Cost Benefit Analysis

Cost benefit analysis is an important techniques of assessing economic viability of a proposed project which examine all the relevant cost and benefits of the project to take a correct decision whether the specific project should be undertaken or not. These analysis is appropriate to select the best project among the available alternatives. Therefore the aim of these
analysis is to channel resources into best project which will yield the highest profit from its implementation. The profit may be commercial profit or social profit. The commercial profit refers to the net profit but social profit refers to the project's contribution to the national economy or social utility. Generally the commercial profitability is assessed in private project and social profitability in public project.

Private projects are interested in maximizing the net profit. So they considers only direct receipts and expenditure that affect net profit. Both receipts and expenditures are valued at prevailing market price for input and output. But they ignore the effect of external environment. So the investment decision based entirely on commercial profitability may lead a set of wrong decision from the point of social welfare. To calculate net social benefit, we need social measures of unit values of all project's inputs and outputs. Such social measures are often made by shadow-pricing. It means the cost and benefit analysis consider both direct and indirect cost in public projects. In this sense, cost benefits analysis is also known as social cost benefits.

Cost Benefits Analysis (CBA) evaluated the overall economic impact of the proposed project. It is used to select the most benefited project for investment after the comparison of all relevant cost and benefits. These analysis explains that all the proposed projects are appropriate to be undertaken which have higher benefits than cost or higher cost benefits ratio than one. But in case of mutually exclusive, a project having highest net profit or highest cost benefit ratio should be selected among the alternatives. Hence these analysis is used to find out the answer of the following questions:
  • Whether a specific project should be undertaken or not.
  • Which project should be selected from various alternatives?
  • Which time cycle must be beneficial to the project?
Procedures of Cost Benefit Analysis
  1. Determine the problem for which (CBA) Cost Benefit Analysis is needed.
  2. Identify the alternative solutions for the problems.
  3. Estimate the costs and benefits.
  4. Select the best solution/ alternative.

Project Analysis: Feasibility Analysis

Feasibility Analysis

Feasibility analysis is the process of determining the implement-ability of the proposed project. It is needed to take to take the final decision whether the proposed project is appropriate to commit (invest) resources or not. It examine the viability of the project through detail investigation. For this purpose, it requires a multi-disciplinary team consisting technician, economist, environmentalist, managerial experts, sociologist, financial analyst who examine the proposed project from different angles like technical, environmental, managerial, marketing, economics, financial etc.

Since feasibility analysis is a series of studies and investigations to examine the project and its capacity to meets the objectives, the project is undertaken to implement if the analysis gives green signal of project success.

Technical Analysis

It is considered as main foundation of feasibility analysis. If technology is sound, project objectives can be achieved within constraint. So in this analysis, technical viability of the proposed project is studied where feasibility of meeting, technical solutions are addressed, availability of alternative technical solution are examined, viability of project design is investigated, legal provision and technical collaboration requirement are analyzed. It covers the following studies:
  • Choice of technology.
  • Design requirement.
  • Human resource requirement.
  • Size, location and geology.
  • Technical risk.
  • Legal provision related to technical collaboration.

Marketing Analysis

It refers to the study of marketing capability of the proposed project in terms of ability to satisfy the customer requirement. Various aspects relating to market and marketing are studied and analyze in this section which focus on:
  • Production capacity of the project.
  • Aggregate demand of customer.
  • Consumption trend.
  • Distribution channel.
  • Level of competition.
  • Sales forecasting and estimated revenue.
  • Availability of required raw materials.
  • Quality standard.
  • Cost and price structure.
  • Marketing policy and strategies.

Environmental Analysis

It is conducted to ascertain the impact of the project on environment and capacity of the environment to support the project. It means it examined both the positive and negative impacts of the project. It focuses on the following area to know the feasibility of the proposed project.

Environmental Suitability:
  • Capacity of environment to support the project.
  • Resource management aspect.
  • Environment impact assessment (guideline issued by government)
Environmental Impacts:
  • It examine the positive and negative impact of the project on the environment.
  • It focuses the impact of the project on flora-fauna, quality of air and water, scenic beauty, society, noise pollution, soil erosion, resource depletion.

Economic and Financial Analysis

Economic Analysis assesses the economic viability of the proposed project. Cost-benefit analysis is used to find out the net contribution of the project to the society and the economy. The assessment of the net contribution of the project is prime analysis in the economic analysis. It is used in private as well as in public project differently.

