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• Research article
• Open access
• Published: 05 September 2018

Cost-benefit analysis of vaccination: a comparative analysis of eight approaches for valuing changes to mortality and morbidity risks

• Minah Park 1 ,
• Mark Jit 1 , 2 , 3   na1 &
• Joseph T. Wu 1   na1  

BMC Medicine volume  16 , Article number:  139 ( 2018 ) Cite this article

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There is increasing interest in estimating the broader benefits of public health interventions beyond those captured in traditional cost-utility analyses. Cost-benefit analysis (CBA) in principle offers a way to capture such benefits, but a wide variety of methods have been used to monetise benefits in CBAs.

To understand the implications of different CBA approaches for capturing and monetising benefits and their potential impact on public health decision-making, we conducted a CBA of human papillomavirus (HPV) vaccination in the United Kingdom using eight methods for monetising health and economic benefits, valuing productivity loss using either (1) the human capital or (2) the friction cost method, including the value of unpaid work in (3) human capital or (4) friction cost approaches, (5) adjusting for hard-to-fill vacancies in the labour market, (6) using the value of a statistical life, (7) monetising quality-adjusted life years and (8) including both productivity losses and monetised quality-adjusted life years. A previously described transmission dynamic model was used to project the impact of vaccination on cervical cancer outcomes. Probabilistic sensitivity analysis was conducted to capture uncertainty in epidemiologic and economic parameters.

Total benefits of vaccination varied by more than 20-fold (£0.6–12.4 billion) across the approaches. The threshold vaccine cost (maximum vaccine cost at which HPV vaccination has a benefit-to-cost ratio above one) ranged from £69 (95% CI £56–£84) to £1417 (£1291–£1541).

Conclusions

Applying different approaches to monetise benefits in CBA can lead to widely varying outcomes on public health interventions such as vaccination. Use of CBA to inform priority setting in public health will require greater convergence around appropriate methodology to achieve consistency and comparability across different studies.

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Health economic evaluations are used to inform medical procurement and reimbursement decisions by public and private healthcare providers. The most popular form of health economic evaluation is cost-effectiveness analysis (CEA), which often presents the ratio of the incremental cost of an intervention (from the perspective of either the healthcare provider or society) to the incremental health benefits of an intervention. A review conducted for the Bill & Melinda Gates Foundation of health economic evaluations of interventions related to malaria, tuberculosis, HIV/AIDS and vaccination in low- and middle-income countries found that, of 204 studies published in 2000–2013, 202 (99%) were CEAs [ 1 ].

Economic evaluations of large public health interventions such as new vaccination programmes attract particularly intense debates because of the high absolute costs (and potentially large benefits) involved [ 2 ]. A major focus of such debates has been about whether current economic evaluation techniques capture the full scope and value of these public health programmes. For instance, several reviews have found that vaccines may have broad, long-term societal consequences that are not always captured in CEAs [ 3 , 4 ], although many of these benefits can, in principle, be monetised and included in CEA based on a broader societal perspective as recommended by the US Second Panel on Cost-Effectiveness in Health and Medicine [ 5 , 6 ]. Such broader, non-health benefits of an intervention include effects on future productivity and consumption, social services, educational achievement and other societal impacts.

Several economists have instead proposed the use of cost-benefit analysis (CBA) [ 7 , 8 ]. The term CBA is often informally used to refer to any analysis used in decision-making that compares the expected costs and benefits (both in monetary terms) of an investment. In principle, to be regarded as complete, a CBA should capture all benefits due to an intervention, valuing them either at their market value or at the level of consumption that individuals are willing to forego to obtain them. Hence, it has its conceptual roots in welfare economics, which quantifies social welfare in terms of individuals’ willingness-to-pay (WTP) to increase welfare. By using a consistent, directly comparable metric to value all outcomes, CBA allows comparison with non-health interventions. A recent analysis estimated that the return on investment (a form of economic analysis that uses the same economic assumptions as CBA) for vaccines in low- and middle-income countries was comparable or superior to that for non-health interventions such as road safety [ 3 ].

The methodology for CEA has been well established, with the perspective or range of costs admissible in a CEA usually prescribed by ‘reference cases’ produced by particular health authorities. In CEAs, the perspective on costs can be narrow (costs and cost offsets falling to healthcare providers alone, as recommended by the National Institute for Health and Care Excellence (NICE) in the UK) [ 9 ] or broad (all costs and cost offsets falling on society, as recommended by the World Health Organization (WHO)) [ 10 ]. NICE’s recommendation to take a narrow perspective when estimating costs is reasonable given that its evaluations are intended to promote the most efficient use of available resources allocated to the NHS (or publicly funded health sectors) in particular [ 11 ]. Conversely, the WHO Guide to Cost-Effectiveness Analysis [ 10 ] explicitly recommended all costs and health effects to be valued from the societal perspective, because there are always opportunity costs in every decision we make, such that all costs and resources used for a chosen health intervention (regardless of who paid them) could have been used for other purposes in society, including non-health consumption. The guide further argued that the so-called ‘decision-maker’s approach’ taking such a narrow perspective is not consistent with WHO’s concern that governments should strive to maximise not only the overall health but also wellbeing of societies. The Second Panel on Cost-Effectiveness in Health and Medicine, composed of experts and leaders in the field of health economics, has also provided two reference cases for healthcare sector and societal perspectives, respectively, in their recent report. The Panel recommended that CEAs are undertaken based on both perspectives to improve the quality and comparability of CEAs [ 5 ].

Each of these approaches also affects the threshold by which an option with a particular cost-effectiveness ratio is deemed cost-effective. The CEA threshold is often determined based on one of the following: (1) the opportunity cost of new spending at the margin of a budget limit, (2) a multiple of GDP per capita, usually based on human capital arguments (although they have also been justified based on WTP) or (3) preference elicitation (based on WTP) [ 12 ]. Using a decision-maker’s perspective and assuming that the decision-maker has control over a budget with the objective of maximising health, the threshold should arguably be set based on the opportunity cost of new spending at the margin of the decision-maker’s budget. From a societal perspective, the threshold should arguably instead be set based on either the human capital value of improved health, or by preference elicitation (based on WTP) of societal willingness to improve health.

In contrast, there is less detail around CBA methodology in health. While there exists guidance on conducting CBAs for government policies [ 13 , 14 , 15 ], it generally is not as precise as ‘reference cases’ available for CEAs that specify the exact economic assumptions to be used in pharmacoeconomic evaluations. This is likely because CBA has not been used as extensively as CEA for informing decisions on specific healthcare resource allocation. While CBA is used to evaluate a broader range of public sector initiatives across multiple sectors, CEA guidelines are generally used in the health sector only.

