Forget the jargon - you’ll find everything you need to know about cost-benefit analysis here. Written for real people, not corporate robots! 🤖
We all do cost-benefit analyses on a regular basis. A bacon, egg, and cheese bagel might be an excellent start to the day…but is it worth the workout you’ll need to do to burn it off later? Gas is cheaper in the next town over…but will driving there cost more than you save?
Cost-benefit analysis simply means working out whether a particular action is worth your while, once you’ve weigh up all the pros and cons.
It helps you make better decisions by considering the economic impact of your choices before you make them.
As a project or resource manager, you make critical decisions every day – decisions that could determine your project's success or consign it to failure. So cost-benefit analysis is a key tool of your trade.
If you’re not familiar with cost-benefit analysis yet, we’ve got you covered. In this article you’ll learn what cost-benefit analysis is and why it’s important, how to perform a cost-benefit analysis, real-life examples to help you, and the limitations of cost-benefit analysis - and alternatives you can try.
So, let's get stuck in:
Cost-benefit analysis (CBA) is a way to decide if something is worth doing. You do this by comparing the benefits you’ll gain versus the costs you’ll incur. It’s important to note that costs aren’t just financial. They can also include time, effort, and other factors. By weighing the pros and cons against one another, you can make more informed decisions.
A simple breakdown of how to conduct a cost-benefit analysis looks like this. We’ll go into more detail later…
While some cost-benefit analysis delivers a clear-cut answer, others need further interpretation.
Let’s look at some simple everyday examples of cost-benefit analysis to understand it better.
You love a morning coffee before work but instant isn’t cutting it, so you spend $5 a day on flat whites (plus another few on pastries when your willpower wanes). You could buy a home coffee machine but it costs $100, plus 50 cents per coffee pod.
The cost-benefit analysis is clear. You’d spend $100+ buying the machine and pods for a month. But you’d save $5+ a day. The coffee machine quickly pays for itself. However, what about the indirect cost of lost socialization opportunities, the exercise from walking to the coffee shop… it’s not as simple as it seems.
You need to get somewhere. You could walk for 30 minutes or take a cab. If you walk, you’ll get there just in time, slightly sweaty, but having met your daily step and vitamin D quota 💪 If you call a cab, you’ll spend $15 and miss out on the exercise. But you’d arrive fresh and in plenty of time.
If you’re not in a hurry and enjoy walking, that’s a better option. If you’re short on time or it’s raining, taking a taxi is worth the money. You’ll need to take these scenarios into account when making your decision (more on this later too…).
We’re all about keeping it simple here at Runn, but there are some concepts you’ll need to understand before you learn how to do a CBA. And there’s no way around it – they’re head-scratchers.
Net Present Value (NPV) evaluates the profitability of a project or investment by calculating the difference between the present value of benefits and the present value of costs over a specific period of time. It’s basically a way to work out whether a project will make or lose money.
If NPV is positive, the project is expected to make more money than it costs. If NPV is negative, the project is expected to cost more than it makes. Simple!
The Benefit-Cost Ratio (BCR) compares the total expected benefits of a project to its total expected costs. It is calculated by dividing the total benefits by the total costs.
If BCR is greater than 1, the benefits outweigh the costs, indicating a good investment. If BCR is less than 1, the costs outweigh the benefits, suggesting it might not be a worthwhile investment.
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NPV and BCR seem similar but they serve different purposes. At a basic level, the difference is that:
The last thing you need to think about is your discount rate. You need a discount rate because – thanks to inflation and other factors – time changes the value of costs and benefits.
Say you put £100 in the bank for five years. When you get that £100 out, the cost of everything else has risen, so you can buy less with it.
In cost-benefit analysis – if you’re considering long-term costs and benefits – you can apply a discount rate to understand their real value in the future. Namely, at the end of your payback period – the time when you expect to have realized all the benefits.
There are so many variables that we won’t go into the weeds with this one (we did say that we were trying to keep things fairly straightforward, after all). But check out this article if you really want into dig into the math behind it.
Cost-benefit analysis takes time so you can’t be expected to do them all the time. However, when it isn’t immediately clear whether a scenario will benefit you – or when you have a lot of different options to compare – you should.
For a resource or project management professionals, that might include:
In these circumstances, conducting a cost-benefit analysis provides a framework for ensuring your decisions are economically viable and advance your business objectives. It’s also a systematic way to prioritize projects and resources, maximizing efficiency, financial success, and strategic alignment.
Cost-benefit analysis ensure that you have fully understood the implications of your decisions – and gives you confidence to pursue the right projects and opportunities. It should be a key step in your decision-making processes.
