your expenses.
Why Is the Cost Performance Index Important?
The cost performance index is an essential economic tool that can be used for more than just the project management. As we’ve discovered, it is a crucial method of evaluating the cost for a project compared to the ones set over a certain time frame. The primary reason for its importance in project management is the fact that it evaluates the effectiveness and financial efficiency that the plan.
Related Value Management Metrics
Of course the cost performance index is just one of the value measurements which project managers utilize to track their projects. There are four metrics–planned value cost variance, cost variance performance index, cost variance scheduling and the variance in schedule–that are the ones we’d love to emphasize. Here’s a quick description of each.
Also read: Top 10 Project Tracking Software
Planned Value (PV)
The value that is planned for the project is another method of describing the budget for the work to be completed. It’s the amount of the budget set to be used at any point in the duration of the project. The planned value is also known as the budgeted cost of the work plan (BCWS). It differs from the actual cost, which is the amount that was spent on the project at the time it is included in the plan. Thus, you can view the planned value as the total project cost over a time-baseline defined at any point in the timeframe.
Cost Variance (CV)
Another way to assess how your financial project has performed is the cost variance. This is the process of comparing the budget that was set at the start of the project and the amount of money put into the project. Also project managers can review the budgeted costs of the work done and then determine the difference between them and the actual price of the work done. This is a way to know if your project is financially sound or if you’re either overspending or underspending.
Schedule Performance Index (SPI)
Schedule performance index on can be used to evaluate the actual progress of a task against the planned progress. It is a measure of the efficiency of the project based on its schedule or the time it takes to complete tasks. The index of performance on schedules is a part of a bigger measurement referred to as earned value management.
Schedule Variance (SV)
Cost variance is the difference between the anticipated cost and the actual cost that is associated with the project. Schedule variance is the same thing, but about time. It is a measure of how far the project is behind, ahead, or ahead of schedule. It measures this by analyzing the actual project performance and comparing that to the expected progress at this point in the project. Like all performance measurements, when a project is running behind schedule, resources can be allocated to bring it back on course.
Conclusion
Knowing and using how to effectively utilize the Cost Performance Index (CPI) is essential to the success of a project. CPI offers a precise metric to evaluate the efficiency of projects and identify overruns in cost, and ensure financial performance is aligned with project objectives. Through regular monitoring and analysis of CPI, project managers can make educated decisions and negotiate with stakeholders, and develop strategies to increase cost efficiency.
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