Cost Variance vs Performance Index

Cost Variance vs Performance Index | Earned Value Analysis

For instance, Earned Value Analysis (EVA) compares the performance measurement baseline to the actual schedule and cost performance. EVM integrates the scope baseline with the cost baseline and schedule baseline in order to form the performance measurement baseline. hence, Earned Value Analysis, or EVA, is a project management technique for analyzing a project’s progress at any given time. So, The purpose of this article is to describe cost variance vs performance index as elaborated in PMBOK Guide 6th Edition. 

Cost Variance (CV):

Cost Variance is the amount of budget deficit or surplus at a given point in time. It is a measure of cost performance on a project. It is expressed as the difference between Earned Value and Actual Cost. The cost variance at the end of the project will be the difference between the Budget at Completion (BAC) and the actual amount spent. A positive CV indicates the project is under planned cost. A negative CV indicates the project is over the planned budget. The CV is particularly critical because it indicates the relationship of physical performance to the costs spent. A negative CV is often difficult for the project to recover. The formula to calculate CV is mentioned below.

CV=EV-AC {CV is positive, the project is under planned cost       CV is neutral, the project is on planned cost               CV is negative, the project is over planned cost        

Cost Performance Index (CPI):

Cost Performance Index is a measure of the cost-efficiency of the budgeted resources. It is expressed as a ratio of EV to AC. It is considered the most critical EVA metric and measures the cost efficiency for the work completed. ACP value less than 1.0 indicates a cost overrun for work completed. A CPI value greater than 1.0 indicates a cost underrun of performance to date. The formula to calculate CPI is mentioned below.

CPI=EVAC {CPI>1.0, the project is under planned cost                                   CPI=1.0, the project is on planned cost                                          CPI<1.0, the project is behind schedule over planned cost     

Actual Cost (AC): 

It is the realized cost incurred for the work performed on an activity during a specific time period. It is the total cost incurred in accomplishing the work that the EV measured. The AC needs to correspond in definition to what was budgeted in the PV and measured in the EV (e.g., direct hours only, direct costs only, or all costs including indirect costs). The AC will have no upper limit; whatever is spent to achieve the EV will be measured.

Earned Value (EV):

It is a measure of work performed expressed in terms of the budget authorized for that work. It is the budget associated with the authorized work that has been completed. The EV measured cannot be greater than the authorized PV budget for a component. The EV is often used to calculate the percent complete of a project. Progress measurement criteria should be established for each WBS component to measure work in progress. Project managers monitor EV, both incrementally to determine current status and cumulatively to determine the long-term performance trends.

It is a quantitative technique used in PMP Certification Training Course project management for evaluating project performance and predicting final project results.

Cost Variance vs Performance Index Example

Since A project has been undertaken to paint a room. The room has 4 sidewalls. The effort estimated in order to paint one side of the wall is 1 person-day. One human resource (A) is assigned to complete the project. The cost associated with painting one side wall is USD 100. Hence, As per the definition of planned value mentioned in the above paragraph, the total planned value of this project is USD400 (4 * 100).

This is the Budget At Completion (BAC). At the end of day 2, the project manager asks A the status of the project. A mentions that the one side is painted completely, and the second wall is painted half. The resource also mentions that the amount of money spent so far is USD250. The project manager then calculates the cost variance vs performance index as per the formulas mentioned above. The details of the calculation are provided below.

Planned Value (PV) at the end of day 2 = USD 200

Earned Value (EV) at the end of day 2 = USD 150 (USD 100 for painting 100% of the first wall, and USD 50 for painting 50% of the second wall)

Actual Cost (AC) at the end of day 2 = USD 250

Cost Variance (CV) = EV – AV = 150 – 250 = – 100

Cost Performance Index (CPI) = EV / AV = 150/250 = 0.60

It can be inferred that the project is over planned budget as CV is in negative and CPI is less than 1.0.

You can view our other blogs related to the Analogous Estimation Technique and the Parametric Estimation Technique in Project Management.

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