Cost Performance Index (CPI) in construction

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What You Need to Know About the Cost Performance Index (CPI) in Construction

The cost performance index in construction is also known as the CPI.  It is a project metric that will calculate the ratio of the earned value on the project to the actual cost of the project.

Therefore, the formula that you will use to determine the cost performance index for any construction project is as follows:

Cost Performance Index = Earned Value / Actual Cost

The earned value is the authorized budget for any of the work completed during the project.  The actual cost is the amount of money that has been truly spent to complete the project.  You can use the actual cost at any time to determine the cost performance index but remember that the number will change as the project continues to get closer to its completion.

Knowing where you are with the cost performance index is a good thing at any time, because it shows you whether you are within your budget or if you need to look for cost saving measures going forward to get back onto budget.

How to Determine If You Are Within Budget

  • If the cost performance index is equal to one, the entire project is going as planned when it comes to what you are spending.
  • If the cost performance index is larger than one, the entire project is currently under budget and you will earn more at the end if it stays that way.
  • If the cost performance index is less than one, the entire project is going over budget. This will affect how much you earn at the end and you must make some changes to get back on track if possible.

An Excellent Example of the Cost Performance Index

To keep things simple, we are going to use basic numbers for this example.  We understand that most buildings cannot be constructed for such a small amount of money.

The project is a building that has a total budget of $100,000 and you have 12 months to completely finish it.  At the 6-month mark, you realize that you have already spent $60,000.  You don’t think much of that until you realize that you have only completed 40% of the work that needs to be done!

It is at this time that you quickly determine your cost performance index to see where you stand.

Remember, the formula for the cost performance index is as follows:

Cost Performance Index = Earned Value / Actual Cost

Cost Performance Index = $40,000 / $60,000

Cost Performance Index = 0.67

This means that you are currently earning 67 cents for every dollar you spend.  This number is under one, which means that you are way over budget.

While you probably already knew that you were over budget, this shows you exactly how far over you truly are.

How the Cost Performance Index is Different from the Schedule Performance Index

Many people think that the cost performance index and the schedule performance index are exactly the same thing, but that couldn’t be further from the truth.

The schedule performance index shows your current progression when compared to where you planned on being at that point in time.  This is more of a measure of your efficiency when it comes to the schedule.

The formula that is used for the schedule performance index is as follows:

Schedule Performance Index = Earned Value / Planned Value

How to Determine If You Are on Schedule with the Schedule Performance Index

  • If the schedule performance index is equal to one, the work that you have completed so far is exactly what you thought you would have done at this point in time.
  • If the schedule performance index is less than one, the work that you have completed so far is a lot less than you thought you would have done at this point.
  • If the schedule performance index is greater than one, the work that you have completed so far is a lot more than you thought you would have done at this point.

It is imperative that you consider every single task when calculating the schedule performance index or your results will be skewed.

An Excellent Example of the Schedule Performance Index

We are going to use the same example as above, so you can see how the schedule performance index is slightly different than the cost performance index.

As a reminder, you are constructing a building that has a budget of $100,000 and you must complete it within 12 months.  However, at the six-month mark, you have already spent $60,000 and only completed 40% of the work that you needed to.  The planned value that you will be using in the formula below is calculated at half of the budget since you are currently halfway through the project timeline.

Schedule Performance Index = Earned Value / Planned Value

Schedule Performance Index = $40,000 / $50,000

Schedule Performance Index = 0.8

This shows that you are currently behind schedule, which you probably already knew.  However, it shows you exactly how far behind schedule you truly are.

You may think that you can use either the cost performance index or the schedule performance index and not determine the other.  However, both these numbers are necessary, because they show you exactly how far off you are, or how far ahead you are, when it comes to both your budget and your schedule.

Yes, you can get an idea for both your budget and schedule by just determining one of these figures, but it is always best to have both numbers in front of you.  The reason for this is it will be easier to make changes if you know exactly how many changes are necessary to get you back on budget and schedule!

Of course, these numbers can also tell you if you are ahead of the game when it comes to budget and schedule and that is always welcomed news!  You may then want to use these numbers, and see what you did differently to achieve them, so all your future projects can go as smoothly as this one.

After all, you are in the business of making money when constructing buildings, so you might as well find out how you can make the most of it instead of losing money with every project that you do.

 

 

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