Given the increasing interest in using CBA to evaluate the value of vaccinations and other major public health programmes (as in part evidenced by the Bill & Melinda Gates Foundation’s recent efforts to develop a reference case for CBA), it is important to understand the implications of different approaches for capturing and monetising benefits. To this effect, we conducted a CBA of human papillomavirus (HPV) vaccination as a case study. HPV vaccination is a major public health investment that has been the topic of numerous CEAs with a total of more than 60 studies identified across a number of systematic reviews [ 16 , 17 , 18 ]. Indeed, vaccination in general has been subject to numerous studies assessing costs and benefits based on various monetisation methods [ 3 , 19 , 20 , 21 , 22 ]. For the current study, we applied eight different approaches to monetise benefits of HPV vaccination and compared the results.

We conducted a CBA of HPV vaccination in the UK. HPV is the aetiological agent of a number of cancers and other diseases such as anogenital warts. Cervical cancer has the highest global burden among the HPV-related fraction of these cancers [ 23 ]. In particular, around 70% of cervical cancers are caused by HPV-16 and HPV-18. We have chosen this example as a large public health investment with a well-established model of HPV vaccine impact used for national decision-making, so that our focus in this study could be on the methodology of CBA rather than on the modelling of HPV epidemiology. For simplicity, we focus only on the value of vaccination in preventing cervical cancer due to HPV-16 and HPV-18.

The decision to introduce HPV vaccination in the UK was informed by a CEA that incorporated an epidemiological model of HPV transmission [ 24 ] to assess the impact of routine female adolescent two-dose vaccination on cervical cancer burden over a time horizon of 100 years. We adopted the same epidemiological model but used it as input for CBA. We assumed that (1) vaccination is given annually to 12-year-old girls at 80% coverage, with a catch-up campaign in the first year to age 16, and that (2) the vaccine provides lifelong protection against HPV-16 and HPV-18 without cross protection against other HPV types. Costs and benefits were discounted at 3.5% per annum. For the probability sensitivity analysis, we used Latin hypercube sampling to generate 1000 scenarios that encompass the uncertainties in epidemiologic and economic parameters.

The outcome in our CBA was threshold vaccine cost (TVC), which we defined as the maximum vaccine cost per person (including the administration cost) at which HPV vaccination has a benefit-to-cost ratio above one (i.e. the vaccination programme is cost-beneficial) (Additional file 1 ). The direct benefits of vaccination included all medical cost avoided due to reduced screening for and treatment of cervical cancer and pre-cancerous lesions (Additional file  2 : Table S1).

We applied two conceptually different approaches to monetise benefits (lost production and WTP) to examine the impact of varying methods on the results. Estimates of WTP were derived from stated or revealed preference studies while lost production were measured using the human capital and friction cost methods as summarised in Table  1 .

Lost production: Conventional production-based approaches

While conventional CBA generally assumes that individuals are the best judges of their own welfare (i.e. consumer sovereignty) and that monetary values should reflect individual willingness to exchange consumption for the outcomes of concern (e.g. [ 25 ], p. 30), lost production has also been commonly used in the CBA literature to value health [ 26 , 27 , 28 , 29 , 30 , 31 ]. Under these approaches, productivity loss averted due to reduction in morbidity and mortality were incorporated as indirect benefits of vaccination in terms of the wider economic effects of health as human capital (rather than its intrinsic value).

We considered the two most commonly used production-based approaches, namely the human capital (HC) and friction cost (FC) methods. From the perspective of affected individuals, the HC method assumes that production loss incurred by sick or deceased workers is irreplaceable. The duration of productivity loss for a sick worker was therefore assumed to be the same as the entire duration of disease treatment, whereas productivity loss due to premature death was estimated by assuming an average retirement age of 65. Specifically, production loss was measured with a cumulative sum of income lost over the duration of illness (morbidity) and the number of years lost due to premature death (mortality) using age-specific employment rates and mean personal incomes retrieved from the UK Office for National Statistics [ 32 , 33 ].

In contrast, the FC method takes the employer perspective and assumes that there always exists some level of involuntary unemployment and hence a sick or deceased worker is replaceable by an otherwise unemployed worker [ 34 ]. As such, the FC method only accounts for productivity loss during the friction period, which is defined as the time between the first day of absence of a sick or deceased worker and the last day of training for a replaced worker. According to the 2015 UK Recruitment Trends Report [ 35 ] based on responses from major UK recruitment agencies, the average time to fill a vacancy (i.e. time between announcing a job and finding a successful applicant) ranged from 6 to 44 days in 2014. The average time in training for a new employee of 6.8 days was derived from the UK Employer Skills Survey 2015 [ 36 ]. As the friction period largely depends on the type of job (e.g. longer friction period for jobs requiring higher-level knowledge and skills) and economic or labour market conditions, it was difficult to find all the necessary data needed to estimate the friction period. We assumed that the sum of (1) the time period between the start of absence by a sick employee and the first day of job announcement and (2) the time period between the acceptance of job offer and the first day of training of a new employee to be approximately 3 to 5 weeks in total based on Koopmanschap’s study [ 34 ]. The friction period in the UK was estimated to be approximately 34 to 86 days. In addition to productivity loss incurred over the friction period, we considered additional administrative costs related to hiring (£2610) [ 36 ] and training (£5433) [ 37 ] a new worker for all mortality and long-term morbidity cases (i.e. treatment time > friction period).

The conventional production-based approaches account for productivity loss from individuals with the paid jobs only and thus disregard homemakers who comprise a substantial proportion of cervical cancer cases (mean age 45, interquartile range 27–59) [ 38 ]. As indicated in one of WHO’s guidelines on CBA, the economic value of unpaid work, such as homemaking and caring, is undervalued using this approach [ 39 ]. As such, we also considered modified versions of the conventional production-based methods (HC-M and FC-M) in which paid labour and homemakers within the same age group were assumed to have the same economic productivity. The assumption is in line with the UK’s recent effort in recognising the value of unpaid work at home and its contribution to the economy, by providing it with a monetary value equivalent to the average wages of those who are paid to do those tasks [ 40 ]. The proportion of homemakers in each age group was approximated based on the Office for National Statistics employment statistics [ 13 ].

Lost production: a new production-based approach

The conventional production-based approach has the advantage that it uses relatively objective and quantifiable measures (e.g. wage rates) compared to a WTP-based approach. However, the theoretical framework of neither the HC nor the FC method is completely sound, because (1) the HC method’s underlying assumption of full employment is often considered unrealistic and (2) the friction period of the FC method largely varies across occupations, times and countries. In order to address both issues, we examined how easily job vacancies could actually be filled within the ‘normal’ friction period in the current UK labour market.

