To do this we will calculate two more variables from the initial three we gathered from the project data. They are very similar to the schedule-related variables but require their own interpretation and understanding.
- Cost Variance (CV)
- Cost Performance Index (CPI)
Cost Variance (CV)
The Cost Variance, usually abbreviated CV, answers the following question:
- How far over or under budget is the project?
It represents, simply, the amount that the task is over or under its budget, interpolated to the current date. It must be calculated for each task and summed to produce the overall project’s cost variance. The formula is:
- If CV is negative, the task is over budget.
- If CV is zero, the task is on budget.
- If CV is positive, the task is under budget.
- CV = -$1,000 means the project is over budget.
- CV = $0 means the project is right on budget.
- CV = $1,000 means the project is under budget.
The CV can be compared to the task’s budget, for example if the above cost variance of $1,000 applied to a task with a budget of $2,000 it has incurred an overrun equal to 50% of the task, a seemingly existential problem, whereas if the task budget was $100,000 the overrun is small and could probably be mitigated somewhere else.
In our running example task, in which we have already calculated the schedule status on the previous tutorial page, we will add a column to the table for CV.
CV = EV – AC
CV = $2,000 – $4,500 = -$2,500.
|100||Set up Database||Mar. 1||Mar. 10||$10,000||$3,000||$2,000||$4,500||-$1,000||0.67||-$2,500|
The task is $2,500 over budget on a task value of $10,000. If everything goes according to plan from here on, the task will finish at $12,500. There is clearly a budget problem as well as a schedule one.
Cost Performance Index (CPI)
The Cost Performance Index (CPI), like the Cost Variance, is a measure of the cost performance of the project, but it is a relative instead of an absolute measure. It answers the question:
- How efficiently are we using our resources?
The formula is:
- If CPI is less than 1, the task is over budget.
- If CPI is zero, the task is on budget.
- If CPI is greater than 1, the task is under budget.
- CPI = 0 means the project work has not started.
- CPI = 0.5 means the project has spent twice amount that it should have at this point.
- CPI = 1.0 means the project is on schedule.
- CPI = 2.0 means the project has spent half the amount that it should have at this point.
For the CPI, like the SPI, greater than 1.0 is good.
We will add a column to the table for CPI.
CPI = EV / AC
CPI = $2,000 / $4,500 = 0.44.
|100||Set up Database||Mar. 1||Mar. 10||$10,000||$3,000||$2,000||$4,500||-$1,000||0.67||-$2,500||0.44|
The task has spent more than twice what it should have at this point.
In short, this task has a minor schedule problem and a major cost problem. A quick glance at the table, where CPI = 0.44 indicates that this task is in danger of extending the project’s completion date or driving the project over budget. Neither of those have occurred yet, but 3 days into our 10 day task the project manager can clearly see that action needs to be taken.
Just like with the schedule variance, it is a well understood concept that a project that goes over budget early on will finish over budget. Thus, it is extremely important to watch the CV and CPI early and often, being sure to address the small variances, thus fostering a culture of performance for the project from the beginning.
Graphing the trend of the CV and CPI through multiple status points can identify trends that can be enlightening. Often unexpected one time expenses can be mitigated if the project is consistently under budget elsewhere. But consistent over spending leaves no room for unexpected events.
In fact, almost everything unexpected that happens on projects requires more money. It would be nice if you arrived at work one morning to realize you’re going to save some money on your project without any sacrifice, but this is very rare. It is important to make sure that the CPI is monitored and acted upon to ensure the maximum efficiency, and thus ability to absorb small one time items.
The CV and CPI give you an at-a-glance snapshot of the project’s budget status at any given time. They are very similar to the SV and SPI which give you the same snapshot as it relates to schedule. On the next page we will calculate four variables that represent the forecast of the current status to the end of the project, an extrapolation if you will.