A cost-benefit analysis, or CBA, is a simple comparison of the projected or estimated business costs or opportunities of a project against the benefits to the business. Experienced project managers know that Insights gained from this exercise are invaluable when planning and forecasting work.
The Importance of Cost-Benefit Analysis
Business decisions are based on many different data-driven variables. A useful tool for helping evaluate whether to move forward with or abandon a key business maneuver is calculating a cost-benefit analysis.
Cost-benefit analysis gives an individual or a group of business leaders the power to evaluate a decision or consider a proposal based on an opinion-free, evidence-based evaluation of options to aid data-driven choices and plans.
A CBA involves measurable financial metrics such as revenue earned or costs saved as a result of the decision to pursue a project. It is recommended to perform a CBA during the initial stages and planning process of a project.
Any business leader can perform a cost-benefit analysis, and this responsibility usually falls on analysts and managers to conduct and evaluate. Key stakeholders should participate in and provide input on the specifics involved, especially those individuals impacted by the outcome of the analysis.
Project managers can benefit from conducting or participating in a CBA because it provides an opportunity to weigh and consider the benefits from alternative courses of action instead of continuing to follow the current plan. By considering all options and any potential missed opportunities, the cost-benefit analysis supports better decision-making moving forward.
How to Create a Cost-Benefit Analysis
To calculate the cost-benefit analysis of a project, add up all costs of the project or of a specific decision and subtract that amount from the total projected benefits of the project or decision.
If the estimated benefits outweigh the cost, this is an indication that this could be a good decision to make. If, however, the costs outweigh the benefits, then leadership may want to rethink the project or decision.
For example, if the benefits of a project could be $1 million USD in revenue and the cost to deliver the project is $500,000, then the benefits clearly outweigh the costs in this scenario.
As a project manager, you can create a cost-benefit analysis by working through these simple steps:
- Identify Project Scope: Understand the situation, determine goals, and build a framework for scope.
- List All of the Direct and Indirect Costs and Benefits Associated With the Project: A complete list of costs should include short and long-term costs of labor, inventory, materials, supplies, overhead, services, training, and fees.
- Sum It Up: Add up all of the figures using accurate estimates and historical data to support the best guess at numbers if they are not obvious.
- Evaluate the CBA: the outcomes as a group and consider how the project will affect users and the company.
- Make a Recommendation and Implement: Summarize findings and present the details to management for their review, approval, and final decision to move forward.
The Benefits of Cost-Benefit Analysis in Project Management
Cost-benefit analysis in project management involves measuring and comparing key project management metrics, for both management and financials. ivity, schedule variance, return on investment (ROI), and payback period are just a few of these metrics. The benefits of analyzing cost-benefit for project managers include:
- Gaining stakeholder support
- Receiving approval from informed management
- Obtaining the most accurate estimate of what the project development costs will be
- Easily evaluating and controlling the project’s progress over time
Other benefits to the business include higher revenue, improved customer satisfaction and employee morale, competitive market advantage, and reducing the complexity of business decisions.
Useful Tools for Preparing Cost Benefit Analysis
Diving into the specifics of a cost-benefit analysis can become complicated, depending on the project being evaluated. From simple spreadsheets to robust full-service software tools, there are many options available to help with calculating the details of cash flow; computing a benefit-cost ratio (BCR); and conducting regression modeling, valuation, and forecasting.
A good software solution will allow companies to define standard costs for resources and activities; create project budgets using estimated and standard costs; calculate costs per activity, project, portfolio, or customer; and compare budgets and actual costs per project or portfolio.
Consider one of these cost analysis software tools to help you accurately estimate and support your CBA efforts:
- Oracle Primavera: For projects of any size, this solution integrates project and portfolio planning and delivery teams for planning, resourcing, risk mitigation, scheduling, and program management.
- Harvest: Track time and gain insight from past projects with a tool that integrates with other apps and tools to fit right in with your overall workflow.
- Project Manager: This simple-to-use yet powerful software solution allows project managers to make data-driven decisions and to manage projects on any level of complexity.
Make Smarter Business Decisions With Cost-Benefit Analysis
Cost-benefit analysis provides the necessary information to make smart business projections and decisions. Project managers often perform and evaluate a CBA, so they are 100% certain their project will be successful.
Cost-benefit analysis establishes proof, which eliminates the need to constantly prove that costs are being minimized to maximize benefits. When conducting a CBA, be thorough with all estimates in order to arrive at the most accurate analysis to support necessary decisions.