5/2/23, 6:33 PM Cost-Benefits Analysis for Projects - A Step-by-Step Guide

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PLANNING, PROJECT MANAGEMENT, RISK MANAGEMENT

Cost-Benefit Analysis for Projects: A Step-by-

Step Guide
by Peter Landau | Jun 9, 2021
Table of Contents
What Is a Cost-Benefit Analysis?
Cost-Benefit Analysis in Project Management
The Purpose of Cost-Benefit Analysis
How to Do a Cost-Benefit Analysis
Cost-Benefit Analysis Example
Cost-Benefit Analysis Templates

When managing a project, one is required to make a lot of key decisions. Project
managers strive to control costs while getting the highest return on investment and
other benefits for their business or organization. A cost-benefit analysis (CBA) is just
what they need to help them do that.
In a project, there is always something that needs executing, and every task has a
cost and expected benefits. Because of the high stakes, good project managers don’t
just make decisions based on gut instinct. They prefer to minimize risk to the best of
their ability and act only when there is more certainty than uncertainty.
But how can you accomplish that in a world with myriad variables and constantly
shifting economics? The answer: consult hard data collected with project
management software, reporting tools, charts and spreadsheets. You can then use
that data to evaluate your decisions with a process called cost-benefit analysis (CBA).
Intelligent use of cost-benefit analysis will help you make cost-effective decisions and
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5/2/23, 6:33 PM Cost-Benefits Analysis for Projects - A Step-by-Step Guide

maximize gains both for your project and your organization.

Before we explain how to do a cost-benefit analysis, let’s brieflyStart free trial
define what it is.
What Is a Cost-Benefit Analysis?
A cost-benefit analysis (CBA) is a process that is used to estimate the costs and
benefits of decisions in order to find the most cost-effective alternative. A CBA is a
versatile method that is often used for the business, project and public policy
decisions. An effective CBA evaluates the following costs and benefits:
Costs

Direct costs
Indirect costs
Intangible costs
Opportunity costs
Costs of potential risks

Benefits

Direct
Indirect
Total benefits
Net benefits

Our free cost-benefit analysis template can help you manage and analyze all these
project details. Download yours today.

GET YOUR FREE

Cost Benefit Analysis Template
Use this free Cost Benefit Analysis Template for Excel to manage your
projects better.

Download Excel File

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5/2/23, 6:33 PM
Download Excel File
Cost-Benefits Analysis for Projects - A Step-by-Step Guide

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Cost-Benefit Analysis in Project Management

In project management, a cost-benefit analysis is used to evaluate the cost versus the
benefits in your project proposal and business case. It begins with a list, as so many
processes do.
There’s a list of every project expense and what the expected benefits will be after
successfully executing the project. From that, you can calculate the cost-benefit ratio
(CBR), return on investment (ROI), internal rate of return (IRR), net present value (NPV)
and the payback period (PBP).
Whether the benefits outweigh the costs or not will determine if action is warranted or
not. In most cases, if the cost is 50 percent of the benefits and the payback period is
not more than a year, then the action is worth taking.
The Purpose of Cost-Benefit Analysis
The purpose of cost-benefit analysis in project management is to have a systemic
approach to figure out the pluses and minuses of various paths through a project,
including transactions, tasks, business requirements and investments. The cost-
benefit analysis gives you options, and it offers the best approach to achieve your
goal while saving on investment.
There are two main purposes in using CBA:

1. To determine if the project business case is sound, justifiable and feasible by

figuring out if its benefits outweigh costs.
2. To offer a baseline for comparing projects by determining which project’s benefits
are greater than its costs.

Keeping track of all these figures is made easier with project management software.
For example, ProjectManager has a sheet view, which is exactly like a Gantt but
without a visual timeline. You can switch back and forth from the Gantt to the sheet
view when you want to just look at your costs in a spreadsheet. You can add as many
columns as you like and filter the sheet to capture only the relevant data. Keeping
track of your costs and benefits is what brings in a successful project. Use our tool to
get the control you need by taking this free trial.
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5/2/23, 6:33 PM Cost-Benefits Analysis for Projects - A Step-by-Step Guide

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Track costs alongside your project schedule in ProjectManager. Learn more

