How to Determine a Project's Investment Worthiness

Perform a cost-benefit analysis to ensure that project benefits outweigh project costs.

New projects can demand significant outlays of resources. Project costs and timeline may require investment of both human resources and financial capital. Business decision-makers who seek to make the most of scarce resources perform a cost-benefit analysis -- an economic feasibility study -- to ensure that the project's returns outweigh its costs.

Instructions

1. Perform a cost-benefit analysis, or CBA, evaluation for the prospective project to determine whether its benefits are worth the necessary investment of business resources. This business analytical approach will help to assess whether the project is economically sound and cost effective in meeting the project's business objectives.

2. Identify and provide a valuation of the project benefits. In the cost-benefit analysis process, the value of the project's business objective should be clearly established. This may be expressed in intangible or tangible terms. Tangible project objectives, such as increased revenue and cost reductions, are easier to compare against estimated project costs because they both can be expressed in terms of dollar value. Nontangible project values, such as increasing efficiency or employee morale, are more difficult to compare against dollar-value project costs. In identifying the value of intangible project benefits, compare the current state of affairs against the expectancy if the project objectives are achieved. Use this to identify and document a descriptive list of all the benefits of achieving the project objectives.

3. Estimate project costs from a work-breakdown structure that outlines the tasks and activities that must be performed to achieve the project objective. The work breakdown structure divides the project into more approachable units of work that generally serve as the basis for developing a project budget estimate. Based on project workload and required performance skills, estimate staff time and wages -- typically the largest project cost. Add this staffing cost to estimates for equipment, materials, supplies and administrative and other necessary costs for the project.

4. Analyze the benefits and costs data. Spreadsheet models are frequently used to assist project managers in assembling and analyzing cost-benefit analysis data for a proposed project. Manual comparisons of the project benefits against the project costs may also be performed on a decision table using one of the following techniques: pro versus con comparison; plus or minus comparison; or numerical grading or ranking in a matrix .

References

• Virginia Information Technologies Agency; Project Management Guideline: Cost/Benefit Analysis Guide; January 2006

Resources

• U.S. Department of Health & Human Services: Work Breakdown Structure Template