Cost Performance Index in Project Management: CPI Definition & Formula

Your cost performance index in project management tells you whether your budget is at risk or right on track.

It helps project managers take corrective actions to ensure successful project outcomes, making it one of the core project management metrics. However, calculating it can be confusing if you don’t understand some key terminology.

This article will discuss the core performance index formula, what the values mean, and why it’s so important to maintaining optimal financial performance.

The cost performance index compares your planned costs to actual expenses, with values indicating whether you’re on budget (1.0), over budget (less than 1.0), or under budget (greater than 1.0).

It’s part of earned value (EV) analysis, which also includes metrics such as cost variance and schedule variance.

The cost performance index and cost variance are related concepts, but their business focus is different. The cost variance formula depicts the specific amount of budget that has been either saved or exceeded, while the cost performance index reflects the overall efficiency of your financial management.

The basic cost performance index formula is:

To calculate your earned value during a particular point in the project schedule, multiply the completion percentage with your original budget.

Your actual cost is the amount of money during the analyzed time period.

To provide a practical example:

Let’s say the original budget of a construction project is $100,000. If the project is 50% complete, the earned value equals 0.5 x $100,000 = $50,000.

If your actual cost is $40,000, the CPI would look like this:

This means your project budget is operating at 125% project efficiency, putting you ahead of your costs.

Instead of tracking your performance indicators manually, you can control costs with a project management software like Productive.

Productive enables you to build and manage budgets of all types, monitor actual progress, and forecast budget burn and profit margins — learn more about optimizing costs with Productive.

 Speaking generically, this is what your CPI index ranges mean:

Since every business has its specificities and particular context, your CPI benchmarks will largely depend on historical performance. You’ll want to start gathering data as soon as possible to make informed decisions.

You can monitor CPI across various periods to establish which CPI is acceptable and still results in project success and which signals project risk that needs to be addressed as soon as possible.

For example, a cost performance index research that examined the cost library of the US Air Force discovered that once projects have a low CPI and are past a certain completion percentage, it’s unlikely that they’ll recover:

Source: Cost Performance Index Stability: Fact or Fiction?

As you can see, this data is highly contextual. Ideally, a project manager would set target CPI rates with the project team before the execution to help support cost efficiency and project performance.

Research conducted by McKinsey on IT projects with cost overrun has identified a couple of common risk factors during the project management process:

Although most projects can withstand the downsides of schedule and cost overrun, 17% of IT projects perform so poorly that they threaten the continued functioning of the business.

The cost performance index (CPI) helps project managers control these risks by identifying potential financial issues early in the project lifecycle. By setting CPI targets, tracking costs, and comparing them to internal and external industry benchmarks, project management professionals can get more reliable insights into their project status for proactive decision-making.

This also helps improve project quality and outcomes for future projects by developing a set of standards to adhere to. Continuous monitoring and cost control also help set more accurate budget estimates in the future, helping combat unrealistic schedules.

Productive is an all-in-one agency management software with a range of features for resource planning, project management, budget management, and comprehensive analytics.

To ensure your project is on track and manage progress, you can use the integrated Time Tracking feature to track and approve billable hours. You can also organize simple or complex projects with a variety of project views, including Gantt, Kanban, Workload, Calendar, and more.

Productive’s Budgeting tools help you control your budget burn, manage overhead and expenses, invoice and track payments, and get consolidated data on key metrics.

A great example is Productive’s Budgeting and Profitability charts, which provide real-time insights into pivotal metrics for project and business success.

Your budget burn will be updated automatically based on your billable hours tracked and billable rates. Then, by switching to the Profitability view, you can see how your project progress impacts your revenue and profit margins.

You can also turn on forecast charts to visualize your project planning and finances for upcoming periods of time, based on your employee scheduling in the Resource Planning module.

Productive also includes overhead and expense management to provide project managers with a deep understanding of the project in terms of cost and success.

Additional features include:

Book a demo with Productive today to find out what it can do for your business.

CPI supports project forecasting and provides project management teams with the necessary information to make data-driven project management decisions. By analyzing CPI, project managers can monitor project costs during project execution to identify potential risks and make timely interventions. By estimating the total cost at project completion (estimate at completion or EAC), businesses can analyze their processes, make long-term improvements, and make better estimates for future projects (including resources, timelines, and project scope).

Common pitfalls of monitoring your CPI are not considering its context properly, for example, the phase of the project and your previous internal benchmarks. Another potential issue is monitoring CPI in isolation, i.e. without calculating other performance metrics such as schedule or cost variance.

CPI is often used alongside other EVM metrics, such as the schedule performance index, to provide a more comprehensive view of project performance. While CPI focuses on cost efficiency, SPI tracks schedule efficiency. Together, they can highlight whether a project is both on budget and on time, enabling more holistic project management.

CPI is a versatile metric that can be applied across various industries and project sizes. It’s frequently used in the context of the construction industry, but is also valuable for the professional services realm of project management. Keep in mind that CPI benchmarks and target values can differ from industry to industry and even project to project.