Cost Performance Index (CPI) helps us to analyze the efficiency of the cost utilized by the project. CPI computes the value of the work completed compared to the actual cost spent on the project. The Cost Performance Index (CPI) can be defined as a measure of the cost efficiency of budgeted resources expressed as a ratio of earned value to actual cost.
The Cost Performance Index describes how much you are earning for each rupee or dollar spent on the project. The Cost Performance Index is an evidence of how well the project is remaining on budget.
Calculation of CPI:
The Cost Performance Index can be calculated by dividing the earned value by actual cost.
CPI = EV / AC
Earned Value (EV): Earned Value is the amount of the task that is actually completed.
Actual Cost (AC): Actual Cost is the amount that has been spent on the task.
Interpretation of Cost Performance Index:
- CPI < 1:
If the CPI is less than one then the earning is less than the amount spent. In other words we can say that project is over budget.
- CPI > 1:
If the CPI is greater than one then the earning more than the amount spent. In other words we can say that project is under budget.
- CPI = 1:
If the CPI is equal to one then the earning and spending are equal. It can stated that project is proceeding exactly as per the planned budget.
Given a project to be completed in 12 months and the budget of the project is 1, 00, 000 INR. Six months have passed and 60, 000 INR has been spent but on closer review it is found that
only 40% of the total work has been done to date.
Find the Cost Performance Index for this project and conclude whether you are under budget or over budget.
Actual Cost (AC) = 60, 000 INR
Planned Value (PV) = 50% of 1, 00, 000 INR = 50, 000 INR
Earned Value (EV) = 40% of 1, 00, 000 INR = 40, 000 INR
Cost Performance Index (CPI) = Earned Value / Actual Cost = 40, 000 / 60, 000 = 0.67
Hence, the Cost Performance Index is 0.67.
This concludes that earning is 0.67 INR for every 1 INR spent as the Cost Performance Index is less than one.
In order it can be deduced that project is over budget.
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