Five key steps in conducting a cost-benefit analysis

The current COVID-19 crisis places a microscope on the decisions governments and not-for-profit organizations make. It is essential for decision-makers to understand the impacts of their decisions, as they have a fiduciary responsibility as stewards of the public funds they manage. A cost-benefit analysis is a critical tool for all public sector managers to leverage when making difficult financial decisions that will become commonplace as COVID-19 response and recovery processes continue.   

Most people do not realize that they conduct a cost-benefit analysis when making everyday decisions. The decision can be for something simple, for example, choosing whether to use beef or a plant-based alternative to make chili. It can also be more complex, such as deciding whether to purchase a property in a suburb with a large yard or a luxury loft condominium with breathtaking city views. A cost-benefit analysis is simply a systematic approach that individuals and organizations can use to analyze the risks and rewards of a project and select the optimal solution.

Cost-benefit analysis is a vital component of the decision-making process for governments and not-for-profit organizations. It is often used when considering a new program, eliminating services or even deciding which initiatives the organization will support as a component of its strategic mission.

Cost-benefit analysis includes the five fundamental steps outlined below.

Identify the scope – likely a project, initiative, program or service offering

To establish a framework, details of the proposed program, new project, strategic initiative or service offering must be outlined. This allows organizations to understand what is being evaluated, as well as the relationship it has to the problem or challenge being addressed.

Once the change or new program is outlined in detail, the current state of that environment will need to be outlined. This would include identifying the background, current challenges and performance of the environment related to the change or program.

Determine the scope

• Demographics need to be determined related to the decision and the population that it will impact. Key stakeholders should be identified and taken into consideration during the decision-making process. A time frame or period should be determined related to the decision-making process and implementation of the change or new program.