We considered a new approach for estimating productivity loss by interpolating between the HC and FC methods (HC/FC). Under this approach, productivity loss was a weighted average of that under the two methods where the weight for HC corresponded to the proportion of jobs that are unlikely to be filled within the friction period in the current labour market. We estimated this weight based on recent statistics on ‘hard-to-fill vacancies’ (HtFV) from the UK Commission’s Employer Skills Survey 2015 (Additional file  3 : Table S2) [ 36 ]. HtFV refer to vacancies that are difficult to fill due to skill-related (e.g. lack of qualified applicants) or non-skill-related reasons (e.g. low pay offered for the post). It was noted that there is a major gender difference in occupational employment in the UK [ 41 ], with women historically dominating employment in jobs such as leisure and caring while men dominating in construction industry, for example. To take into account the gender difference in occupational employment and largely varying proportions of HtFV by industry sector [ 36 ], we calculated the weighted proportion of HtFV for women to be used in the analysis. We compiled two recent UK employment statistics that provide (1) the distribution of female workforce [ 42 ] and (2) the proportion of HtFV in 13 industry sectors categorised according to the Standard Industrial Classification [ 36 ]. The distribution of females in the workforce largely varied by industry sector, ranging from 0.6% in agriculture to 22% in health and social work, while the proportion of HtFV (regardless of gender) ranged from 23% in education to 43% in construction.

WTP: the value of a statistical life (VSL) approach

Under this approach, the monetary values of both pecuniary (e.g. avoided medical expenses) and non-pecuniary (e.g. pain and suffering associated with the disease) benefits are presumed to be encapsulated by VSL estimates given that individuals’ WTP takes into account the impact of mortality risk reductions on their wellbeing in every aspect. The VSL estimates are used to value mortality risk reductions and obtained via (1) revealed preferences (VSL-RP) based on labour-market or hedonic wage studies; or (2) stated preferences (VSL-SP) based on contingent valuation studies [ 8 ]. While the VSL generally does not address morbidity associated with non-fatal cases, it has been suggested that VSL-RP may as well include the value of the associated morbidity risk though it is likely to be minimal (6–25%) compared to the value of the fatality risk [ 43 ]. As for the VSL-SP, there has been mixed evidence regarding the morbidity premium (or cancer premium) to take into account the effects of morbidity associated with the fatality in the VSL estimate [ 44 , 45 , 46 ]. This highlights a key advantage of the VSL approach over the HC or FC methods that do not take into account the intrinsic value of health gains. We considered seven different VSL estimates derived from three individual studies (labelled as ‘Lang’, ’Viscusi’ and ‘Gayer 1–2’ in Fig.  1 ) and three normative national and international guidance (‘UKHSE’, ‘USDoT’ and ‘OECD’) (Additional file  4 : Table S3). For VSL-RP, we selected (1) a VSL estimate currently in use by the US Department of Transportation (‘USDoT’) [ 47 ], which is very similar to that adopted by the US Department of Health and Human Services [ 14 ] and the US Environmental Protection Agency [ 15 ], as well as the estimated means from a meta-regression analysis, which adjusted for publication bias [ 48 ], and (2) a range of VSL for cancer risk reduction estimated based on hedonic housing prices in the US (‘Gayer 1–2’) [ 49 ]. For VSL-SP, we selected VSL estimates from (1) a WTP study conducted among cervical cancer patients in Taiwan (‘Lang’) [ 50 ], (2) a recent systematic review of VSL focusing on a ‘cancer premium’ (‘Viscusi’) [ 45 ], (3) recommendation of the UK Health and Safety Executive (‘UKHSE’) [ 13 ], and (4) OECD guidelines for EU-27 countries (‘OECD’) [ 44 ]. All VSL estimates were converted to the current UK currency based on the OECD guideline [ 44 ]. To convert VSL values varying across countries and over time to the UK 2015 value, we used the benefit transfer method with income adjustments. For example, to approximate VSL used by the US Department of Transportation, we used purchasing power parity (PPP)-adjusted GDP per capita in the following equation:

Direct and indirect benefits of two-dose HPV vaccination in the UK (top) and threshold vaccine cost (TVC) estimates (bottom) under different cost-benefit analysis (CBA) approaches

Here, PPP-adjusted GDP per capita for both the UK and the US were extracted from the World Bank [ 51 ]. To convert the VSL (in USD) estimated from the above equation to the UK currency, we used PPP-adjusted exchange rates from OECD Statistics [ 52 ]. To update VSL values across different years (e.g. 2000 to 2015), we used the average Consumer Price Index and Real Income in the UK as follows:

Data on Consumer Price Index and Real Incomes across different years were available at the UK Office for National Statistics website [ 53 ]. After the adjustment, the selected VSL estimates ranged from £1.1 million to £7.2 million. Each adjusted VSL estimate was then multiplied by the projected number of cervical cancer deaths prevented from vaccination.

WTP: the quality-adjusted life-year (QALY) monetisation (QM) approach

Under this approach, the health outcome in conventional cost-utility analyses, namely QALY, was monetised using individual WTP for an additional QALY gained. Based on a study that assessed WTP for the respondent’s own additional QALY gained (WTP sel ) in the UK [ 54 ], we applied £23,000 to the discounted QALY gained. Our QM approach with a £23,000/QALY WTP is analogous to NICE’s cost-effectiveness reference case, which has a cost-effectiveness threshold of £20,000–£30,000/QALY [ 9 ], although our approach is based on individual rather than societal WTP arguments. Hence, it would be expected that the net present value of an intervention using our QM approach would correspond to its net monetary benefit evaluated using NICE’s reference case.

Integration of production-based and QM approaches

Under these approaches, productivity loss from production-based approaches and monetised QALYs gained were both included when estimating the economic benefit of vaccination (e.g. HC/QM when HC is integrated with QM) to capture both the intrinsic and the instrumental value of better health. Such analyses are analogous to cost-utility analyses using a societal perspective.

Future deaths averted were discounted at 3.5% per annum back to the reference year, i.e. the year in which the vaccination programme is initiated. Subsequently, the value attached to averted mortality was discounted further, depending on the method used. For production-based (HC and FC) and QM approaches, the productivity loss and QALYs lost for each year of life lost due to premature death was discounted back to the year of death. For the VSL-based approaches (VSL-RP and VSL-SP), the same value was ascribed to a prevented death regardless of the age of the woman or the number of life years averted, as has been standard practice for public policy analyses [ 55 ].

Among all CBA methods considered, the WTP-based approach using the VSL yielded the highest TVC estimates. Specifically, the median TVC estimates ranged from £206 (interquartile range: £187–£223) to £939 (£855–£1021) under VSL-SP and £734 (£669–£798) to £1417 (£1291–£1541) under VSL-RP, which correspond to approximately 78.6% and 541% of the TVC estimated under the standard QM method (£262), respectively (Fig. 1 ). When the QM approach was integrated with the production-based approaches, the TVC estimates ranged from £268 (£244–£293) with FC/QM to £373 (£345–£407) with HC/QM and remained lower than that estimated under the VSL method.

