Photo credit: “Youth unsure of university cost-benefit analysis” by Chris Parr, courtesy of www.timeshighereducation.com
When deciding “what if” or “should we,” cost-benefit analysis provides decision support. This mathematical method measures the benefits of a course of action and systematically evaluates the net effect of that course, whether it’s buying new equipment, expanding into a new service area, outsourcing a task, or something else.
Cost-benefit analysis helps to determine whether something is a sound investment/decision and provides a basis for comparing projects. It balances the total expected cost of each option against the total expected benefits, determining whether the benefits outweigh the costs and by how much.
A cost-benefit analysis finds, quantifies, and adds all the positive factors — the benefits. Then it identifies, quantifies, and subtracts all the negatives — the costs. The difference indicates the feasibility of the action. The key is including all the costs and benefits and properly quantifying them.
Advantages of using cost-benefit analysis are that it is easy to understand and straightforward, a tool for making small and large decisions, a way to evaluate alternative scenarios under different assumptions and a method of looking at the net present value of future events. Disadvantages occur with intangible factors that aren’t easily quantified or monetized, subjective assumptions, and excluded costs or benefits.
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 affected by the program. Thus, the analysis must be as comprehensive as possible.
If your agency is considering a new policy or project, RSG can perform a cost-benefit analysis to help guide the decision-making process to ensure the best possible outcome.
Written by Jeff Khau, an Analyst at RSG