What Is Cost-Benefit Analysis in Project Management?

What Is Cost-Benefit Analysis in Project Management?

Knowing how to conduct a cost-benefit analysis before investing organizational time and resources into a new project or business proposal can make the difference between eventual success and failure.

A cost-benefit analysis (CBA), sometimes referred to as benefit-cost analysis (BCA), makes it clear what projects or investments are most viable, possible, and beneficial for an organization at any given time. 

Below, we’ll delve into what cost-benefit analysis is and why it’s important. We’ll also outline the cost-benefit analysis steps to follow so you can make the best possible decision before embarking on new projects or taking on new investments. 

Cost-benefit analysis in project management

A cost-benefit analysis in project management is a tool to evaluate the costs vs. benefits of an important project or business proposal. It is a practical, data-driven approach for guiding organizations and managers in making solid investment decisions. It helps determine if a project or investment is financially feasible and beneficial for the organization.

A formal CBA identifies and quantifies all project costs and benefits, then calculates the expected return on investment (ROI), internal rate of return (IRR), net present value (NPV), and payback period. The difference between the costs and the benefits of moving forward with the project is then calculated. 

In a CBA, costs may include the following: 

• Direct costs: These are costs that are directly related to the proposed project or investment, e.g., materials, labor, and equipment.
• Indirect costs: These are related fixed costs that contribute to bringing the project or investment to life, e.g., overhead, administrative, or training expenses.
• Opportunity costs: These are the benefits or opportunities foregone when a business chooses one project or opportunity over others. To quantify opportunity costs, you must weigh the potential benefits of the available alternatives.
• Future costs: These are costs that may come up later in the project. These costs depend on certain factors happening, e.g., costs of mitigating potential risks.

Cost-benefit analysis facilitates a structured cost management process, helping project managers and company executives prioritize projects and allocate resources effectively to achieve the organization’s main goals. 

Benefits may include:

• Tangible benefits: These are measurable outcomes that can be easily quantified in monetary terms, e.g., increased revenue or reduced costs.
• Intangible benefits: These benefits are difficult to measure in monetary terms. They are indirect or qualitative outcomes, such as improved customer satisfaction or increased employee morale.

Although intangible benefits may be difficult to quantify in financial terms, it is necessary to factor them in when conducting a CBA, as they still have a significant impact on the overall value of a project. 

Quantifying intangible benefits

One way to account for intangible benefits in a CBA is to use qualitative measures to assess their value. For example, a survey or focus group can be used to gather information about customer satisfaction or employee morale. The results are then used to inform estimates of the value of these intangible benefits. 

In some cases, it may be possible to estimate the value of an intangible benefit based on its impact on other tangible benefits, such as increased productivity or reduced costs. Even though intangible benefits are more subjective and less precise than tangible benefits, ignoring them in your cost-benefit analysis can create an incomplete picture of the overall impact of a proposed project. 

Why is conducting a cost-benefit analysis important?

Conducting a project cost-benefit analysis helps to:

• Identify project costs and benefits: A project cost-benefit analysis ensures all costs and benefits associated with a project are identified and quantified. This reduces cases of hidden expenses and future hurdles or losses, which may only be apparent with a closer look at the project. 
• Provide a framework for analysis: A CBA provides a structured framework for analyzing the costs and benefits of a potential project. This helps ensure all factors are considered and the most optimal decision is made from a business perspective.
• Make better-informed decisions: A cost-benefit analysis helps decision-makers determine whether a proposed project or investment is worthwhile. By comparing the costs and benefits of the project, decision-makers make better-informed decisions and allocate organizational resources effectively.
• Promote transparency: A CBA promotes transparency by making the costs and benefits of any potential project visible and quantifiable. This can help ensure that decision-making is objective and all stakeholders have a clear understanding of the project’s potential impacts.
• Facilitate communication: A cost-benefit analysis in project management facilitates trust and a foundation for communication between various stakeholders by providing a common language and framework for analyzing a potential project. This helps ensure all parties are on the same page and decisions are made collaboratively and aligned with business goals and objectives.

How to conduct a cost-benefit analysis for a project

Conducting a project cost-benefit analysis is a straightforward process. Follow the four steps of cost-benefit analysis outlined below to get started.

1. Define project goals and objectives

The first step in conducting a cost-benefit analysis is to define the project scope and objectives. This includes identifying the following:

• The problem the project aims to solve
• The project goals
• The expected outcomes

Defining the project goals and objectives creates a solid foundation for the CBA to be as accurate as possible. The goals provide a framework and parameters the project must adhere to be successful. 

Once decided, list your project goals in a business case or project proposal. This will be useful in determining the metrics you’ll use to measure and compare the costs and benefits, and interpreting the results of the CBA. 

2. Identify costs and benefits

The next step is to identify and list all the costs and expected benefits associated with the proposed project. 

