University of Washington Extension

March 4, 2009

Cost Benefit AnalysisGeography CP300 : GIS Certificate Program

Cost Benefit Analysis

• C/B Analysis involves weighing the costs of (proposed) projects against their anticipated, and estimated, benefits.

• Why Do It ?– In most organizations, capital investments (ie, projects) must be

compared against each other and analyzed objectively.

– In public agencies, C/B analysis also provides documentation as to the true value of investments.

• Estimating Costs can be difficult, but…• Estimating Benefits is the real challenge

Cost Benefit Analysis

• What, why & who– Its mostly an inexact science, guided by basic

economic principles & common sense.– It’s a better approach than approving projects based

on vague assertions of needs or problems that need to be solved and/or the charisma of project sponsors.

– Project Managers lead the effort to develop costs, with support from a variety of experts. An economist, assisted by the user community, should lead the actual analysis and assignment of dollar values for benefits.

Estimating Benefits• Benefits are the services and capabilities of a

system or application that can be viewed as returns on investment.

• Benefits: …………• Benefits to a Sponsoring Agency include:

– increased revenue, avoided costs, – improved productivity

• Benefits to customers include:– Improvements to current services– New or additional services– Lower costs or rates

Cost Benefit Analysis

• Traditional Financial Analysis– Considers cost to implement a project and the

tangible benefits accrued from the investment

– Focuses on the Direct Financial Impacts to the agency sponsoring the project

Cost Benefit Analysis

• Triple Bottom Line Analysis– Includes Capital, as well as Operations and

Maintenance funding & Replacement costs– Considers a wider range of benefits and costs

• Also includes Social and Environmental benefits and costs

• Recognizes benefits and costs to Customers and the Community

• Technology projects in general are hard to cost justify in this model.

Benefit Categories

• Tangible Benefits– Benefits that are capable of being appraised at an

actual or approximate dollar value– Benefits are estimated by determining the “fair

market value” of the benefits

• Intangible Benefits– Benefits to which a dollar value cannot be

assigned.– Evaluators should assign relative numeric values

for comparison purposes

Traditional Tangible and Intangible Benefits for GIS projects

• Tangible Benefits– Reduce Duplication of Efforts across an agency or

between agencies– Enhance Productivity by Saving Time in Info search,

retrieval & analysis– Reduce Liability

• Intangible Benefits– Increase Accuracy & Consistency of Key Map Series– Improve Customer Service– Improve Decision Making

• Reduced Travel Time– One trip per week per crew– 1.5 hours per trip– $38 average hourly rate + overhead

• Reduced Data Recording– .5 hours per crew per day– 22 days per month– $38 average hourly rate + overhead

• Access to Information– 1 hour per day– 22 days per month– $38 average hourly rate + overhead

Examples of Benefit Calculations

Typical Cost Categories for a GIS Project

• In-house Staff (PM, ETC)

• Contractors (peak loads)

• Consultants (special skills)

• Data Acquisition• Software Licenses• Hardware (servers & mobile devices)

• Network (wireless?)• Training

Quantifiable Benefits to consider for GIS Projects

• Reduced Data Entry Time

• Reduced Data Entry Errors

• Penalty Avoidance

• Reduced Travel Times

• Reduced Time to Generate Reports

• Consolidating servers and reducing administration costs

Conclusions

• Successful projects need complete, inclusive cost estimates

• Funded projects almost always have to provide some statement of benefits

• Cost / Benefit identification and analysis is as much an art as a science.

• Experience and a good metrics base will make a good estimator into a better one.