For a private project, cost-benefit analysis is applied to assess commercial profitability. For a public project, the analysis is use to assess the social profitability in terms of contribution to national economy by achieving the goals of poverty
Financial analysis is conducted to measure the financial sustainability of the project. It studies the adequacy of needed fund and proper settlement of the fund. Generally the technique capital budgeting are used in these analysis. However the areas of focus in this analysis are:
  • Total capital requirement
  • Source of fund
  • Projected cash flow
  • Accounting and reporting system
  • Projected profitability
  • Break Even Point (BEP)

Managerial Analysis

Managerial Analysis is done to examine the managerial or institutional viability of the project. It studies the adequacy of the management system to direct and control the project, political and legal acceptability of the project. The area of the focus in these analysis are as follows:

i) Form of the project Organization:
  • Appropriateness of the organizational structure.
  • Relationship of authority and responsibility.
  • Communication system.
  • Flexibility.
ii) Personnel:
  • Personal availability and their experience, qualification.
  • Job description.
  • Need of training.
iii) External linkage/ Institutional Relationship:
  • Relationship with stakeholders.
  • Relationship with functional department.
  • Relationship with regulatory agencies.
iv) Implementation Plan:
  • Required cost and resources.
  • Estimated time schedules.
  • Quality standard.
  • Use of planning and controlling techniques.

Project Formulation

Project formulation refers to the development of the project from the generated idea of the firm, the idea is the seed of the project. Project formulation includes the total procedures or activity of altering the project concept, theme etc from intuitions based to an institutional based and rational based to result feasible work form. It is detail procedure of analyzing the feasibility of any specific project. So various factors are taken into consideration to test the viability of the proposed project. It plays the dominant role into the success of the any project.
Project formulation task defines the parameters of the proposed project and develops the objectives and outputs of the project in broad terms. It aims at gaining preliminary formal commitment to the project and the project idea to justify the further work on it. It serves at the basis of project planning. It is the basis of project planning.

There are various techniques available for the project formulation. Most commonly used techniques are as follows:
  1. Cost Benefit Analysis
  2. Feasibility Analysis
  3. Input Analysis
  4. Financial Analysis
  5. Network Analysis

Elements/ Components of Project Specification

  1. Statement of Work (SOW): It is the description of the work to be performed in the proposed project. The work may be construction, procurement, installation, operation schedule. For example: in a building construction project specification includes detail description of all the relevant works like size of wall, size and length of pillar etc. 
  2. Quality of materials: Every project requires quality raw materials to deliver the quality output. The quality standard for material to be used in project is specified. It specify the type of materials, standard of materials with its physical and chemical properties.
  3. Detailed Engineering Design: Engineering design is the blueprint of the project. It is the key to implement the project. Therefore the specification should be provided the detailed engineering design.
  4. Workmanship: Specification identifies every type of work in the project. The right man is necessary for the right job to complete the work as per requirement as well as successful attainment of project objectives. Therefore it specifies time and skill of the personnel required to implement the project.
  5. Work in progress: Every work passes its own process as well as linked with other works. It makes clear what is linked activity and which should be completed to start another.

Project Specification

Project specification refers to the statement of works or narrative description of works to be done in a proposed project. It is a description of technical content, quality standard and organization's policy for the project. It is obligatory statement of procedure and processes that are applicable to the project for the effective implementation. It serves as standard for pricing the proposal. It is used for quality assurance. It provides procurement guidelines as well as accurate information on technical and general requirement of the project.

Project is divided into various phases. Each stage is further broken down into work-packages, task and sub-tasks and then presented in a hierarchical order by the use of work-down structure. The structure facilitates the project implementation more effectively. The specification should be appropriate to each task and sub-task. It is used for estimates of equipment, materials, man-hour, workmanship etc needed for each task and sub-task. It is prepared in professional manner using professional manner using technical experts focusing on the desire of top level authority, customers and other groups. Once finalize specification is generally not change because even small changes in specification result in cost over-run and affect the quality too.

However specification should be complete, clear and capable of being understood easily. It should set-out the way in which all works should be done in the project. It should describe and specify the supplies work and services clearly. It provides accurate information on all relevant project's work. Clear and complete specification may avoid lot of unpleasant situation during the project implementation period. Therefore, it should be kept updated through periodic revision.