Cost Performance Index (CPI) for PMP® Exam Prep
Anyone in a project management role knows the top questions asked by the customer (or boss) will be: “when will it be done?” and “how much will it cost?” Although project managers do not have a crystal ball to see into the future, there are proven formulas to provide data-based predictions for schedule and cost. The Project Management Institute (PMI)®’s Project Management Professional (PMP)® exam includes questions around the definition, purpose, and calculation of project management formulas used to assess cost and schedule, including the Cost Performance Index.
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Cost Performance Index (CPI) Defined
The A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Seventh Edition, offers this definition of Cost Performance Index (CPI):
“The Cost Performance Index (CPI) is a measure of the cost efficiency of budgeted resources, expressed as a ratio of earned value to actual cost.”
Whereas that CPI PMP® definition is important to know for the PMP® certification exam, it is not a description that will help non-project managers understand the value of the formula. In basic terms, the CPI shows how well the project is sticking to the budget. To calculate the CPI, a project manager must have an understanding of the CPI formula and the formulas that comprise it.
Cost Performance Index Formula
The CPI formula for the PMP® exam is calculated with the Earned Value (EV) and Actual Cost (AC). Each value has a formula, which will be embedded in PMP® exam questions.
Some may refer to this formula as the “PMP Cost Performance Index” but that is only due to the inclusion of the tool within the PMP® certification exam. Anyone with project management responsibilities can use the Cost Performance Index (CPI) calculation to better manage their schedule and budget.
Calculating Cost Performance Index
Calculating Cost Performance Index provides insight into the budget health of the project. Using the formula CPI = EV / AC, the project manager will have a value of less than 1 (project over budget), of 1 (project on budget), or greater than 1 (project under budget).
|< 1||= 1||> 1|
|OVER BUDGET||ON BUDGET||UNDER BUDGET|
CPI in project management measures the cost efficiency of a project. With or without a PMP® certification, Project Managers can use the CPI to tell the overall story of the project status from a financial perspective. The CPI could indicate the initial budget was not aligned with the project outcomes or estimates were too conservative. The CPI is also used to project cost incurrence for the future periods of a project, e.g. in the context of re-estimation of budgets.
Cost Performance Index Calculation Examples
Calculating the CPI is not a complicated mathematical process, it is merely simple division and knowledge of how to interpret the resulting data. Consider these examples from various project management and PMP® exam resources.
Bathroom Renovation CPI
A simple example is a residential bathroom renovation project, in which there is an overall $1,500 and is 40% complete. Actual costs to date have been $900.
The CPI is (.67), a value less than one indicating the project is over budget by 33% (100 – 67 = 33). With this knowledge, the PMP® credential holder knows changes are needed to mitigate cost overruns.
General Business Project Example 1
You are a Project Manager with a PMP® certification and a business project to complete. Your project has a budget of $10,000 and you determined the actual cost to currently be $8,000. Using the CPI formula, you determine:
CPI of 1.25, which means the project is 25% under budget (the .25 above 1). Yes, the Project Manager should be relieved, but being under budget at a point is not a guarantee for success. The training and experience needed to become a PMP® credential holder means the Project Manager will look to see if the under budget indicates poor estimating or costs that have been deferred but will be incurred later. It could be everything on the project is going better than ever planned; however, a savvy project manager will use the CPI and other formulas to monitor progress and adjust accordingly.
General Business Project Example 2
Determine the Cost Performance Index (CPI) and if the project is under, at, or over budget.
Your project has a one-year timeline and you are at the halfway point. The project budget is $100,000 with 40% of the work completed.
From that description, you have this information:
- Timeline of 12 months
- Actual Cost (AC) = 60,000USD
- Earned Value (EV) = 40% of 100,000 USD = 40,000 USD
In this scenario, the project manager can use the same CPI formula for the PMP® exam, in that CV = AC/EV.
The Cost Performance Index is 0.67, which is less than 1. Your project is earning 0.67 USD for every 1 USD spent since the CPI is less than one; the project is over budget. The formula, informally referred to as the “PMP Cost Performance Index” gives data-driven insight into the budget’s health. It does not indicate the root cause for the budget variance nor offer any clue as to the needed or possible mitigation. Other tools and resources within the PMBOK® Guide and PMI standards serve that purpose for PMP® credential holders.
