Sign up below to download our free cost-benefit analysis guide eBook:
Economics can help make great decisions.
Applying the principles and frameworks of economics can help you to make great decisions.
Decision-making is huge part of our everyday lives. Some decisions feel almost automatic, others require immense consideration. We understand how challenging decision-making can be. NineSquared’s mission is to help our clients make great decisions that make people and places better. We do this by using economics and data to give them the knowledge and insights they need to make decisions with confidence.
We have created a short non-technical guide that explains how cost-benefit analysis (CBA) can be used for decision making. The guide explains what CBA is, how it can be used and the key components of undertaking a CBA. It explains how to interpret CBA results, and some pitfalls you should look out for when undertaking a CBA. The guide also briefly outlines other economic analysis techniques such as Cost-Effectiveness Analysis (CEA).
What is it?
At its simplest, Cost-Benefit Analysis (or CBA) is based on the idea that any new project or policy by the public sector should contribute more to society than it takes away. To assess this, CBA attempts to sum up all of the benefits and all of the costs associated with a new project or policy to see if the benefits are greater than the costs over the life of the project or policy.
Simple enough. However, CBA attempts to sum up not only the financial costs and benefits, things like construction costs and savings that a person might gain from a specific policy setting, but also the social costs and benefits to arrive at an evaluation of the overall impact on social welfare. To do so, CBA considers costs like the reduction in air quality that might result from a project that creates pollution, or perhaps the social benefits of reducing deaths and injuries because a road has been made safer. These costs and benefits cannot typically be observed in the market place. These social costs have to be estimated using techniques that have been developed by economists over many years. We outline some of these techniques within the guide.
Who is it for?
Not everyone is an economist. The guide is aimed at anyone who needs to know more about tools and techniques for comparing options and making decisions about projects and policies. It can be read by anyone from a senior executive with limited background in economics or direct experience in undertaking a CBA, to a junior team member who is new to project planning. We hope the guide gives you a good understanding of how CBA works, and helps you to make great decisions.
Why use it?
-
Policy, program and project evaluation
CBA is useful when considering whether or not a particular course of action will have an overall positive or negative economic impact on the community. A course of action might be a new policy or program that is being developed, or perhaps a new infrastructure project. An evidence based evaluation, founded on a consistent and methodologically sound approach, means that decision-makers can approve or reject proposed changes with greater confidence that their decision will enhance social welfare rather than reduce it.
-
Post completion reviews
CBA is also a useful tool for evaluating the impact of an existing policy, program or infrastructure project. Post Completion Reviews or ‘ex post’ analysis of a policy or program assesses the actual costs and benefits that occurred as a result of the change compared with the costs and benefits that would have occurred without the change being implemented. Such reviews can provide decision- makers with a better understanding of project outcomes and assist in the evaluation of future projects.
-
Project prioritisation and selection
Because CBA provides an evaluation methodology and reporting metrics that are applicable to a variety of different policies, programs and projects, it can be used to prioritise projects in relation to each other. This enables decision-makers to select the highest value policy, program or project from those under consideration.
-
Early project option assessment
Often in seeking to address a specific issue or problem, a project team may develop a substantial number of options. These may address the problem in very different ways. Detailed development of every option may be prohibitively expensive. Some options, however, may be able to be excluded early in the option development process by applying the principles of CBA in a consistent but shortened version of the technique, known as Rapid CBA. Rapid CBA can allow project teams to determine those options that are unlikely to have a positive impact on social welfare early in the option development process allowing project teams to focus more time on viable options.