Under the production-based approach, the direct benefit was £0.54 billion (£0.44 billion to £0.66 billion). The mean UK female employment rate used to measure the indirect benefits in terms of averted productivity loss was 36.9% for those aged 16–19 and 64.7–77.6% for those aged 20–64. The indirect benefits varied 9-fold across different monetisation methods utilising the production-based approach, at £33 million in FC, £37 million in FC-M, £946 million in HC, £1.1 billion in HC-M, and £324 million in HC/FC (Fig. 1 ). Consequently, the FC method resulted in the lowest TVC estimate of £69 (£56–£84), which is only 26% of the TVC estimated under the QM. When integrated with the QM method, the total indirect benefits increased by nearly 53-fold (£1.7 billion) and 2-fold (£2.6 billion) for the FC and HC methods, respectively. Similarly, with homemakers (around 8.9%–13.9% across the different age groups in 2015) included in the calculation of productivity loss under the modified production-based approaches, the TVC estimate increased by 1–2% (from £56–£84 to £57–£85) and 8–10% (from £157–£195 to £172–£211) under the FC and HC method, respectively (Additional file  5 : Table S4).

Point estimates and error bars indicate medians and interquartile ranges across 1000 scenarios randomly generated. Benefits under the VSL approaches cannot be decomposed into direct and indirect components. VSL estimates used in Gayer–1 and –2 were derived from the same study using different level of cancer risk [ 49 ].

The proportion of HtFV varied by industry sector, ranging from 23% in education (in which 16% of women work) to 43% in construction (in which fewer than 2% of women work). Considering the gender difference and varying proportions of HtFV across different establishments, we estimated that the overall proportion of HtFV among the female workforce in the UK was 31% (Additional file  3 : Table S2). That is, we estimated that 69% of all vacancies would be filled with a replaced worker within the friction period. The resulting TVC estimate was £101 (£88–£118) under HC/FC, which was 56% lower and 11% higher than that under HC and FC, respectively. Relative changes in TVC were similar when homemakers were included in the calculation of productivity loss.

We found that the economic benefits of vaccination against HPV-16 and HPV-18 in the UK could vary by as much as 20-fold depending on the method used to monetise benefits. In particular, two-dose HPV vaccination in the UK was found to be not cost-beneficial under the HC approach and all FC-related approaches except when integrated with QM.

Our results suggest that using different approaches to monetise benefits can lead to divergent conclusions about the value of vaccination. Our TVC estimates for a vaccine against cervical cancer in the UK ranged over an order of magnitude (£69–£1417) depending on the method used to value the benefits of cervical cancer prevention. The TVC estimate was lowest (£69–£191) when benefits were valued in terms of productivity loss averted due to ill health and premature mortality, particularly if the friction cost method was used, and highest (£206–£1417) when VSL methodology was used. When an individual WTP for an additional QALY gained was used instead, the TVC estimates (£262–£373) were generally higher than that obtained by valuing productivity gains but lower than that obtained using VSL methods.

Our finding that measuring benefits based on WTP estimates (e.g. the VSL and QM approaches) yields larger benefit estimates than measuring benefits based on lost production (e.g. HC and FC) is unsurprising – this is likely because the former includes both financial (e.g. medical expenses and losses in future earnings) and non-financial (e.g. avoided pain and suffering) benefits of the intervention, whereas the latter solely focuses on lost production [ 56 , 57 ]. The finding that the FC method yields much smaller benefit estimates than the HC method is likewise intuitive, because the FC method only takes into account temporary losses during the friction period while the HC method assumes lifetime losses during the entire period affected by morbidity and mortality.

Each of the methods used has advantages and limitations. Production-based approaches for valuing health gains have been criticised for not being consistent with the theoretical foundations of CBA in welfare economics, as they focus on changes in productivity rather than measuring overall welfare. Similarly, QALY-based approaches do not fit naturally within the conceptual framework of welfare economics, because they measure changes in health rather than overall welfare. The approach that most directly reflects the principles of welfare economics is to estimate the consumption that affected individuals are willing to trade-off to avoid morbidity or mortality [ 27 , 58 , 59 ].

Valuing benefits based on averted productivity loss has the advantage of being based on an easily measurable quantity (market income). However, for diseases such as cancer, which tend to cause long-term work absences, the difference in outcome between the production-based approaches can be large. In our study, productivity loss estimates under the HC approach were 29 times higher than that under the FC approach. Similarly, Oliva et al. [ 60 ] found that the annual productivity cost of mortality due to cervical cancer in Spain was €21.7 million based on HC and €0.39 million with FC (56-fold difference). Advocates of the FC method argue that there is always some level of involuntary unemployment, so the HC method overestimates the societal cost of long-term illness or death by measuring the ‘potential’ productivity loss over the entire period of absenteeism beyond the friction period [ 34 ]. The FC method purports to measure the ‘actual’ productivity loss to society from an employer’s perspective by considering the time and related costs (e.g. hiring and training costs) needed to fully restore production levels with a replacement worker.

Both conventional production-based methods have been criticised for valuing life purely in terms of marketable productive capacity and not providing an explicit value for the health gains themselves (i.e. ignoring the additional value of avoided suffering, leisure time and unpaid labour) [ 61 ]. The concern is that this may lead to prioritising interventions that primarily benefit high-wage earners over low-wage earners and those doing unpaid labour (e.g. caregiving and housework). In our analysis, we have accounted for unpaid labour by employing the modified versions (namely HC-M and FC-M) and estimate that the TVC for HPV vaccination increases by 22% with the HC and 2% with the FC method if all females are included in productivity loss calculations (data not shown here), rather than those in the paid labour force only. It should be noted, however, that the market value approach that we used measures unpaid household work based on the population average wage, which differs from the conventional method of valuing household based on the average wage of a paid household worker or carer.

Measuring lost production by using wage rates raises a number of methodological questions, including (1) whether or not to assume full employment (we capture this uncertainty by showing results using both HC, which assumes full employment and competitive labour markets, and FC, which does not make these assumptions), (2) whether the economic value of lost productivity is best captured by the employer perspective (so measured in pre-tax wages including fringe benefits and indirect costs) or employee perspective (so measured in post-tax wages), and (3) how to capture labour market constraints on how much work an individual does, since there may be requirements to work a fixed number of hours [ 62 ]. For example, Bockstael et al. [ 63 ] found that individuals who are required to work a fixed number of hours valued the opportunity cost of time approximately 3.5-fold more than the wage rate, whereas those with flexible working hours valued it similarly to their wage rate.

We proposed an alternative production-based method that may be used instead of established methods, as it strikes a balance between the two approaches in terms of assumptions about unemployment. Weighting the outputs from the two methods according to the proportion of HtFV should theoretically give estimates closer to the actual productivity loss due to ill-health.

