Hopefully you’ve been following our series on PMP Exam calculations.
If you have, you’ll know that one of the areas that people often struggle with when studying for the PMP is the calculations involved with the Cost Management knowledge area.
This post is about how to calculate Cost Performance Index. Otherwise known as CPI.
Cost Performance Index is used to show the efficiency of the money being spent by the project.
In other words, the Cost Performance Index shows how much value you are getting for each dollar spent on the project. (or pounds, rupees or riyals – you get the point)
Cost Performance index Formula
The Cost Performance Index is calculated as follows:
Cost Performance Index = Earned Value / Actual Cost
Tip – Earned Value is also known as Budgeted Cost of Work Performed (BCWP). And Actual Cost is also known as Actual Cost of Work Performed (ACWP).
So you may see the formula written as – Cost Performance Index = BCWP / ACWP
What does CPI mean?
The result of the Cost Performance Index formula is a number. So what does this number mean?
A value of less than one means that money is being spent inefficiently on the project. So if your CPI is 0.7, this means that for every $1 spent on the project you are getting $0.70 of value.
A CPI of one means that your project is exactly on track. You spent $1 on the project and got $1 of value in return.
And a value of greater than one means that money is being spent efficiently on the project. So if your CPI is 1.4, this means that for every $1 spent on the project you are getting $1.40 of value.
Cost Performance Index answers the question “We’re spending money on this project, but is what we’re producing worth something?”
Example of Calculating Cost Performance Index
Lets see an example.
Brian is the project manager for a food manufacturing company based in Dallas, Texas. He is working on a project to implement a new inventory management system. The estimated value of the work completed by the project so far is $405,000. The total cost of the project is expected to be $650,000. So far the project has cost $325,000.
What is the Cost Performance Index? And what does this tell us about Brian’s project?
Answer: The Cost Performance Index is 1.25. This means that for every $1 spent on the project $1.25 of value is being produced.
How did we calculate this?
Well we know that Cost Performance Index = Earned Value / Actual Cost.
The Earned Value is $405,000.
Tip – the PMP exam may use slightly different descriptions to describe the inputs to a formula. This is to test your knowledge and make sure you understand what you are calculating. EG “estimated value of the work completed by the project so far” is another way of saying Earned Value.
The Actual Cost is $325,000.
Knowing this we can calculate:
Cost Performance Index= $405,000 / $325,000 = 1.25
That wasn’t too hard to calculate, right?
Next in the PMP Exam calculation series is Schedule Performance Index (SPI).
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