Schedule Performance Index (SPI) and CPI
A review of the CPI is incomplete without addressing the Schedule Performance Index (SPI). While, the CPI speaks to budget variance, SPI provides insight into schedule variance. There is a formula specific to the SPI and those seeking to successfully pass the PMP® exam should know how to calculate the SPI.
The formula for SPI uses Earned Value and Planned Value.
The SPI is calculated by dividing the EV by PV. The resulting SPI value is interpreted like the CPI in its variance from 1.
|< 1||= 1||> 1|
|Ahead of schedule|
SPI and CPI are key calculations in Earned Value Management and are critical concepts for the PMP® certification exam. Although its highly unlikely, students may be asked to do straightforward calculations of either the CPI or the SPI as part of the PMP® exam, with numbers not necessitating the use of a calculator. Additionally, in both the context of the PMP® exam setting and later as an active PMP® credential holder, the Project Manager should be able to interpret what the CPI and SPI mean to a project’s schedule and budget respectively.
The small business website Chron provides this example of how one determines the SPI and CPI in a given setting.
“…a project has two people working full time, and that each person costs the company $1,250 a week. A project is one week behind at the time of the calculation. One week times two people at $1,250 a week equals $2,500, which represents the amount by which the schedule is behind. If the budgeted cost of work scheduled at that time is $6,000, you subtract the $2,500 from that cost to come up with the budgeted cost of work performed at $3,500. Dividing $3,500 by $6,000 produces an SPI of 0.53. As with the CPI, SPI values under 1 are not good because they mean the project is behind schedule. A value of 1 means the project is on schedule, and a value more than 1 means the project is ahead of schedule.” – Source: Chron.com
The SPI and CPI PMP® exam questions will require knowledge of how the formulas are calculated, how to interpret the resulting value, and how each is used during the life of a project.
Cost Formulas for PMP® Exam Preparation
There are 25 formulas that may be included or referenced on the PMP® certification exam, speaking to the range of knowledge a project manager needs in any business setting. The CPI and SPI formulas discussed herein are part of what is known as Earned Value calculations. In the PMI article “How to make earned value work on your project,” the top ten items for implementing earned value are listed as:
- Project Requirements
- Work Breakdown Structure
- Change Management Process
- Integrated Project Plan
- Correct Schedule and Budget
- Schedule and Budget Contingency
- Contingency Management
- Cost Collection System
- Accurate Reported Progress
- Management Support
Preparation for the PMP® certification exam should include Earned Value formulas and their connection to project management processes, tools, knowledge areas, and resources.
PMP® Certification Exam CPI Sample Questions
|1. You just picked up a new project from a departing project manager. You meet with her before her departure to discuss the performance of the project. She mentions that the schedule has been challenging and has used fast-tracking to stay on schedule. She is unsure about the budget since on-time delivery was a primary concern. She tells you that EV is 20 and AC is $20. What is your CPI?||4||1||2||1.25|
|2. Reporting the project performance is a required task as per your contract. You have calculated earned value measures and report them to your stakeholders. BAC = $20,000; PV = $18,600; EV= $17,500; AC = $17,000; CPI = 1.03; SPI is 0.94; EAC is $19,400; ETC is $2,400. What do these figures tell you about your project performance to date?||The budget at completion is less than the estimate at completion so we will spend more than we planned and need to get approval||You are behind schedule and over budget so we need to establish new cost and schedule baselines immediately||The estimate at completion is over the original budget||The cost performance index tells us that we are getting a good return for the money spent on the project so far but we are behind schedule|
Studying for the PMP Exam?
- B. The formula for CPI is EV/AC. In this case, that is 20/20, or 1.0, and you are on budget.
- Choice D is correct. CPI greater than 1 indicates we are performing better than planned with regard to costs, and an SPI < 1 indicates we are behind schedule.
Project managers should be able to determine SPI and CPI for their projects. The formula is straightforward, and with accurate numbers, can be calculated quickly. The interpretation of the resulting figure for both SPI and CPI is relatively simple. It takes a depth of project management experience and knowledge to know what actions to take and how to use these schedule and cost insights to make adjustments leading to project success.
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