There are many hurdles in project management. One challenge project managers face is how to provide a solution on low workforce to keep up with the increasing workload. Hiring new team members is clearly one of the best solutions but before doing that, it is important to weigh the associated costs. This is the reason why the cost-benefit-analysis is important.
The cost-benefit-analysis (CBA) is a simple technique that is used to create non-critical financial decisions. It involves adding the benefits of a particular action then providing a comparison with the associated costs. The results of the analysis are expressed as payback period which is the duration needed for the benefits to repay the costs.
CBA is an important tool in project management and it is applicable in situations like evaluating a new project, assessment of any change initiative and determining the feasibility of different purchases. A good CBA lists down the project expenses as well as evident benefits before calculating the Return on Investment (ROI), net representative value (NPV) and internal rate of return (IRR). It is important to take note that the cost calculated should be less than 50% of the benefits and the payback period should not exceed more than a year.
In making CBA, it is important to brainstorm all costs and benefits that are associated with a particular project. Once the costs and benefits have been listed down, assign a monetary value to the costs. Costs like physical sources used in the project as well as human effort should be assigned their monetary value. The same things should be done to the benefits. This will allow project managers to compare both costs and benefits effectively to make the right decision.
The cost-benefit-analysis is an important tool in making simple and quick financial decisions in different project management activities. However, this particular tool is no longer effective if used to create high-cost decisions.
This term is defined in the 5th edition of the PMBOK.