Project Selection Using Cost Benefit Analysis

Project business case is the first building block in the success of any project. It is used to capture the reasoning behind initiation of the work. Majority of business cases in most organizations do not succeed in convincing the board. Only few of them manage to make their way through the interrogative approach of the project steering committee. It is very useful to understand and manage expectations of the project steering committee members in any business case. It is important that the business case captures quantifiable and non-quantifiable benefits.

One of the critical convincing factors for any board is business benefits that can be justified using financial numbers. A cost benefit analysis finds, quantifies, and adds all the positive factors. These are the benefits. Then it identifies, quantifies, and subtracts all the negatives, the costs.  It includes all the costs and all the benefits and properly quantifies them. Should we get new staff or ask existing staff to do overtime? Should we go for new software or continue with manual processes.

Each of these questions can be answered by doing a cost benefit analysis. Let’s consider the business case example of automated coffee vending machines against manual coffee makers. Before you present the business case to the sponsor, you need to arrive at convincing numbers. Let’s talk about benefits. It can produce coffee within a minute. It will reduce staff waiting time. It would result in increased staff productivity. E.g. 3 minutes * 100 staff members=300 minutes.

It is the equivalent of 5 productive hours. It will come out to a saving of £100 per day @£20 per hour. If we take this into account it is going to be £24000 per annum (100*20 working day * 12 months). It appears to be a great benefit. Let’s talk about the cost involved with a proposed project. Say that the cost of purchase is going to be £20000. There would be an annual maintenance charge of £5000 for the machine. It is also going to consume electricity of approx. £1000 per annum. So the overall cost involved for the first year is going to be £26000. It sounds like a failure in the first instance as costs involved are higher than benefits. Let’s revisit costs again. A major contributing cost factor is the purchase of the new machine.

Let’s talk about expected savings and cost involved in the second year. It is going to cost £6000 vs a benefit of £24000 per annum. The above investment makes absolute sense now. Taking these numbers back to the steering committee will definitely raise the chances of project funding approval. Non usage of the above technique would have created an issue as the management could take a decision based on apparent numbers i.e. the first year cost vs. returns.

It is not expected from project managers to be sound in financials but they could utilize tools and techniques and work closely with financial SME’s in order to get the numbers right. It is not easy to get exact benefit numbers for all the projects. Some of them involve hypothetical calculation. Majority of environmental projects fall in this category. Neither is it easy to achieve straight benefits, these are usually calculated in terms of sampling, such carbon emission. The overall conclusion is that the cost vs benefit analysis technique can be a really useful tool in order to justify the purpose of a new project.