An alternative approach is the VSL method. The VSL reflects the marginal rate of substitution between money (or income) and mortality risk and infers the value of the consumption of market goods that individuals are willing to forgo to achieve a reduced risk of premature death [ 8 ]. Hence, VSL can be seen as a direct application of the welfarist principle of consumer sovereignty. Consistent with the conceptual framework for CBA, VSL estimates are highly context specific. In practice, however, researchers often rely on the averages across country populations (or even extrapolations from other countries), which can potentially cause under- or overestimations of the result. Furthermore, there are few VSL estimates from low- or middle-income countries. VSL estimates for cancer are particularly divergent, with debates around the existence and magnitude of a ‘cancer premium’ that inflates the VSL for a cancer death in comparison to a death from an acute fatality to incorporate the latency and morbidity period of cancer. For instance, Viscusi et al. [ 45 ] suggested the use of 1.21 for cancer premium, the US Environmental Protection Agency, the European Commission and several studies recommend a cancer premium of 1.5 [ 46 , 64 , 65 ], and the UK’s Health and Safety Executive doubles the VSL (or the value of preventing a statistical fatality) estimates of accidental death to derive a VSL estimate for cancer [ 13 ]. We understand that there are concerns about transferring VSL between countries with different healthcare systems, income levels and cultural values that may affect mortality risk valuation. Nevertheless, we have used VSL estimates derived from other countries also for the following reasons: (1) there is disagreement and inconsistency with the use of a ‘cancer premium’ when applying a standard VSL to cancer studies and (2) there were few studies reporting cancer-specific VSLs at the time of the study, none of which was from the UK. To minimise such effects, we have adjusted for different income levels and costs between the countries using the ‘unit transfer with income adjustments’ method.

A third approach is to monetise individual WTP for an additional QALY gained. It offers policymakers the flexibility to incorporate additional units for the value of non-health outcomes not captured in measures such as QALYs, as well as to compare outcomes with non-health interventions. In practice, monetised QALYs has been used by government agencies such as the US Department of Health and Human Services [ 14 ] and US Food and Drug Administration for regulatory analyses [ 66 ]. However, there is still an on-going debate around the use of monetised QALYs in healthcare decision-making among health economists. During the meeting organised by the US National Institutes of Health in 2010, for example, it was argued that QALYs should not be monetised since this approach lacks theoretical and empirical support [ 67 ]. It should also be noted that adding productivity costs to monetised QALYs may lead to double counting, as there remains uncertainty about whether productivity loss has been fully captured in QALY measures [ 5 , 6 ].

Hence, a key challenge to using CBA for priority setting around public health interventions is the great variety in the way benefits can be monetised and the relative lack of detail on normative guidance about the appropriate methodology to use.

In principle, CBA offers the opportunity to capture many benefits of public health interventions such as vaccination that may not naturally fit into a CEA framework. Other approaches, such as cost-consequences analysis and multiple criteria decision analysis, also admit a wider range of outcomes, but do not offer a straightforward way to synthesise multiple outcomes into a single measure. Wider use of CBA to evaluate public health interventions will require greater convergence around the appropriate methodology to use in order to achieve consistency and comparability across different studies. Ultimately, discussions around appropriate methodology for CBA could help us better understand what we actually value about health.

Abbreviations

cost-benefit analysis

cost-effectiveness analysis

friction cost

modified friction cost method

human capital

modified human capital method

human papillomavirus

hard-to-fill vacancies

National Institute for Health and Care Excellence

purchasing power parity

quality-adjusted life-year

monetisation of QALYs

threshold vaccine cost

value of a statistical life

VSL based on revealed preference

VSL based on stated preference

World Health Organization

willingness-to-pay

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This study was supported by a commissioned grant (HSK-17-E15) from the Health and Medical Research Fund from the Government of the Hong Kong Special Administrative Region and Award Number U54GM088558 from the National Institute of General Medical Sciences. MJ was supported by the National Institute for Health Research Health Protection Research Units (NIHR HPRUs) in Immunisation at the London School of Hygiene and Tropical Medicine in partnership with Public Health England (PHE). The content is solely the responsibility of the authors and does not necessarily represent the official views of the National Institute of General Medical Sciences, the National Institutes of Health, the National Health Service, the NIHR, the Department of Health, or PHE.

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The epidemiological outputs generated from the HPV transmission dynamic model and used in the current study are available from the corresponding author on reasonable request. All other data generated or analysed during this study are included in this published article (and its supplementary information files).

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Mark Jit and Joseph T. Wu contributed equally to this work.

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WHO Collaborating Centre for Infectious Disease Epidemiology and Control, School of Public Health, Li Ka Shing Faculty of Medicine, The University of Hong Kong, G/F, Patrick Manson Building (North Wing), 7 Sassoon Road, Hong Kong SAR, People’s Republic of China

Minah Park, Mark Jit & Joseph T. Wu

Department of Infectious Disease Epidemiology, London School of Hygiene and Tropical Medicine, Keppel Street, London, WC1E 7HT, UK

Modelling and Economics Unit, Public Health England, 61 Colindale Avenue, London, NW9 5EQ, UK

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MJ and JTW designed and conceived the study. MP collected and analysed the data. All authors contributed to interpreting the results and drafting the manuscript. All authors read and approved the final version before submission.

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Additional files

Additional file 1:.

Supplementary Text. Summary of the literature review and descriptions on the methodology used for calculating conventional and modified production-based approaches

Additional file 2:

Table S1. Summary of cost and QALY parameters used in the model

Additional file 3:

Table S2. Distribution of women in workforce and the proportion of hard-to-fill vacancies across industry sectors

Additional file 4:

Table S3. List of selected value of a statistical life (VSL) estimates included in the analysis

Additional file 5:

Table S4. Threshold vaccine cost (TVCs) based on different methods of monetising benefits

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Park, M., Jit, M. & Wu, J.T. Cost-benefit analysis of vaccination: a comparative analysis of eight approaches for valuing changes to mortality and morbidity risks. BMC Med 16 , 139 (2018). https://doi.org/10.1186/s12916-018-1130-7

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Cost-Benefit Analysis for Business Cases (Definition, Steps, Example)

When you prepare a project in line with PMI or other established project management methodologies , you will have to create a project business case. This business case is usually a study on the expected qualitative and financial benefits of a single project or different project options. An essential part of this process is the cost-benefit analysis (sometimes also called benefit-cost analysis).

What Is a Project Business Case?

What is a cost-benefit analysis used for, net present value (npv), benefit-cost ratio (bcr), payback period (pbp / pbp), return on investment (roi), internal rate of return (irr), comparison of approaches – differences between npv vs bcr vs pbp vs roi vs irr, step 1) define the scope and purpose of a cost-benefit analysis, step 2) define the fundamental assumptions, step 3) determine the qualitative advantages and disadvantages of a project or investment option, step 4) develop a forecast of investments, costs and benefits, step 5) choose the methods to assess a project option (e.g. npv, bcr, irr), step 6) calculate the value of the success measures, step 7) consolidate, compare and interpret the results, forecast of cash flows, determination of the discount rate, comparison of npv, bcr, pbp, roi and irr results.

Before a project is initiated, the potential benefits need to be analyzed in a project business case. This document is also the basis for stakeholder decisions and the selection of project options.

