The Earned Value Management (EVM) process is a commonly used method for measuring and reporting the status and health of a project. Project managers are able to calculate a variety of ratios and indexes that identify whether a project is ahead or behind schedule and under or over budget. Two of the more valuable indexes of EVM are the Cost Performance Index (CPI) and the To-Complete Performance Index (TCPI).
The Cost Performance Index (CPI) measures the cost efficiency of a project. CPI is a ratio between the original budget amount for the completed work, or the earned value (EV), and the actual cost (AC) of completing these tasks. To calculate the CPI, divide the budgeted amount for the work completed by the actual costs of completing this work.
The desired goal is a CPI equal to one or greater than one, indicating the project is on budget or under budget, respectively. A CPI value less than one indicates the project is over budget. As the CPI approaches zero, the situation becomes more and more severe.
CPI is a measurement of the past performance of a project and how it conformed to its budget. If the CPI were 0.80, the indication is out of every dollar spent to this point in the project, only 80 cents worth of work was earned. Budget-wise, the project overspent by 20 percent in accomplishing only 80 percent of the budgeted work.
The To-Complete Performance Index (TCPI) indicates the level of performance necessary for the remainder of a project for it to complete on budget. The CPI indicates past expenditures and the amount of complete work for the budget spent. The TCPI tells the project manager the amount of earned value for each budget dollar for all future work in order for the project to meet the budget.
To calculate the TCPI, subtract the earned value (EV) from the project’s total budget amount -- called the budget at completion (BAC) -- and then divide this value into the remaining (unspent) budget amount, or BAC minus AC. The formula for TCPI is
TCPI = (BAC - EV)/(BAC - AC)
If the project manager calculates the EV and the AC for the project are $8,000 and $10,000 respectively, the CPI is 0.80. For the project’s total budget of $30,000, the TCPI indicates that
TCPI = ($30,000 - $8,000)/($30,000 - $10,000) = 1.1
A TCPI of 1.1 indicates that for the remainder of the project, for each budget dollar spent there must be a gain of $1.10 of earned value. Whether or not this is realistic is something the project manager and the other stakeholders must decide. In any case, the TCPI informs them of what needs to be done.
The calculated value of the CPI lets the project manager know the status of the project to a certain point using the data accumulated from the past up to that point. On the other hand, the TCPI tells the project manager what must happen in the future. In many ways, CPI and TCPI are somewhat complementary in that the problems of the past are setting the requirements of the future. These two indexes are often used together, along with other EVM indexes, to determine where the project is and what must happen to get it to where it must go.
While EVM is an excellent tool for stating the status of a project quantitatively, the project manager, because she is intimate with the day-to-day actions, details, and progress of a project, may rely on only a few or just one or two of the EVM indexes. However, management or the customer may place greater emphasis on indexes such as CPI and TCPI because they monitor the money of a project, in the past, the present and into the future.
In a situation where the CPI is low and the TCPI is high, it should become obvious to all management more funds are needed to complete the project, should that be still be the desire.