Performance Indices – A Primer

After my post on the utility and applicability of CPI and SPI I was asked by some of my readers, not very well versed in PMI terminology, what exactly did these terms mean and how they were calculated. I thought I’d dedicate this post on explaining in laymen’s terms, in as much as possible, what these indices did, where they came from and what the numbers, once calculated, meant.

What are they?

The Project Management Institute (PMI) defines the Cost Performance Index (CPI) as the ratio of the value of work that you have performed and the actual cost that you have incurred in performing that work. The Schedule Performance Index (SPI), on the hand, compares the value of the work you have performed at a certain point in your project to the value of work you were supposed to have performed by that time according to your plan. The value of the work performed or Earned Value (EV), the Actual Cost (AC) of the work performed, and the value of the worked planned at that time or Planned Value (PV) may be represented by either dollar values (money) or the number of resource hours for each of these values. The reason resource hours (or man-hours) may be used in place of real dollar figures is because in most projects the resource hours very closely parallel the dollar value of the project. There might also be confidentiality issues where you may not want to release figures representing money.

So, okay, how are the CPI and SPI calculated?

Suppose, at a certain stage of your project, your schedule was planned to be at 100 man-hour level. However at that particular point in time, in the real world of project execution, you have already spent 120 man-hours. Does this mean that you have overspent your budget? Not at all – you don’t have all the information yet to decide one way or the other. You still need to know what is the value of the work, as per your plan, that you have completed while spending these 120 man-hours. To get this number you go back to your plan and add up all the numbers of man-hours that you had originally budgeted for the activities that you have completed till now. Suppose you have completed three activities where you had originally planned to spend 30, 40 and 20 man-hours respectively and you are 50% done with an activity where you planned to spend 50 man-hours. In this case your total EV will be 30 + 40 + 20 + 50% of 50 = 115 man-hours.

Now you have three numbers: your Planned Value (PV) equals 100, your Actual cost (AC) equals 120, and your Earned Value (EV) equals 115. You use these to calculate your performance indices as follows:

CPI = EV/AC = 115/120 = 0.96

SPI = EV/PV = 115/100 = 1.15

Okay, now I have the numbers but what do they mean?

Generally speaking, values over 1 are good and the values below 1 are bad. In the above example a CPI value of 0.96 means that you are slightly over budget and maybe you should start looking at ways to optimize your resource use without compromising quality. On the other hand, your SPI of 1.15 means that you are ahead of your scheduled progress.

Now it is time for you to start evaluating the various scenarios – can you reduce your work force and make them more efficient so that you get more production out of them without falling behind in schedule? Do you need to streamline processes so that your labor may not need to waste time? Is it possible to use local resources instead of importing material and expertise? Are there any signs of gold plating and scope creep that may be affecting your costs? This is when the second part of real project management comes into play – go, have fun!