Cost Benefit Analysis

Cost-benefit analysis (CBA) is a technique used to compare the total costs of a programme/project with its benefits, using a common metric (most commonly monetary units). This enables the calculation of the net cost or benefit associated with the programme. 

As a technique, it is used most often at the start of a programme or project when different options or courses of action are being appraised and compared, as an option for choosing the best approach. It can also be used, however, to evaluate the overall impact of a programme in quantifiable and monetised terms.

CBA adds up the total costs of a programme or activity and compares it against its total benefits. The technique assumes that a monetary value can be placed on all the costs and benefits of a programme, including tangible and intangible returns to other people and organisations in addition to those immediately impacted. As such, a major advantage of cost-benefit analysis lies in forcing people to explicitly and systematically consider the various factors which should influence strategic choice.

Decisions are made through CBA by comparing the net present value (NPV) of the programme or project’s costs with the net present value of its benefits. Decisions are based on whether there is a net benefit or cost to the approach, i.e. total benefits less total costs. Costs and benefits that occur in the future have less weight attached to them in a cost-benefit analysis. To account for this, it is necessary to ‘discount’ or reduce the value of future costs or benefits to place them on a par with costs and benefits incurred today. The ‘discount rate’ will vary depending on the sector or industry, but public sector activity generally uses a discount rate of 5-6%. The sum of the discounted benefits of an option minus the sum of the discounted costs, all discounted to the same base date, is the ‘net present value’ of the option.

Source: (Prime Minister's Strategy Unit. 2004)

Example

In 2005 the UK Government undertook a value for money analysis of Government investment in different types of childcare. The choice was between higher cost "integrated" childcare centres, providing a range of services to both children and parents, or lower cost "non-integrated" centres that provided basic childcare facilities.

The analysis included both a 'hard exercise' and a 'soft exercise'. The hard exercise identified, quantified and monetised direct costs and benefits. The soft exercise identified and described qualitatively non-monetisable impacts, leading to option ranking.

Source: (Prime Minister's Strategy Unit. 2004)

Advice

Advice for CHOOSING this option (tips and traps)

  • Cost-benefit analysis should normally be undertaken for any project which involves policy development, capital expenditure, use of assets or setting of standards. Depending on the nature of the issue, it will sometimes be very quick and easy. At other times it will require complex economic analysis best conducted by a professional evaluator experienced in CBA techniques.
  • The best cost-benefit analyses take a broad view of costs and benefits, including indirect and longer-term effects, reflecting the interests of all stakeholders who will be affected by the programme. It is thus important to ensure the analysis is as comprehensive as possible.

Advice for USING this option (tips and traps)

  • Cost-benefit analysis (CBA) is traditionally based on conventional welfare economics, which provides a utilitarian account of value which relies on individual self-interest. In practice, people express preferences for a much wider set of public goals. Techniques such as CBA rarely give proper recognition to these wider public preferences. Consideration should be given therefore to the prevailing understanding of the public good and how this is best served.
  • In carrying out a CBA, it is critical to begin with an exhaustive list of all the different costs and benefits that could arise - even if some are later excluded. Otherwise, important aspects of the analysis could be overlooked.
  • Information on costs, benefits and risks is rarely known with certainty, especially when one looks to the future. This makes it essential that sensitivity analysis is carried out, testing the robustness of the CBA result to changes in some of the key numbers.

Resources

Guides

Example

Sources

Boardman, A., Greenberg, D., Vining, A., & Weimer, D. (2006). Cost benefit analysis: Concepts and practice. (3rd. ed.). Upper Saddle River, NJ: Prentice Hall.

Prime Minister's Strategy Unit. (2004). Strategy survival guide. Retrieved from Cabinet Office website: http://www.odi.org.uk/resources/docs/7270.pdf

Society for Benefit-Cost Analysis. (2010). The society for benefit-cost analysis. Retrieved from http://benefitcostanalysis.org/

Updated: 13th January 2014 - 2:50pm
A special thanks to this page's contributors
Author
Oxford University.
Oxford.
Contributor
Melbourne.

Comments

geoff's picture
geoffrey drover

Good day All,

I am currently writing a cost-benefit analysis report on a volunteer leadership development program designed for marginalised communities i.e. low income, single families and new Canadians. 

Are you able to provide any references that may provide insight into how a cost-benefit analysis is conducted for a training program designed to make communities stronger, healthier and safer?

Regards, 

Geoffrey

Patricia Rogers's picture
Patricia Rogers

Hi Geoffrey,

The basic logic of a cost benefit analysis is the same for all programs - you need to be able to identify all the costs (not just the money spent by the funder) and identify the positive results that can be attributed to the program, and then compare them.  This presentation (http://betterevaluation.org/resources/guide/cost_analysis) provides clear guidance on the steps involved.

For many programs, such as yours, it can be difficult to identify all the costs and it can also be hard to identify all the benefits - especially if the experiences of participants are very diverse and it is hard to attribute these to the program because of the many other contributing factors.

You might therefore find it useful to follow the approach used in the qualitative cost benefit analysis of the Stronger Families and Communities Strategy  - a program of 635 projects which was intended to help families and communities build strength and capacity to solve problems, build on their assets and develop opportunities for the future, with a particular focus on those at risk of social, economic and geographic isolation.  In this program there were not common outcome measures across the projects nor was it possible to use strong causal inference strategies (experimental, quasi-experimental or non-experimental). If you have more systematic outcome data and more ability to build a stronger causal argument you might be able to produce a more specific cost benefit analysis.

You can access the report here http://mams.rmit.edu.au/phhpu3ty2nm5.pdf which outlines the methodology and the findings.

Please let us know if these are useful for your project.

geoff's picture
geoffrey drover

Ms Rogers, 

Thank you very much for taking the time to respond and directing me to helpful resources. I will happily read and apply. 

As an aside, I was able to find an article on Multiple Attribute Utility Technique (I can provide the reference upon request). Have you come across this type of analysis before? It appears to be a useful technique to use when (1) social costs and benefits are difficult/impossible to express in monetary terms and (2) outcomes are multi-dimensional. In the program being evaluated, one outcome is to increase social assets i.e. social connections. I believe we can place a utility value on social connections; but I struggle to think how we can place a monetary value on it. 

Wonderful chatting with you and thanks again for your help. 

Regards, 

Geoffrey Drover

Anonymous's picture
Shoaib Mukit

Thank you very much

Anonymous's picture
Kalist David

Dear all, i just want to know how can one use the cost benefit analysis tool in policy making.

regards,

Kalist.

Anonymous's picture
sunil thapa

How can you determine whether the importance of the costs associated with addition of unit "A" to improve the performance of the unit "B"?

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