Cost benefit analysis demonstrates the value of an intervention – when you are still planning it or once you have delivered it.
Although it looks technical, in practice it is about being logical and distilling your intervention to its essence.
Cost benefit analysis is often used to demonstrate the effectiveness of service transformation for both the system and its citizens, while you’re still planning or delivering it.
The process is broken down into five basic steps to producing a cost-benefit analysis of an intervention or programme:
1. Describe – Set out the process
The first step in any cost-benefit analysis is to describe what you are trying to achieve and how you will go about it. This is known as a theory of change, a logic chain or a logic model.
2. Measure – Quantify costs and benefits
There are three different types of cost which need to be considered: capital costs, revenue costs and in kind costs.
3. Identify – Assess the timing of your benefits and who benefits
Is the time horizon for your analysis one year? Five years? Twenty five years? And when are costs incurred and benefits realised?
4. Calculate – The ratio between your costs and the different types of benefit
The next step is to put all the data you have collected in a spreadsheet – a template is available from New Economy.
5. Present – Communicate what the figures mean
Having filled in all the elements of the cost-benefit analysis, look again at all your key assumptions and ensure that these are explained as fully as possible.
This is a guide to cost-benefit analysis (CBA), designed to help those new to this methodology to understand the process. It is based on the HM Treasury Guidance for Local Partnerships, developed by New Economy in partnership with analysts from a number of government departments, which itself is based on HM Treasury Green Book methodology.