How to Do a Cost-Benefit Analysis

According to the Economist, CBA has been around for a long time. In 1772, Benjamin
Franklin wrote of its use. But the concept of CBA as we know it dates to Jules Dupuit,
a French engineer, who outlined the process in an article in 1848.
Since then, the CBA process has greatly evolved. Let’s go through this checklist to
learn how to do a cost-benefit analysis:
1. What Are the Goals and Objectives of the Project?
Create a business case for your project and state its goals and objectives.
2. What Are the Alternatives?
Before you can know if the project is right, you need to compare it to similar past
projects to see which is the best path forward. You can quickly check their success
metrics such as their return on investment, internal rate of return, payback period and
benefit-cost ratio.
3. Who Are the Stakeholders?
List all stakeholders in the project. They’re the ones affected by the costs and
benefits Describe which of them are decision makers
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 benefits. Describe which of them are decision-makers.
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4. How Will You Measure Costs and Benefits?Start free trial

You need to decide on the metrics you’ll use to measure all costs and benefits. Some
of them will have a dollar value, while others will need other metrics. Also, how will you
be reporting on those metrics?
The process can be greatly improved with project management software.
ProjectManager has one-click reporting that lets you can create eight different project
reports. Get data on project status, variance and more. Reports can be easily shared
as PDFs or printed out for stakeholders. Filter any report to display only the data you
need at the time.

5. What Is the Outcome of Costs and Benefits?

Look over what the costs and benefits of the project are, assign them a monetary
value and map them over a relevant time period. It’s important to understand that CBA
estimates the monetary value of present and future costs and benefits.
6. What Is the Common Currency?
As mentioned in the last step, you can’t compare the current monetary value of costs
and benefits with future rates. That’s why you’ll have to calculate the time value of
money, discount rate, and the net present value of cash flows.
However, in some cases, the benefits of a project are not measurable in monetary
value. If you find yourself in that position, you should do a cost-effectiveness analysis.
7. What Is the Discount Rate?
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5/2/23, 6:33 PM Cost-Benefits Analysis for Projects - A Step-by-Step Guide

The discount rate is used to calculate the present value of the future cash flows
coming in or out of your project. Start free trial

8. What Is the Net Present Value of the Project?

The net present value of a project is a measurement of profit that is calculated by
subtracting the present values of cash outflows from the present values of cash
inflows over a period of time.
9. What Is the Sensitivity Analysis?
A sensitivity analysis is a probability method used in management and business to
determine how uncertainty affects your decisions, costs and profits.
In a project management CBA, sensitivity analysis is used to determine the benefit-
cost ratio of probable scenarios. You can use Excel or more specialized software to do
sensitivity analyses.
10. What Do You Do Once Your CBA Is Complete?
The final step after collecting all this data is to make the choice that is recommended
by the CBA, which is the one with the highest benefit-cost ratio.
Cost-Benefit Analysis Example
Now let’s put that theory into practice. For our cost-benefit analysis example, we’ll do
an assessment of a project that involves delivering a product as its main goal.
Costs
Direct costs: These are all the costs that are directly related to the
manufacturing of the product. Such as materials, equipment, labor, etc.
Indirect costs: Other expenses that are not directly related to the product such
as rent, utilities, or transportation costs.
Intangible costs: Any other costs that can’t be quantified, such as the brand
damage if the market doesn’t respond positively to the product.
Opportunity costs: The loss of opportunities that occurs when a decision is
made instead of another. For example, you could have chosen to manufacture a
product that could have been more profitable than the one you chose to make.
Costs of potential risks: Any project is susceptible to a variety of risks. You
should always consider that you might have unexpected costs at some point.
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Benefits Start free trial

Direct Benefits: The measurable benefits in monetary value that you get from
the project. In this case, the revenue, sales and profit obtained from your
product.
Indirect Benefits: Benefits that you can perceive but not necessarily measure
such as increased brand awareness.

Now that you have the costs and benefits of your project, it’s time to assign a
monetary value to them. In this case, we can only do that with our direct and indirect
costs and our direct benefits. However, you should assign other metrics like key
performance indicators to those that can’t be measured with a dollar amount.
Once you estimate the dollar value of your costs and benefits using past-project data,
you’ll have to compare them to see if the costs outweigh the benefits.
However, to do a more reliable CBA, you’ll need a sensitivity analysis to evaluate
different scenarios and how those affect your cost-benefit ratio. For example, try
different demand levels on your linear programming equation.
It’s important that you keep in mind that depending on the timeframe of your project,
you might have cash flows coming in and out at different times. For this reason, you’ll
need to consider the time value of money, discount rate, net present value when
comparing cost-benefit cash flows.
Capture all the costs and benefits with project management software. But unlike many
apps with inferior to-do lists, ProjectManager has a list view that is dynamic. It adds
priority, customized tags and you can assign team members to own each item. Our
cloud-based tool will also automatically track in real time the percentage complete for
each item. All the data you collect in our list view is also visible throughout the tool.
Use whatever view you want, they’re all updated live and ready for you to work with.

