Understanding the Cost Performance Index (CPI) on Your ...

Cost performance index (CPI) also known as earned vs. burned, measures the financial effectiveness and efficiency of a project. It represents the amount of ... Readthelatestindustryreport2021IntegratedProjectControls&DigitalInsightsReportTofindoutmorepleaseclickhere Home/Insights/UnderstandingtheCostPerformanceIndex(CPI)onYourProject UnderstandingtheCostPerformanceIndex(CPI)onYourProject Postedin:Blog Author:DaleHealey WhatistheHeartbeatofYourProjectTellingYou? Costperformanceindex(CPI)iswidelyusedtoinfluenceandsupportprojectmanagementdecisionsaroundtheworldbutwhatisitreallytellingus?DoesaCPIof0.90immediatelymeantheproject’shealthispoor?Ordoesitfallintoanacceptablerange?Theanswerisn’tthatstraightforward.ThereareadditionalcriteriathatshouldbeevaluatedtoensurethatdecisionsarebeingmadebasedonthecompletepictureandwilldependontheCPIoperatingrange.Firstly,let’sremindourselvesofthedefinitionofCPI. WhatistheCostPerformanceIndex(CPI)? Costperformanceindex(CPI)alsoknownasearnedvs.burned,measuresthefinancialeffectivenessandefficiencyofaproject.Itrepresentstheamountofcompletedworkforeverymonetaryunitspent.CPIisexpressedasaratiocalculatedbydivingthebudgetedcostofworkcompleted(BCWP)orearnedvalue,bytheactualcostoftheworkperformed(ACWP)orburnedcosts. Asanexample,ifaprojecthasanearnedvalueof$30,000butburnedcostswere$40,000. CPI=EV/AC=30,000/40,000=0.75 Iftheratiohasavaluehigherthan1thenitindicatestheprojectisperformingwellagainstthebudget.ACPIof1meansthattheprojectisperformingonbudget.ACPIoflessthan1meansthattheprojectisoverbudget. Itseemsstraightforward,however,thedefinitionabovedoesn’tconsiderthattheCPIwillexperiencenaturalfluctuationsovertimeandthatthereisanacceptablerangeinwhichtoexpectittodoso.Toworkouttheacceptablerange,itishelpfultounderstandwhyCPIfluctuates. WhyDoesCostPerformanceIndex(CPI)Fluctuate? Dependingonthetimescalebeingusedtoanalysecostperformance,itisexpectedthatanaturalfluctuationwillbeobserved.Thisfluctuationisaresultofthemanyfactorsthatinfluencecostperformanceonaproject,suchaspeople,equipmentandweather.Thesefactorschangeovertimeleadingtopeaksandtroughsincostperformance.Forexample,anemployeewouldnotbeexpectedtoperformat100%efficiencyforthewholeday.Employeesmayexperienceboostsofenergythatallowthemtoachievemorethanexpectedatcertaintimeswhichthenbalancesoutduringperiodswherefatigueresultsinlowerperformance.Thesefluctuationsarenaturalandcreateaseriesofpeaksandtroughsknownastheoperatingrange. WhatistheCostPerformanceIndex(CPI)OperatingRange? Eachprojectisuniquebutitwillstillhaveanacceptablecostperformanceindexoperatingrange.Theoperatingrangeisdeterminedbyhowmanyunpredictablefactorswillinfluenceyourproject.Aproject-basedinsideafactorywheretheenvironmentiswellcontrolledwillhaveamuchnarroweroperatingrange(1.05>X>0.95),whereasanextremelyunpredictableenvironmentsuchasoff-shoreconstructionwillnaturallyhaveamuchhigherrange(1.50>X>0.5). Theserangesshouldbeagreedtobytheprojectmanagementteambeforeworkcommencesonaprojectandshouldbebasedoncriteriasuchaspastprojectperformance,industrybenchmarksandexpertopinion.Onceagreed,projectmanagersshouldworkwithinthisrangefocusingonmakingimprovementstoefficiencytoreturntheprojecttoaCPIof1.00.Forexample,movingthebreakroomclosertotheworkfrontcouldleadtolessdowntimewalkingbetweentheselocations.IfCPIfallsoutsideoftheagreedrange,thisshouldsignalaseriousproblemtotheprojectmanagementteamandundergoadditionalinvestigation. WhatDoesitMeaniftheCostPerformanceIndex(CPI)LandsOutsidetheOperatingRange? Althoughnaturalfluctuationsinperformancearenormalovertime,valuesthatlandoutsidetheoperatingrangecanbeacauseforconcern.IftheCPIistoohigh/low,itindicatesthatsomethingbesidesinefficiencyisimpactingtheprojectperformance. Ifaprojectisexperiencinglowerthanexpectedcostperformance,itnormallyindicatesthatthescopeofyourprojecthaschangedoriscreeping.Thelowerperformanceisasymptomofadditionaltimeandmaterialbeingusedonoutofscopework.Forexample,youroriginalscopeincludesbuilding30linearmetersofaperimeterfencearoundafacility,however,whencrewsstartconstructionnoconfirmationoftheperimeterlengthwasmade,andcrewsbuiltafence10meterslongerthancontractedtodo. Ontheotherendofthespectrumisanover-performingproject.Oftenoverlookedbecausetheyareachievingmorevaluethanexpectedforeverymonetaryunitspent.Thisisbadpracticeandover-performingprojectsshouldbeevaluatedjustasthoroughlyasunderperformingones. Itisimportanttoevaluateover-performingprojectsbecauseifyouarenotspendingasmuchasexpecteditcanindicatethatareasofthescopeofworkarebeingmissed,whichcouldendupbeingcostlyinthefuturetocompleteorrepair.Forexample,acast-in-placeconcretefoundationmissinghalftherebarwillneedtobede-constructedtoreinstallthemissingitems,ultimatelycostingmoreinthelongrun.Alternatively,ifthereisnoscopebeingmissedonanover-performingproject,itcanleadtoanegativereputationwithintheindustryandcostfutureworkbecauseclientswillexpectthatbudgetedcostsareinflatedpasttheiractualvalue. Conclusion Costperformanceindicesareagreatindicationofprojecthealthbutalsocontainadditionalinformationthatcanbeunlockedbyengagingaprojectcontrolsprofessional.Projectcontrolsprofessionalscandesigntheproceduresandsystemsrequiredtocaptureprojectperformanceonintervalsthatarereasonableforyourscopeofwork.Theycandeterminethedesiredoperatingrangeandindicatewhenaspectsofyourprojectaren’tperformingasplanned.Also,projectcontrolsprofessionalscandealwiththelow-leveldetailedviewsofdatathatcanthenbereporteduptoprojectmanagersconcisely.Thiswillensurethatthereportsdistilltheinformationinawaythatcanaccuratelyinfluencedecisionsandenableasafeandsuccessfulprojectdelivery. Ifyou’dliketoknowmoreaboutyourprojectCPI,orifyouarelookingtoimproveyourcapability,getintouch! Youcancallon+44(0)[email protected] Oryoucanusethecontactusformhere. AboutDaleHealey DaleisaseniorconsultantandthecostmanagementSubjectMatterExpert(SME). ClickheretocontactDale ContactDale YourFirstName* YourLastName* YourEmailAddress* YourTelephoneNumber YourMessage(optional) agree IagreetoyourPrivacyPolicy SendMessage MessagetoDalesent! Thankyouforyourenquiry.Oneofourconsultantswillbeintouchwithyousoon. Doyoulikethispost?Whynotshareit? SearchourInsights RecentInsights TheRightWaytoSetUpYourPMO Postedin:Blog TheBasicsofProjectControls Postedin:Blog WhatisLastPlannerMethodology? Postedin:Blog PreviousPost WhatistheBestWaytoApply4DPlanningtoyourProject? NextPost 2020ProjectControlsSurveyReport OtherInsightsYouMayBeInterestedIn Viewallinsights TheRightWaytoSetUpYourPMO Postedin:Blog TheBasicsofProjectControls Postedin:Blog WhatisLastPlannerMethodology? Postedin:Blog AwardshighlightsreelfromProjectControlsExpoandAwards2021