Please note that this is the fourth blog post for Earned Value Management (EVM) concepts. If you’re coming here directly through a search result or a referral, then please go through my previous three posts before reading this post. Links are given below for your easy reference.
- Earned Value Management
- Elements of Earned Value Management, Planned Value, Earned Value and Actual Cost
- Variance in Project Cost Management— Schedule Variance (SV) and Cost Variance (CV)
Schedule Performance Index (SPI): The Schedule Performance Index tells us about the efficiency of time utilized on the project. It is a measure of progress achieved compared to the planned progress.
Schedule Performance Index = (Earned Value)/(Planned Value)
SPI = EV/PV
The Schedule Performance Index informs us how efficiently we are actually progressing compared to the planned progress.
- If SPI is greater than one, this means more work has been completed than the planned work.
- If SPI is less than one, this means less work is completed than the planned work.
- If SPI is equal to one, this means the work completed is equal to the planned work.
Cost Performance Index (CPI): The Cost Performance Index tells us about the efficiency of the cost utilized on the project. It is the measure of the value of the work completed compared to the actual cost spent on the project.
Cost Performance Index = (Earned Value)/(Actual Cost)
CPI = EV/AC
The Cost Performance Index informs us how much we are earning for each dollar spent on the project.
- If CPI is less than one, this means we are earning less than the spending.
- If CPI is greater than one, this means we are earning more than the spending.
- If CPI is equal to one, this means earning and spending is equal.
At this stage you may be thinking that if we can get all this information from the Schedule Variance and the Cost Variance, then why are these Schedule Performance and Cost Performance Indexes required?
There is a difference between variance and index. In variance we find the difference between the values, and in performance index we get the ratios.
In cost or schedule variance, the result comes in dollar form. If this number is negative then we say that the project is in bad shape, and if this number is positive, we say that the project is in good shape.
The problem with variances is that we cannot compare the health of different projects with one another.
Therefore, we use performance indexes to compare the health of the projects among themselves.
The Performance Index’s value lies between 0 to 1; therefore, only a glimpse of these ratios will be sufficient for us to get an idea about the health of the projects.
Size does not matter in calculating the indexes and it makes our job easier to compare the relative health of the project.
You have a project to be completed in 12 months and the total cost of the project is $100,000. Six months have passed and $60,000 is spent but on closer review you find that only 40% of the work is completed so far.
Find the Schedule Performance Index (SPI) and Cost Performance Index (CPI) for this project.
Given in question:
Actual Cost (AC) = $60,000
Planned Value (PV) = 50% of $100,000
Earned Value (EV) = 40% of $100,000
Schedule Performance Index (SPI) = EV / PV
= $40,000 / $50,000
Schedule Performance Index is 0.8, and
Since the Schedule Performance Index is less than one, we are behind the planned schedule.
Cost Performance Index (CPI) = EV / AC
= $40,000 / $60,000
Cost Performance Index is 0.67, and
Since the Cost Performance Index is less than one, this means we are earning $0.67 for every $1 spending.
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