CBA provides a framework for identifying, quantifying and comparing costs against benefits. But it also lets you compare the relative benefits of different scenarios too. So you can make sure your decisions deliver the right mix of monetary, non-monetary, tangible, and intangible benefits.
This supports profitability, strategic planning, scenario planning, risk mitigation, and more.
Let’s look at the advantages of cost-benefit analysis in resource management in a bit more detail. Feel free to skip ahead to the next section if this isn’t relevant to you…
Cost-benefit analysis is a key tool for resource and project managers because it helps you make informed decisions about scheduling and staffing your projects.
This can lead to improved KPIs all-round, such as optimal resource utilization, less schedule and budget variance, better project cost management, and improved client outcomes.
In fact, cost-benefit analysis can help overcome many of the 15 most common project management challenges we’ve identified…
First, determine what falls into your cost-benefit analysis. If you’re a project or resource manager, this falls within your general requirements gathering process.
You’ll need to think about initial, ongoing, and future costs.
Next you need to identify tangible and intangible benefits.
This is where it gets a little trickier. You need to assign dollar values to the benefits, so you can compare them against the costs. There are too many ways to do this to cover here. But here are a few…
You’ll need to consult various sources to work this out – like internal records, external studies, industry reports, and expert opinions.
Calculate the NPV and/or BCR, depending on your needs. See calculations above. Don’t forget to use the same discount rate for both costs and benefits, to ensure the figures are comparable.
Remember those variables you identified earlier - now’s the time to quantify their impact. Recalculate your NPV and/or BCR and see how those variables impact the result. If something changes in your project scenario, does the CBA still add up? How easily could your benefits be derailed? Can you mitigate against those potential risks?
Review your NPV and/or BCR scores alongside the scenario analysis. Compare the results against the objectives and criteria for decision-making. Then – crunch time – decide whether to proceed.
Despite the clear advantages of conducting a cost-benefit analysis to ensure you’ve properly weighed up project pros and cons, there are limitations.
Cost-benefit analysis relies heavily on assumptions and estimates. This means it is ultimately a very educated guesstimate. Plus, quantifying costs and benefits in monetary terms can oversimplify complex issues and overlook non-monetary considerations.
CBAs can also be time-consuming and resource-intensive, particularly when collecting data and conducting sensitivity analysis. After all, where do you draw the line with assessing different possible scenarios? You could get lost down that particular rabbit hole…
And let’s not forget that we all have blind spots. There may be issues we don’t understand or biases we accidentally bring to our work.
Despite these limitations, cost-benefit analysis is still a valuable tool when used appropriately – especially if you can complement it with qualitative assessments to gain a 360° understanding of all the pros and cons.
Okay, so what can you use instead of – or alongside – cost-benefit analysis to make the best decisions for your business? Here are a few ideas.
Cost-effectiveness analysis evaluates different projects or approaches based on their ability to achieve a specific outcome at the lowest cost. And who doesn’t want to achieve and improve cost efficiency…! Unlike CBA, which just compares costs and benefits in monetary terms, CEA focuses on how efficiently a specific approach will deliver a predefined outcome.
For example, in a software development studio, a project objective may be to deliver a specified level of functionality at a certain fixed cost. A CEA can help determine the optimal staffing and development methodology to achieve that.
MCDA considers multiple criteria beyond just costs and benefits. It assesses different factors and weights them according to their importance. is useful when decisions involve complex trade-offs among multiple objectives.
For example, when choosing a construction contractor, you don’t simply want to go with the cheapest quote available. You also need to consider their safety record, environmental credentials, etc. MCDA lets you consider how important each factor is and rate it accordingly.
Like CBA analysis, risk-benefit analysis assesses the benefits of a project. But instead of comparing them against cost, it compares it against potential risk.
For example, a resource manager might conduct a risk-benefit analysis alongside a cost-benefit analysis when deciding how to staff a project. Scheduling a less experienced resource may deliver valuable upskilling and cut budget costs… but does it pose a risk to project deliverables in this instance?
Qualitative assessment methods incorporate stakeholder opinions, expert judgment, and qualitative data alongside quantitative analysis. They help you understand the benefits of non-monetary factors such as social considerations, ethical concerns, and stakeholder perceptions.
For example, consulting employee interest groups before committing to a new flexible working policy or benefits package. Looking beyond the monetary costs and perceived benefits, this approach ensures your initiative actually aligns with people’s needs and delivers desired results.
These are just some of the options available to you. Learn more about different decision-making models.
Has this article whet your appetite for techniques you can bring to your professional practice as a project or resource manager? The Runn blog just so happens to be a treasure-trove of articles covering project and resource management methodologies, best practices, and expert perspectives.
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Happy reading! 📖
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