Cost Performance Index (CPI) in construction

The cost performance index in construction is also known as CPI. It is a project metric that will calculate the relationship between the value gained in the project and the actual cost of the project.

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

Cost Performance Index = Added Value / Actual Cost

Earned value is the authorized budget for any work completed during the project. The actual cost is the amount of money that was actually 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 approaches completion.

Knowing where you are with your cost performance index is a good thing at any time because it shows you whether you are within your budget or whether you need to look for cost-saving measures in the future to get back on budget.

How to Determine If You're on Budget

• If the cost performance index equals one, the entire project is going as planned in terms of what you are spending.
• If the cost performance index is greater than one, the entire project is under budget and you will earn more in the end if you keep it that way.
• If the cost performance index is less than one, the entire project is over budget. This will affect how much you earn in the end and you should make some changes to get back on track if possible.

An excellent example of a cost performance index

To keep things simple, we will use basic numbers in this example. We understand that most buildings cannot be built with so little money.

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

This is when 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 = Added Value / Actual Cost

Cost performance index = R$40,000 / R$60,000

Cost Performance Index = 0.67

This means you are currently earning 67 cents for every dollar you spend. This number is below one, which means you have gone over budget.

While you probably already knew you were over budget, this shows exactly how much over budget you really 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 compared to where you planned to be at that time. This is yet another measure of your efficiency when it comes to scheduling.

The formula 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 equals one, the work you have completed so far is exactly what you thought you would have done at this point.
• If the schedule performance index is less than one, the work you have completed so far is much less than you thought you would have done at this point.
• If the schedule performance index is greater than one, the work you have completed so far is much more than you thought you would have done at this point.

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

An excellent example of a schedule performance index

We'll use the same example as above so you can see how the schedule performance index is slightly different from the cost performance index.

Remember, you are constructing a building with a budget of $100,000 and must complete it in 12 months. However, at the six-month mark, you have already spent $60,000 and completed only 40% of the required work. The planned value you will use in the formula below is calculated as half the budget since you are halfway through the project timeline.

Schedule Performance Index = Earned Value / Planned Value

Schedule performance index = R$40,000 / R50,000

Schedule Performance Index = 0.8

This shows that you are late, which you probably already knew. However, it shows exactly how behind you really are.

You might think you can use either the cost performance index or the schedule performance index and not determine the other. However, both numbers are necessary because they show exactly how far along you are, or how far ahead you are, with regards to both your budget and your timeline.

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

Of course, these numbers can also tell you whether you're ahead of the curve when it comes to budget and schedule, and that's always welcome news! You may then want to use these numbers and see what you did differently to achieve them so that all your future projects can go as well as this one.

After all, your goal is to make money by building buildings, so you better figure out how to make the most of that rather than losing money on every project you take on.