Create two lists: one for all the estimated costs and the other for the expected benefits. Include direct, indirect, opportunity, and future costs. After identifying the individual costs, assess the potential benefits of the project. Include all tangible and intangible benefits, even those that are difficult to quantify.

3. Add up all potential costs and benefits

Once you have your lists of costs and benefits, assign current, realistic monetary values to each one and then sum up both sides. Ensure that you use credible data sources. For instance, you can gather data from financial reports, market research, and expert opinions. 

Also, perform a project cost analysis and estimate the timing of the costs and benefits. Some may occur immediately, while others may crop up later on. By accurately calculating the timing of the project costs and benefits, you can determine their present value and evaluate the project’s financial feasibility.

4. Evaluate predicted outcomes

After adding up both sides of your analysis, you can calculate the total cost and benefit for the proposed project. If the benefits exceed the costs, the project may be worth pursuing. Conversely, if the costs exceed the benefits, it’s advisable to reconsider investing in it.

However, comparing the two totals is not the end. At this stage, revisiting the project goals and objectives set out in the first step of the CBA is helpful to check if the analysis shows you can achieve the set goals. Ask questions like: 

• Can your organization pool the needed funds to cover all costs? 
• Will the benefits come in time to keep business operations running smoothly?

Next, conduct a sensitivity analysis to test the robustness of the CBA results. This may require changing assumptions about costs, benefits, and discount rates to see how sensitive the analysis results are to changes.

Finally, interpret the results of the CBA and communicate them to stakeholders to make informed decisions about the project. A general rule of thumb to remember when evaluating project cost-benefit analysis is that the costs should be less than 50% of the benefits, and the payback period should not exceed a year. 

Cost-benefit analysis sample

Here’s an example of a cost-benefit analysis by a software company looking to upgrade its current customer relationship management (CRM) system. The two options being considered are:

• Option A: Upgrade to a more advanced CRM system that has enhanced features and capabilities and an easy learning curve
• Option B: Stick with the current CRM system and invest in additional training for employees to optimize its use

Here’s a simple version of what the cost-benefit analysis for each option may look like:

Option A: Upgrade to a more advanced CRM system

Benefits:

• Improved customer service and relationship management capabilities: $150,000 per year
• Increased efficiency and productivity: $100,000 per year
• Ability to analyze customer data and generate insights: $75,000 per year

Total estimated annual benefit: $325,000

Costs:

• Upfront cost of a new system: $150,000
• Implementation and training costs: $50,000
• Ongoing maintenance and support costs: $75,000 per year

Total annual cost: $275,000

Net annual benefit: $50,000

Option B: Invest in additional training for the current CRM system

Benefits:

• Increased employee expertise and productivity: $50,000 per year
• Improved customer service and relationship management capabilities: $75,000 per year

Total estimated annual benefit: $125,000

Costs:

• Cost of additional employee training: $25,000
• Time and resources required for training: $10,000
• Potential loss of productivity during training period: $15,000

Total annual cost: $50,000

Net annual benefit: $75,000

Based on this cost-benefit analysis, it may seem better for the company to go with Option B in the short run as it provides a higher net annual benefit of $75,000 compared to Option A, which only provides a net annual benefit of $50,000. Plus, it costs less.

However, from a forward-thinking perspective, it would be better for the company to go with Option A, even though it has an initially lower net annual benefit and higher costs. The compounding, long-term benefits of Option A are far more substantial than Option B and will bring in increasing ROI over time.

How can Wrike help you with your cost-benefit analysis in project management?

Wrike’s powerful enterprise project management platform helps to streamline project planning and execution from start to finish with a rich library of templates, a robust collaboration workspace that is easily integrated with other work-critical software tools, and smart features such as interactive Gantt charts and selective visibility and permission levels for teams, collaborators, and stakeholders on your account. 

You can use Wrike to gather relevant information about potential projects, organize your findings, evaluate predicted outcomes, and communicate a plan of action with stakeholders and team members.

To begin, create a folder to contain all your cost-benefit analysis details. Name it and write an overview summarizing the purpose of the analysis. Now, create sub-folders within the folder for each project or investment option. Add summaries and descriptions in the respective fields, stating what each project is about, its costs and benefits, and when it needs to be completed. 

Follow the cost-benefit analysis steps above. Invite teams and stakeholders to your workspace. Tag team members in charge of providing specific information — e.g., the finance manager — to provide cost figures before adding and comparing the costs and benefits. 

Once a project is approved, you can draft a timeline within Wrike and begin assigning tasks to team members. Pay attention to your resource allocation and note when you’ll be spending the most money and resources over the course of the project as well as when you’ll begin to receive the benefits. 

Are you ready to improve your project planning and management organization-wide? Get started with a two-week free trial of Wrike today. 

Further reading:

• Peter Taylor on Overcoming 7 Top Project Management Challenges (Book Review)
• Project Management Tools Every Event Planner Should Steal