Economic and Social Cost
Benefit Analysis in
Project Management
Shaina Mae Cabanig
INTRODUCTION
DEFINITION OF SOCIAL COST
BENEFIT ANALYSIS
OBJECTIVE OF SOCIAL COST BENEFIT
ANALYSIS
FEATURES OF SOCIAL COST BEFENIT
ANALYSIS
IMPACT OF SOCIAL COST BENEFIT
ANALYSIS
STAGES OF SCBA IN PROJECT
MANAGEMENT
TYPES OF SOCIAL COST BENEFIT
ANALYSIS AND IT’S ADVANTAGE
AND DISADVANTAGE
CONCLUSION
Introduction
Cost-benefit analysis is a process of deciding whether to
go with a business decision or not on the basis of the net
benefits from it. We first assess the benefits or rewards
from a business decision. Then we deduct the costs that
we will incur in order to implement that decision or idea.
If the result is positive, we can go ahead with the plan.
We should shelve the idea and look for other alternatives
in case of a negative result. However, there are some
projects in which we may not benefit financially, but still,
companies and governments go ahead with them. Such
projects have social implications or benefits.
20XX 3
In order to gauge the social or socio-economic
benefits of a project, we do a social cost-benefit
analysis in project management. The most
common investments that have social benefits
are infrastructure projects like building roads,
dams, railway tracks, bridges, electricity
generation, etc. Social cost-benefit analysis in
project management is a tool to assess the
viability of such projects.
20XX 4
Apart from taking into account the financial costs that
we incur in a project, we also consider the social impact
of the project on the people, environment, and society
as a whole. Such impacts include pollution effect,
safety, and security, the effect on the lives of people,
etc. We assess the benefits of a project by attaching a
price to the social effects that they cause. We deduct the
social costs from the social benefits derived from a
project to arrive at the net social benefits to the society.
20XX 5
What is Social Cost Benefit
Analysis?
A Social cost benefit analysis, also known as economic analysis, is a decision-making
strategy which helps in assessing the impact of investment business projects on the society
as a complete. It is an organized and cohesive mechanism to contemplate the impact of
development projects on society.
Social Cost-Benefit Analysis in project management, has become a tool for effective
financial evaluation. It is an approach to assessing infrastructure investments from a social
(or economic) perspective.
It is a technique used for determining the value of money, specifically public investments,
and it is becoming extremely popular. In addition, it helps in decision-making regarding
the numerous parts of the organization and closely related project design programs.
20XX 6
Objectives of Social Cost-Benefit
Analysis
The main focus of SCBA is to determine:
1. Economic benefits of the project in terms of shadow prices
2. The impact of the project on the level of savings and investments in
the society
3. The impact of the project on the distribution of income in the society
4. The contribution of the project toward the fulfillment of certain
merit wants (self-sufficiency, employment etc.)
20XX 7
Features of SCBA
Following are the features (and uses) of SCBA:
Assess the viability of a project for the public and not for shareholders.
Identifying the economic as well as social cost and benefits of a project
and investment.
Measuring the economic as well as social cost and benefits of a project
and investment.
Identifying and measuring the impact of risk and uncertainty.
20XX 8
Impact of SCBA
SCBA
POSITIVE
NEGATIVE
(Social
(Social Cost)
Benefit)
20XX 9
Social Costs Social Benefits
Subsidies offered Taxes raised
Environmental degradation Improvement of environment
Depletion of energy Product and Services
Unemployment caused Indirect employment creation
Human service used Socio-economic developments
20XX 10
Social Cost in Tea
Industry
Environmental Degration:
Cutting of trees and shrubs
Water pollution due to insecticide use
Air pollution from factory
Ecological Imbalance
Shrinkage of habitat of wild animals
Reduction of grazing land
20XX 11
Social Cost in Tea
Industry
Human Services Used
Shortage of labor for crop
cultivation
Usage of public Utility
Consumption of power
Global Warming
Factory’s carbon emission
20XX 12
Social Benefit of Tea
Industry
Improvement of Environment
Tree planting
Tree Plantation
Employment Creation
Direct Employment
Indirect Employment
Foreign Exchange Earning
Social welfare
Education
Health Care
20XX 13
Main Stages of Social Cost-Benefit Analysis in Project
Management
1. Shadow Pricing
The first stage in the process of social cost-benefit
analysis is to ascertain the shadow price of the inputs as
well as the outputs of the product or service that the
project purposes to deliver. The shadow price is an
estimate for something that we cannot buy or sell in the
open market, such as government infrastructure projects.
20XX 14
Shadow pricing refers to the practice of assigning a monetary
value to something whose value can only be estimated because it
is not something regularly bought and sold in a marketplace.
Shadow pricing is often required when a financial analyst is
doing a cost-benefit analysis to decide regarding a proposed
investment.
Shadow prices are commonly assigned to designate the value of
an intangible asset, such as the benefit to society of creating a
public asset.
20XX 15
2. Financial and Social Viability
oOnce managers have the shadow pricing in place,
they can move ahead to judge the financial and
social viability of the project. The managers need to
identify and measure the costs and benefits of the
project. Every project for society will have a
positive impact in the form of social benefits as well
as a negative impact in the form of social cost.