The Project Management Institute (PMBOK®, 6 th ed., part 1, p. 30) defines the business case as a ‘documented economic feasibility study’ that outlines the business needs, the current situation, an economic analysis and recommendations. In practice, the structure of business case documents is typically tailored to the requirements and expectations of the stakeholders and the organization. In order to evaluate the economic effects of a project and make different project options comparable, project managers leverage the tools and techniques of the cost-benefit analysis (see next section).

A business case is often accompanied by a benefits management plan (which is also suggested by the PMBOK). This document sets out how the project is going to ensure that the expected benefits will eventually materialize in reality. Both the business case and the benefits management plan are the foundation and input documents of the project charter which is the formal documented authorization and mandate for the initiation of a project.

What Is a Cost-Benefit Analysis?

A cost-benefit analysis is an economic evaluation of investment alternatives and project options with respect to their profitability and liquidity effects. It can also consider non-financial and qualitative aspects which however may or may not be reflected in the forecast of cost and benefits.

Besides forecasting investments, cost and benefits over an individually defined time horizon, a cost-benefit analysis usually involves a number of indicators. These measures aggregate forecasts and assumptions into catchy numbers that can be used for comparison and communication purposes.

Discounting cash flows, determining the amortization time, and calculating return rates are the most common approaches for calculating key performance indicators of a forecast in a cost-benefit analysis. We will cover these approaches in detail in the next section.

There are several reasons for using a cost-benefit analysis. The most obvious one is to determine the expected financial returns and profitability of an investment or a project. Subsequently, different options can be compared with each other based on cost-benefit analyses. This can be the basis for decision-making and the selection of the alternative or option to go for (source). This is a typical step before project initiation and often part of a project business case.

The initial cost-benefit analysis results also serve as a baseline for the measurement of success in an ongoing project. Thus, they help project managers, sponsors and other stakeholders to measure, monitor and manage the value a project is creating against the original expectation.

Although the cost-benefit analysis is not an original risk management technique, its results can be used to assess and consider certain risks of a project. An example is a benefit-cost ratio greater than 1: the closer it gets to 1, the higher the risk that even small deviations from the forecasted benefits lead to a loss-producing project.

On the other side, discounted cash flow-based approaches can be calculated using a risk-adjusted discount rate. This allows taking inherent risk into account when net present values or benefit-cost ratios are calculated.

What Are Common Tools and Techniques of a Cost-Benefit Analysis?

An inevitable part of a project business case and a cost-benefit analysis are certain success measures. While the set of indicators needs to be in line with the organization’s requirements, there are in fact a number of very common indicators that are introduced below.  Although the following list is not exhaustive, it covers the generic types of the most common success measures, namely:

• Net present value (NPV),
• Benefit-cost ratio (BCR),
• Payback period (PBP or PbP),
• Return on investment (ROI),
• Internal rate of return (IRR).

These success measures allow project managers to conduct a balanced cost-benefit analysis that covers different aspects such as profitability, liquidity and riskiness of project options. At the same time, these indicators are comparatively simple to calculate and easy to understand in the course of stakeholder communication .

The NPV represents the present value of a series of cash flows. The calculation involves the discounting of net cash flows with a discount rate. This rate is part of the set of assumptions required for applying the net present value method.

The underlying series of cash flows begins with the initial investment as an outflow, followed by net cash flows for each period of the time horizon of the forecast. Future cash flows and a remaining value (or salvage value), as well as disposal costs or further returns expected in subsequent periods, are reflected in a residual value.

Read more in our article on the net present value and use our NPV calculator to determine the value of your project options and investment alternatives.

What Is the Net Present Value (NPV) & How Is It Calculated?

Net Present Value (NPV) Calculator

The benefit-cost ratio compares the present values of all benefits with the present value of all costs expected in a project or investment. A value greater than 1 indicates a profitable project with a total return exceeding the discount rate. A value of less than 1 suggests that the forecasted series of cash flows is not a profitable option.

Read more in our article on the benefit-cost ratio and use our BCR calculator to determine the value of your project options and investment alternatives.

What Is the Benefit Cost Ratio (BCR)? Definition, Formula, Example.

Benefit Cost Ratio (BCR) Calculator

The payback period determines the period in which the cumulative cash flows of a project turn positive for the first time. At that point, the initial investment has been ‘paid back’.

The series of cash flows usually starts with an investment (an outflow, hence a negative number), followed by positive and/or negative net cash flows. These can be even, i.e. the net cash flow remains constant for the entire forecast horizon, or uneven with different values among the periods of a forecast.

When determining the payback period, the generic approach does not use any discount rates or other adjustments which may be inaccurate for long-term forecasts. However, there are a number of modified PbP approaches that can be used to resolve this disadvantage.

Read more in our article on the payback period and use our PbP calculator to determine the value of your project options and investment alternatives.

Payback Period Calculator – PbP for Even & Uneven Cash Flows

The basic formula of the ROI is a division of expected constant returns by the investment amount. It is usually calculated for only one period. However, there are several variants of the return on investment method, including a cumulative and annualized ROI (for multiple periods).

Return on Investment (Single & Multi-Period ROI): Formulae, Examples, Calculator

The internal rate of return is determined by using a net present value calculation. The IRR is the discount rate that would lead to an NPV of 0 if applied to the individual forecast. The resulting rate is the fictive interest or return rate of an investment.

Internal Rate of Return (IRR) vs. ROI – What Are the Differences?

IRR Calculator: Internal Rate of Return (IRR) of Projects

How to Do a Cost-Benefit Analysis in 7 Steps

Follow these 7 steps to prepare a cost-benefit analysis. You will need some input data, as set out in the individual steps, a calculator and a fundamental understanding of the aforementioned indicators. You can download this checklist which will help you gather the required information and data.

The following steps refer to both the qualitative and the financial aspects of a cost-benefit analysis.

First things first: before you start assessing different project options or investment alternatives, make sure that you develop and agree on a clear definition of the scope and purpose of the analysis.

The scope describes what exactly you are going to evaluate. This may refer to high-level project options, single investments or other types of endeavors that are selected for the analysis. For a proper cost-benefit analysis, it should be clear which components are expected to be included (e.g. indirect / internal costs and benefits) and which are not (e.g. direct or indirect taxes).

Determining the purpose of the analysis relates to the expected result type. It clarifies whether solely economic aspects are to be considered, or whether qualitative criteria are also relevant and part of this analysis. A project manager should also be aware of whether profitability, liquidity or risk is the organization’s most relevant consideration.

Examples of cost-benefit analyses that may not solely focus on economic criteria are non-profit projects or social projects run by governments or NGOs.

Before you start, make sure that the basic assumptions of the analysis are known and will be considered in subsequent steps. Assumptions may range from implementation scenarios, headcount, resource needs, etc. to agreed expectations regarding the discount rate and the organization’s target profitability.

