Cost Performance Index
What is a Cost Performance Index?
The cost performance index, also referred to by the abbreviation (CPI), refers specifically to a method, chart, or other instrument that is implemented for the purposes of determining/measuring the actual cost efficiency of a project. The cost performance index is determined by measuring the ratio of earned value (also known by the abbreviation of EV) to actual costs (also known by the abbreviation of AC). The formula that a business normally uses to assess the cost performance index (CPI) is the ratio of earned value (EV) over actual costs (AC); therefore, CPI is equal to EV divided by AC. If the resulting value is greater than one indicates that the conditions of cost efficiency for the project are considered to be favorable. A resulting value that is less than one indicates that the conditions of cost efficiency for the project are considered to be less than favorable. The cost performance index can change over the life of a project depending on the ways in which the earned values and actual cost have changed.
Scheduling on construction projects serves to ensure that all necessary activities for completing the work are in accordance with the requirements of the contract documents and are properly planned, staffed, coordinated and executed in an orderly and expeditious manner. Schedules assist in ensuring coordination of work and contribute to the decision-making process for owners in evaluating contractor’s payment applications and proposed changes to the contract. There is, however, a perceived risk involved with owners requiring contractors to submit schedules and then proceeding to review and accept them. The risk, of course, is that the owner accepts a schedule and agrees to something that is later used as the basis of a claim. On the flip side, the downside risk of not requiring construction schedules is that the project plan is not communicated and the owner is left with no way to effectively measure progress, check on coordination, or verify the timing of its own responsibilities required to complete the work.