Determining Cost Performance Using EVM

To determine cost performance using earned value management, three values are required:

• Earned value (EV): the authorized budget for the work performed as of the status date.
• Actual costs (AC): the actual incurred cost for the work performed as of the status date.
• Budget at Completion (BAC): This is the sum of all the budgets for the work of the project.

For cost performance, we will review three formulas: cost variance (CV), cost performance index (CPI), and the “to complete performance index” (TCPI).

Cost Variance

Using earned value, the cost variance formula will assess the costs against the value of the work performed. Consider the following situation: your project has a Budget at Completion (BAC) of $100,000. The actual costs are $50,000. If this was the only information you had, you can only determine that you have used fifty percent of your budget. But how much work have you completed for what you have spent? Are you spending as expected? Are you spending more or less? The cost variance formula will provide the answer.

The cost variance formula is: CV = EV – AC. Cost variance is equal to earned value minus the actual cost.

Let us apply this formula to the situation above. Before we do, we will need to know the earned value. Suppose we have determined that the earned value is forty thousand dollars. In that case, the cost variance is negative ten thousand dollars, which is the earned value of forty thousand dollars minus the actual costs of fifty thousand dollars. See the formula applied here:

CV = EV – AC

CV = $40K - $50K

CV = $(10K)

The result is negative ten thousand dollars. A negative variance tells us that we are spending more than what we should be spending. A zero variance tells us that we are spending what we should be spending. A positive variance tells us that we are spending less than what we have budgeted for the work performed.

Cost Performance Index (CPI)

The cost performance index measures cost efficiency and is used to help determine if the budget at completion will be achieved. Once you have determined the cost efficiency or the CPI, then you should be able to ask: if we continue at this rate, will we complete the project within budget or not?

The cost performance index formula is CPI = EV / AC. The cost performance index is the earned value divided by the actual costs.

Let us apply this formula to the situation above:

See the formula applied here:

CPI = EV / AC

CPI = $40K / $50K

CPI = 0.80

The result is .80 or eighty percent efficient. If the result is less than one and performance continues at this rate, you will eventually run out of budget. If the result is one, your project is on track to finish on budget. If the result is greater than one, the project should finish under budget.

To Complete Performance Index (TCPI)?

The TCPI calculates the cost performance necessary by the remaining resources to complete the remaining work within the budget. Once you determine this measure, you should be able to ask: can we achieve the performance required using our existing resources?

The To Complete Performance Index formula is TCPI = (BAC – EV) / (BAC – AC). This index is the budget at completion minus the earned value divided by the budget at completion minus the actual costs. In other words, the TCPI is the remaining work divided by the remaining budget.

Let us apply this formula to the situation above.

See the formula applied here:

TCPI = (BAC – EV) / (BAC – AC)

TCPI = ($100k - $40K) / ($100K - $50K)

TCPI = $60K / $50K

TCPI = 1.20

As you can see, the result in this situation is 1.20 or 120 percent. This means that cost performance would have to be increased from 80 percent (the current CPI) to 120 percent without adding resources. Is this realistic? It depends. If it is early enough in the project, the project team may be able to adjust and improve performance. But if it is late in the project, it is probably unrealistic.

If the TCPI is greater than 1.0, this is not a favorable result. It indicates that the project is having cost performance issues and must take action to get back on track.

Summary

Cost performance for a project can be determined using three formulas:

• Cost variance (CV) = Earned Value (EV) minus Actual Costs (AC). Cost variance indicates the variance as of the reporting date.
• Cost Performance Index (CPI) = Earned Value (EV) divided by Actual Costs (AC). The CPI indicates the cost efficiency and can be used to determine a forecast.
• To Complete Performance Index (TCPI):

(BAC – Earned Value) divided by (BAC – Actual Costs). The TCPI indicates the performance required to get the project back on track.

?Eddie Merla, PMP

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