Make sure that you are incorporating and addressing all the criteria deemed important by the organization. If you compare different project options, it is crucial that the assumptions are used consistently among all the alternatives you are comparing.

If different or even contradicting types of assumptions are requested, you should consider assessing them separately and in different scenarios.

Gather and document the pros and cons of each and every option you are assessing. Group them into categories and compare them among each other, e.g. in a structure similar to our table in the previous section.

Depending on the type of project, you may wish to consider converting qualitative aspects into financial benefits or cash flow equivalents. This could be done for qualitative advantages that are indirectly affecting financial cash flows. Examples are increasing process efficiency, customer satisfaction and engagement as well as improved quality of products and services.

This may however not be working for other types of advantages and disadvantages. For instance, social and ecological considerations ( source ) as well as long-time effects such as brand image may not be convertible into cash flows of a mid-term forecast.

Come up with a forecast of future benefits and costs (or cash inflows and outflows), investment amounts and other financial considerations.

Depending on the complexity of the options that you are analyzing, you may want to involve subject matter experts to create or validate estimates.

This step usually requires a number of assumptions on a granular level. You should therefore develop an understanding of the uncertainty inherent in this forecast. If you are in doubt, you better create different scenarios (e.g. a base and a worst case) to reflect situations where things turn out differently than expected.

A cost benefit analysis can be performed with different tools and techniques. Net present value, benefit-cost ratio , payback period, return on investment and internal rate of return are the most common methods to assess economic effects from projects, investments and initiatives. Refer to the above-mentioned introduction and read the detailed articles on these measures. Eventually, you will come up with a set of indicators that is suitable for the individual situation.

If you have selected the indicators, you need to apply them to the forecasts that you have developed in a previous step. You will find the formulas in the detailed articles on those methods . When calculating the success measures, apply every method in a consistent manner to all options. This will ensure the comparability and thus the integrity of the results.

As a last step, consolidate all the aspects and results that you have produced in the course of the analysis. You can do this by creating a table that contains the calculated values, the qualitative pros and cons and a ranking of each of the options.

If you are working in scenarios, you will probably want to breakdown each option into the different scenarios (e.g. best, middle, worst case) that you have used previously.

At the completion of the cost-benefit analysis, you should have a clear view on the economic and qualitative aspects of the alternatives you are comparing. Ideally, you are able to recommend a certain option or discard others at this point.

Example: Assessing Project Options with NPV, BCR and PbP

In this illustrative example, we will compare 3 different project options for the implementation of a new IT system with each other. For illustrative purposes, the analysis focuses on the economic aspects only, not taking qualitative and strategic considerations into account.

In order to perform the cost-benefit analysis with all three options, the project manager has obtained estimates of the investments , running and maintenance costs and expected benefits. The benefits consist of both savings from more efficient processes and increased revenue given that the new software improves the way customers are served. The following table shows the consolidated forecast of the three alternatives.

One could be tempted to simply calculate the sum of the cash flows. However, this is not an accurate approach to deal with cash flows occurring at different points in time. We will nevertheless use the simple sum in the result table for comparison purposes.

If one of the more accurate approaches such as NPV and BCR are used, a discount rate is necessary to perform the calculation. This discount rate can be a market interest rate which may be risk- or time-adjusted. In organizations and projects, more common alternatives are either the company’s target return rate or the cost of capital. In this example, the organization expects a return of 12% on all investments which will be used as a discount rate accordingly.

The following table compares the results of the different methods applied to this example. Refer to the dedicated articles on each of these indicators for the respective illustrated step-by-step calculation.

Based on the economic cost-benefit analysis, Option 3 seems to be the most promising one in all measures except ROI. Although the simple sum of its net cash flows is the lowest in this comparison, it creates the highest net present value and the highest internal rate of return. This is because the period when expenses and benefits occur is considered in the NPV. It also comes with the highest benefit-cost ratio. Thus, there is a certain buffer if the benefits do not materialize in the way it was initially expected. With a payback period of 4.71, this option achieves a full amortization in less than 5 years which can be a reasonable time horizon for many organizations.

Option 2 which has the highest sum of non-discounted cash flows does in fact not even yield the required return rate of 12%. As this rate has been used as a discount rate, both the BCR and the NPV indicate a non-profitable investment.

Note that the ROI, as well as the annualized ROI, are not accurate for these examples. Refer to the detailed ROI calculation for further explanations. We have not included the Disconted Payback Period (DPP) as it is not mentioned in the PMBOK. You can find the DPP for the above case study in this article though.

This example refers to the economic aspects of a cost-benefit analysis. In practice, you would want to consider and analyze the qualitative pros and cons as well.

A proper project business case usually requires a financial cost-benefit analysis. While there are a number of calculation methods that help compare and evaluate different project options, you should be aware of the risks and weaknesses ( source ).

Financial models and indicators are always an abstraction of the reality and forecasts may or may not be met in reality. Therefore, all the methods introduced above rely on assumptions. In some cases, it may even be only one single figure turning it into a loss-producing or profitable option (e.g. a perpetuity in the NPV).

So, make sure you understand these dependencies, work with different scenarios if sensible and maintain a comprehensive and honest communication with the stakeholders. Read our detailed articles on cost-benefit analysis methods to learn more about these methods and use this checklist when doing a cost-benefit analysis.

Cost-Benefit Analysis of Occupational Health and Safety: A Case Study

• First Online: 21 February 2020

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• Delfina Ramos   ORCID: orcid.org/0000-0003-2862-2883 11 , 12 ,
• Paulo Afonso   ORCID: orcid.org/0000-0003-3882-2491 12 &
• Rosa Costa 13  

Part of the book series: Studies in Systems, Decision and Control ((SSDC,volume 277))

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Top management generally considers occupational safety and health as an extra cost instead of a benefit. The current work presents a case study in a company that produces and installs temporary structures for events, involving two sectors: warehouse and production (assembly and disassembly). The Analysis of the Return on Investment of Preventive Measures clearly proved that the Benefit-Cost (B/C) Ratio is a very valuable instrument for decision making in the context of occupational safety and health. A sensitivity analysis of the B/C ratio was also performed. The proposed measures were proved as efficient for both sectors, with a positive Net Present Value and a B/C ratio higher than 1 in both sectors. Furthermore, the results obtained from the sensitivity analysis allowed us to understand the importance of validating the preventive measures under different situations. Indeed, by varying the scenarios with the introduction of different factors and the level of efficiency of the measures, it became much clearer the conditions of viability of the different preventive measures.

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Ramos, D., Afonso, P., Costa, R. (2020). Cost-Benefit Analysis of Occupational Health and Safety: A Case Study. In: Arezes, P., et al. Occupational and Environmental Safety and Health II. Studies in Systems, Decision and Control, vol 277. Springer, Cham. https://doi.org/10.1007/978-3-030-41486-3_73

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How to Do a Cost-Benefit Analysis & Why It’s Important

• 05 Sep 2019

Are you unsure whether a particular decision is the best one for your business? Are you questioning whether a proposed project will be worth the effort and resources that will go into making it a success? Are you considering making a change to your business, marketing, or sales strategy, knowing that it might have repercussions throughout your organization?

