SPI and CPI in Project Management
Earned Value (EV) Analysis leverages the Earned Value Fundamental Formula to determine the project performance indices pertaining to project cost and schedule. Earned Value is part of the Control Costs process group in Project Cost Management. We will take a look at two components of Earned Value Analysis - SPI and CPI in Project Management. [caption id="attachment_132927” align="aligncenter” width="640”]
- Cost Performance Index (CPI): Represents the amount of work being completed on a project for every unit of cost spent. CPI is computed by Earned Value / Actual Cost . A value of above 1 means that the project is doing well against the budget.
- Schedule Performance Index (SPI): Represents how close actual work is being completed compared to the schedule. SPI is computed by Earned Value / Planned Value. A value of above one means that the project is doing well against the schedule.
You’ll start to see many different abbreviations in the next few sections - I’ve listed them out here to help as you continue reading. EV = Earned Value PV = Planned Value BAC = Budget at Completion AC = Actual Cost
The following formulas will be used for the following examples. PV = Planned Completion (%) * BAC EV = Actual Completion (%) * BAC CPI = EV/AC SPI = EV/PV
Earned Value Analysis Example 1
Suppose you have a budgeted cost of a project at $900,000. The project is to be completed in 9 months. After a month, you have completed 10 percent of the project at a total expense of $100,000. The planned completion should have been 15 percent. Now, let’s see how healthy the project is by computing the CPI and SPI. From the scenario, you can extract the following:
- BAC = $900,000
- AC = $100,000
The Planned Value (PV) and Earned Value (EV) can then be computed as follows:
- Planned Value = Planned Completion (%) * BAC = 15% * $ 900,000 = $ 135,000
- Earned Value = Actual Completion (%) * BAC = 10% * $ 900,000 = $ 90,000
Compute the earned value variances:
- Cost Performance Index (CPI) = EV / AC = $90,000 / $100,000 = 0.90. This means for every $1 spent, the project is producing only 90 cents in work.
- Schedule Performance Index (SPI**)** = EV / PV = $90,000 / $135,000 = 0.67. This means for every estimated hour of work, the project team is completing only 0.67 hours (approximately 40 minutes).
Interpretation: Since both Cost Performance Index (CPI index) and Schedule Performance Index (SPI index) are less than 1, it means that the project is over budget and behind schedule. This example project is in major trouble and corrective action needs to be taken. Risks management needs to kick-in.
Earned Value Analysis - Example 2
Suppose you are managing a software development project. The project is expected to be completed in 8 months at a cost of $10,000 per month. After 2 months, you realize that the project is 30 percent completed at a cost of $40,000. You need to determine whether the project is on-time and on-budget after 2 months. Step 1: Calculate the Planned Value (PV) and Earned Value (EV) From the scenario,
- Budget at Completion (BAC) = $10,000 * 8 = $80,000
- Actual Cost (AC) = $40,000
- Planned Completion = 2/8 = 25%
- Actual Completion = 30%
- Planned Value = Planned Completion (%) * BAC = 25% * $ 80,000 = $ 20,000
- Earned Value = Actual Completion (%) * BAC = 30% * $ 80,000 = $ 24,000
Step 2: Compute the Cost Performance Index (CPI) and Schedule Performance Index (SPI)
- Cost Performance Index (CPI) = EV / AC = $24,000 / $40,000 = 0.6
- Schedule Performance Index (SPI) = EV / PV = $24,000 / $20,000 = 1.2
Interpretation: Since Cost Performance Index (CPI) is less than one, this means the project is over budget. For every dollar spent we are getting 60 cents’ worth of performance. Since Schedule Performance Index (SPI) is more than one, the project is ahead of schedule. However, this has come at a cost of going over budget. If work is continued at this rate, the project will be delivered ahead of schedule and over budget. Therefore, corrective action should be taken. Apart from computing the Cost Performance Index (CPI) and Schedule Performance Index (SPI), you can calculate the earned value cost and schedule variance. In addition, you can use earned value forecasting formula. Image by Steve Buissinne from Pixabay