20XX 16
We can classify the effects of a project
into three main categories:
Direct Effects
o These are the effects of a project on the direct or immediate users. Managers already know the costs of the
project. They can use shadow pricing to measure the benefits to the users of a particular project, such as a
road or a highway.
Indirect Effects
o Indirect effects are the effects that indirectly affect people from a particular project. For example, the price
of real estate may go up if it is located near a proposed highway project. The managers need to ascertain
the costs and benefits from the perspective of the indirect effects too.
External Effects
o These are again usually in the form of effects of a project on the external environment. It measures the
effects due to changes in pollution levels, safety, security, etc., because of a project or otherwise.
20XX 17
Comparison and Selection
o The managers will then compare various options available in the form of
inputs, resources, or similar other projects. They will try to put a
monetary tag on every possible factor involved in the project and its
alternatives. They will describe or try to quantify the effects to the
maximum possible extent in case they are unable to put a price or
monetary value to every effect. The decision-makers also consider all
the possible uncertainties and risks that can arise out of a project. They
then finally make a calculated and informed decision. They will choose
the best alternative among the various options that are available.
20XX 18
COST BENEFIT ANALYSIS
oOne of the most effective types of economic evaluation is the cost-
benefit analysis, also referred to as a benefit-cost analysis. This is a
technique used to determine whether a project or activity is feasible
by weighing the monetary cost of doing the project or activity
versus the benefits. A cost-benefit analysis will always compare the
cost of the effort against the benefits that result from that effort.
Because it deals solely in monetary terms, a cost-benefit analysis is
one of the most bottom-line types of economic evaluation.
20XX 19
oIt can provide valuable insight in comparing and
contrasting work projects, help determine whether an
investment opportunity is ideal, and help assess the
consequences of implementing changes to your business.
However, there is a drawback to this analysis as it is
difficult to place a monetary value on some activities such
as the benefits of increased public safety versus the cost to
increase law enforcement presence in major cities. After
performing the cost-benefit analysis, a small business
owner can make an educated business decision
20XX 20
Cost Benefit Analysis Advantages
oOpportunity costs
oDiscovers hidden costs
oMakes some decisions easier
oProvides a competitive advantage
20XX 21
Cost-Benefit Analysis Disadvantages
oUnpredictable variables
oNot as effective for long-term
projects
oRequires extensive data
20XX 22
COST EFFECTIVE ANALYSIS
oIn a cost-effective analysis, you weigh the
effectiveness of a project against its price.
Unlike with cost-benefit analysis, however, a
low cost doesn’t mean high effectiveness, and
the reverse is also true.
20XX 23
Cost Effective Analysis Advantages
oClarity in Unpredictable Situations
oHelps You Make Rational Decisions
20XX 24
Cost Effective Analysis Disadvantages
oDoes Not Account for All Variables
oRemoves Gut Instinct
20XX 25
COST MINIMIZATION ANALYSIS
As the term suggests, cost-minimization analysis focuses on
finding the cheapest cost to complete a project. This is one of the
economic evaluation methods that business owners use when
cost savings are at a premium and outweigh all other
considerations. It is also used when there are two or more ways
to accomplish the same task. Cost-minimization analysis is most
often used in healthcare.
20XX 26
Cost Minimization Analysis Advantage
and Disadvantage
o The major advantage of cost-minimization analysis is that it helps conduct a
comprehensive assessment of all possible direct and indirect costs associated with
an intended intervention. The analysis may thus show how much money one
should spend on the realization of a project and what costs it will induce in the
long run. However, in reality, even those interventions which seem expensive at
first may turn out to be more cost-efficient when both expenses and possible
benefits are taken into account. The cost-minimization analysis does not consider
this factor, which may be regarded as a significant disadvantage. Moreover, it is
useful only for the comparison of equivalent interventions
20XX 27
Difference Between Cost Analysis &
Social Cost Benefit Analysis
oThe cost analysis is used to document a reasonable
expected return on investment to prospective
investors while the social cost benefit analysis is
used to document that the project is a net benefit to
society as a whole – this is especially interesting in
relation to public investments.
20XX 28
Advantages of SCBA
o The ability to identify the projects that maximize the welfare of the society
o The ability to objectively assess and quantify the purpose of projects in
relation to the community needs
o Exposure of the basis for decision making for projects and opportunity for
public criticism
o Ability to rank and prioritize limited resources so that the maximum
benefit is realized
20XX 29
Disadvantages of SCBA
oDifficulty in measuring social costs and benefits and
converting them into monetary term
oOver statement of the value of social benefits
oComplexity
oConflict between social welfare and financial
justification
20XX 30
Limitations of SCBA
oSometimes it gets very challenging to quantify the social costs
and benefits of a project or investment. This is because many
costs and benefits are intangible.
oIt could get difficult to compare the social costs and benefits of
one project with another.
oThe inputs and outputs of projects and their impact on the
ecology and people would vary from case to case.
20XX 31
Conclusion
Social cost-benefit analysis in project management
helps us to undertake viable developmental projects for
the welfare of society as a whole. Managers can make
an informed decision after comparing several options
and choosing the best one. The analysis also provides
an insight into the social costs or harmful impact of any
project, too, and not just the financial or social benefits.