The way that many businesses, organizations, and entrepreneurs answer these, and other, questions is through business analytics —specifically, by conducting a cost-benefit analysis.

Access your free e-book today.

What Is A Cost-Benefit Analysis?

A cost-benefit analysis is the process of comparing the projected or estimated costs and benefits (or opportunities) associated with a project decision to determine whether it makes sense from a business perspective.

Generally speaking, cost-benefit analysis involves tallying up all costs of a project or decision and subtracting that amount from the total projected benefits of the project or decision. (Sometimes, this value is represented as a ratio.)

If the projected benefits outweigh the costs, you could argue that the decision is a good one to make. If, on the other hand, the costs outweigh the benefits, then a company may want to rethink the decision or project.

There are enormous economic benefits to running these kinds of analyses before making significant organizational decisions. By doing analyses, you can parse out critical information, such as your organization’s value chain or a project’s ROI .

Cost-benefit analysis is a form of data-driven decision-making most often utilized in business, both at established companies and startups . The basic principles and framework can be applied to virtually any decision-making process, whether business-related or otherwise.

Related: 5 Business Analytics Skills for Professionals

Steps of a Cost-Benefit Analysis

1. establish a framework for your analysis.

For your analysis to be as accurate as possible, you must first establish the framework within which you’re conducting it. What, exactly, this framework looks like will depend on the specifics of your organization.

Identify the goals and objectives you’re trying to address with the proposal. What do you need to accomplish to consider the endeavor a success? This can help you identify and understand your costs and benefits, and will be critical in interpreting the results of your analysis.

Similarly, decide what metric you’ll be using to measure and compare the benefits and costs. To accurately compare the two, both your costs and benefits should be measured in the same “common currency.” This doesn’t need to be an actual currency, but it does frequently involve assigning a dollar amount to each potential cost and benefit.

2. Identify Your Costs and Benefits

Your next step is to sit down and compile two separate lists: One of all of the projected costs, and the other of the expected benefits of the proposed project or action.

When tallying costs, you’ll likely begin with direct costs , which include expenses directly related to the production or development of a product or service (or the implementation of a project or business decision). Labor costs, manufacturing costs, materials costs, and inventory costs are all examples of direct costs.

But it’s also important to go beyond the obvious. There are a few additional costs you must account for:

• Indirect costs: These are typically fixed expenses, such as utilities and rent, that contribute to the overhead of conducting business.
• Intangible costs: These are any current and future costs that are difficult to measure and quantify. Examples may include decreases in productivity levels while a new business process is rolled out, or reduced customer satisfaction after a change in customer service processes that leads to fewer repeat buys.
• Opportunity costs: This refers to lost benefits, or opportunities, that arise when a business pursues one product or strategy over another.

Once those individual costs are identified, it’s equally important to understand the possible benefits of the proposed decision or project. Some of those benefits include:

• Direct: Increased revenue and sales generated from a new product
• Indirect: Increased customer interest in your business or brand
• Intangible: Improved employee morale
• Competitive: Being a first-mover within an industry or vertical

3. Assign a Dollar Amount or Value to Each Cost and Benefit

Once you’ve compiled exhaustive lists of all costs and benefits, you must establish the appropriate monetary units by assigning a dollar amount to each one. If you don’t give all the costs and benefits a value, then it will be difficult to compare them accurately.

Direct costs and benefits will be the easiest to assign a dollar amount to. Indirect and intangible costs and benefits, on the other hand, can be challenging to quantify. That does not mean you shouldn’t try, though; there are many software options and methodologies available for assigning these less-than-obvious values.

4. Tally the Total Value of Benefits and Costs and Compare

Once every cost and benefit has a dollar amount next to it, you can tally up each list and compare the two.

If total benefits outnumber total costs, then there is a business case for you to proceed with the project or decision. If total costs outnumber total benefits, then you may want to reconsider the proposal.

Beyond simply looking at how the total costs and benefits compare, you should also return to the framework established in step one. Does the analysis show you reaching the goals you’ve identified as markers for success, or does it show you falling short?

If the costs outweigh the benefits, ask yourself if there are alternatives to the proposal you haven’t considered. Additionally, you may be able to identify cost reductions that will allow you to reach your goals more affordably while still being effective.

Related: Finance vs. Accounting: What's the Difference?

Pros and Cons of Cost-Benefit Analysis

There are many positive reasons a business or organization might choose to leverage cost-benefit analysis as a part of their decision-making process. There are also several potential disadvantages and limitations that should be considered before relying entirely on a cost-benefit analysis.

Advantages of Cost-Benefit Analysis

A data-driven approach.

Cost-benefit analysis allows an individual or organization to evaluate a decision or potential project free of biases. As such, it offers an agnostic and evidence-based evaluation of your options, which can help your business become more data-driven and logical.

Makes Decisions Simpler

Business decisions are often complex by nature. By reducing a decision to costs versus benefits, the cost-benefit analysis can make this dilemma less complex.

Uncovers Hidden Costs and Benefits

Cost-benefit analysis forces you to outline every potential cost and benefit associated with a project, which can uncover less-than-obvious factors like indirect or intangible costs.

Limitations of Cost-Benefit Analysis

Difficult to predict all variables.

While cost-benefit analysis can help you outline the projected costs and benefits associated with a business decision, it’s challenging to predict all the factors that may impact the outcome. Changes in market demand, material costs, and the global business environment are unpredictable—especially in the long term.

Incorrect Data Can Skew Results

If you’re relying on incomplete or inaccurate data to finish your cost-benefit analysis, the results of the analysis will follow suit.

Better Suited to Short- and Mid-Length Projects

For projects or business decisions that involve longer timeframes, cost-benefit analysis has a greater potential of missing the mark for several reasons. For one, it’s typically more difficult to make accurate predictions the further into the future you go. It’s also possible that long-term forecasts won’t accurately account for variables such as inflation, which can impact the overall accuracy of the analysis.

Removes the Human Element

While a desire to make a profit drives most companies, there are other, non-monetary reasons an organization might decide to pursue a project or decision. In these cases, it can be difficult to reconcile moral or “human” perspectives with the business case.

In the end, cost-benefit analysis shouldn't be the only business analytics tool or strategy you use in determining how to move your organization into the future. Cost-benefit analysis isn’t the only type of economic analysis you can do to assess your business’s economic state, but a single option at your disposal.

Do you want to take your career to the next level? Download our free Guide to Advancing Your Career with Essential Business Skills to learn how enhancing your business knowledge can help you make an impact on your organization and be competitive in the job market.

This post was updated on July 12, 2022. It was originally published on September 5, 2019.

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