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How Accurate Is Cost-Benefit Analysis?

How accurate is CBA? The short answer is it’s as accurate as the data you put into the
process. The more accurate your estimates, the more accurate your results.
Some inaccuracies are caused by the following:

Relying too heavily on data collected from past projects, especially when those
projects differ in function, size, etc., from the one you’re working on
Using subjective impressions when you’re making your assessment
The improper use of heuristics (problem-solving employing a practical method
that is not guaranteed) to get the cost of intangibles
Confirmation bias or only using data that backs up what you want to find

Are There Limitations to Cost-Benefit Analysis?

Cost-benefit analysis is best suited to smaller to mid-sized projects that don’t take too
long to complete. In these cases, the analysis can help decision-makers optimize the
benefit-cost ratio of their projects.
However large projects that go on for a long time can be problematic in terms of CBA
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 However, large projects that go on for a long time can be problematic in terms of CBA.
5/2/23, 6:33 PM Cost-Benefits Analysis for Projects - A Step-by-Step Guide

There are outside factors, such as inflation, interest rates, etc., Start
thatfree
impact
trial
the
accuracy of the analysis. In those cases, calculating the net present value, time value
of money, discount rates and other metrics can be complicated for most project
managers.
There are other methods that complement CBA in assessing larger projects, such as
NPV and IRR. Overall, though, the use of CBA is a crucial step in determining if any
project is worth pursuing.
Templates to Help With Your Cost-Benefit Analysis
As you work to calculate the cost-benefit analysis of your project, you can get help
from some of the free project management templates we offer on our site. We have
dozens of free templates that assist every phase of the project life cycle. For cost-
benefit analysis, use these three.
RACI Matrix
One of the steps when executing a cost-benefit analysis (as detailed above) includes
identifying the stakeholders in your project. You need to list those stakeholders, but
our free RACI matrix template takes that one step further by outlining who needs to
know what. RACI is an acronym for responsible, accountable, consulted and informed.
By filling out this template, you’ll organize your team and stakeholders and keep
everyone on the same page.
Project Budget
You can’t do a cost-benefit analysis without outlining all your expenses first. That’s
where our free project budget template comes in. It helps you capture all the
expenses related to your project from labor costs, consultant fees, the price of raw
materials, software licenses and travel. There’s even space to capture other line items,
such as telephone charges, rental space, equipment for the office, admin and even
insurance. A thorough budget makes for a more accurate cost analysis.
Project Risk Register
You have your stakeholders identified and your budget outlined, but there’s always the
unknown to contend with. You can’t just leave that up to chance: you must manage
risk, which is why our free project risk register is so essential. Use it to outline the risks
inherent in the project. There are places to list the description of the risk, its impact,
the level of risk and who is responsible for it. By maintaining a good risk register you
can control the variables in your project and make a better cost-benefit analysis.
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No matter how great your return on investment might be on paper, a lot of that value
can evaporate with poor execution of your project. ProjectManager is an award-
winning project management software that has the tools you need to realize the
potential of your project. First, you need an airtight plan.
Planning
Our online Gantt charts have features to plan your projects and organize your tasks, so
they lead to a successful final deliverable. If things change, and they will, the Gantt is
easy to edit, so you can pivot quickly.

Resource Management
Another snag that can waylay a project is your resources. ProjectManager has
resource management tools that track your materials, supplies and your most valuable
resource: the project team. If they’re overworked, morale erodes and production
suffers.
The workload page on ProjectManager is color-coded to show who is working on what
and gives you the tools to reassign to keep the workload balanced and the team
productive.

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Real-Time Cost Tracking

The surest way to kill any project is for it to bleed money. ProjectManager lets you set
a budget for your project from the start. This figure is then reflected in reports and in
the charts and graphs of the real-time dashboard, so you’re always aware of how
costs are impacting your project. ProjectManager has the features you need to lead
your project to profitability.

Cost benefits analysis is a data-driven process and requires project management software
robust enough to digest and distribute the information. ProjectManager is a cloud-based
project management software with tools such as a real time dashboard that can collect
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project management software with tools, such as a real-time dashboard, that can collect,
filter and share your results in easy-to-understand graphs and charts. Try it today with this
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