Cost Variance vs Cost Performance Index

Cost Variance vs Cost Performance Index

Cost Variance vs Cost Performance Index is the 39th post in our PMP Concepts Learning Series.

Designed to help those that are preparing to take the PMP or CAPM Certification Exam, each post within this series presents a comparison of common concepts that appear on the PMP and CAPM exams.

 

Cost Variance vs Cost Performance Index

Cost variance (CV) and cost performance index (CPI) are two earned value calculations that provide a measurement of project progress against the project cost performance baseline.

Earned value measurements may be helpful on some projects for communicating status or identifying potential issues. However, earned value is an analysis technique that responds to lagging indicators – meaning that it is using the past performance to dictate or predict future performance. That is not always accurate and as such, the PM must use their judgment and knowledge in interpreting the results and communicating to stakeholders.

Cost Variance (CV)

Cost variance (CV) is calculated as the difference between earned value (EV) and actual costs (AC). How much value have we earned in the project based on our budget at completion (BAC) and what percentage of work has been completed and how much money have we actually spent?

CV = EV – AC

[hint: EV always comes first in the earned value calculations of CV, CPI, SV, and SPI]

If you have a negative balance in your bank account, is that good or bad? It’s bad, right? Remember that holds true with cost variance as well. If we have a negative cost variance it means that our costs have exceeded the value we have earned by the project activities.

A positive CV indicates that we are trending under budget. A variance of zero indicates the project is exactly on budget (does that really happen?)

Cost Performance Index (CPI)

Cost performance index (CPI) is a ratio of the earned value (EV) to the actual costs (AC).

CPI = EV ÷ AC

If the CPI is less than one, it indicates that the project is over budget to-date whereas a CPI greater than one, indicates the project is running under-budget. A CPI of one indicates the project is exactly on budget.

If you subtract the CPI from 1, you can see by what percentage you are over or under budget.

Example

You are managing the bathroom renovation project. The project has a budget of $1500 and is 40% complete. Actual costs to date have been $900.

BAC = $1,500
EV = $600
AC = $900

CV = EV – AC = $600 – $900 = ($300) <– That’s bad: we are over budget

CPI = EV ÷ AC = 0.67 <– Indicates we are 33% over budget

Summary

The earned value technique may be a helpful analysis tool, but it still requires the knowledge and judgment of the project manager and the project team to interpret the results.

Cost variance = earned value minus actual costs

Cost performance index = earned value divided by actual costs

See all posts in our PMP Concepts Learning Series

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