Benefit Cost Analysis 1 Last Updated: October 28, 2019; First Released: December 17, 2013 Author: Kevin Boyle, President, DevTreks Version: DevTreks 2.2.0 A. Introduction This reference explains how to start to collect, measure, and analyze, basic benefit and cost data (1*). DevTreks believes that every production process, business practice, and technology, from growing corn in the field to replacing a hip in the hospital, has a story to tell and lessons to teach. Those lessons can only be learned when cost and benefit data about production, business practice, and technology is collected, measured, aggregated, analyzed, explained, and saved in online knowledge banks. A full, uniform, and accurate accounting of the costs, benefits, and outcomes for every dollar spent on crops, livestock, malnutrition improvements, medical treatments, conservation practices, and best or worse business practices, should be one or two links away for everyone. If a business owner, lender, nonprofit member, government official, worker, or citizen, needs to make a decision involving costs, benefits, and performance, they should have ready access to the best data available. This reference introduces another DevTreks way to build these knowledge banks. Section Page Data URLs 2 Domain Calculators versus Generic Calculators 3 Net Present Value (NPV) Calculations 4 NPV Analyses 5 NPV Analyzers 7 Performance Analysis 21 Input and Output NPV Analysis 23 Multimedia and Stories 23 Knowledge Banks and Summary 26 B. Data URLs The Construction Analysis 1, Health Care Analysis 1, Malnutrition Analysis 1, Ag Production Analysis 1, and Work Breakdown Structures, tutorials demonstrate how basic cost and benefit data can be structured to support the analyses shown in this reference. The Analyzers demonstrated in this reference can be found at the following URIs: https://www.devtreks.org/agtreks/preview/crops/linkedviewgroup/Benefit Cost 1 Analyzers/60/none/ https://localhost:5001/agtreks/preview/crops/linkedviewgroup/Benefit Cost Analyzers/56/none/ The following URIs contain sample data sets that display the results of running NPV analyzers. These data sets were structured for the purpose of testing the analyzers (i.e. they don’t all use real WBSs). The data is fictitious and no weight should be assigned to the absolute numbers –pay attention to the aggregation techniques only. Many of these data sets also contain Life Cycle Analysis (LCA) calculators and analyzers. We recommend confirming, and understanding, the differences between the two techniques. The most prominent difference occurs when the data being analyzed does not use LCA calculators and analyzers for every input and output –LCA Analysis only analyzes the results generated by LCA calculations. The NPV tutorials explain that Operating Budgets should only include operating and allocated overhead costs –they shouldn’t include the capital costs contained in some of these examples. * Components URI: Construction Examples (Reconstruction Science Club) https://www.devtreks.org/buildtreks/preview/commercial/componentgroup/Life Cycle Cost Analysis Example 01/657/none/ https://localhost:5001/buildtreks/preview/commercial/componentgroup/Life Cycle Comp Analysis Examples/657/none * Operations URI: Agricultural Examples (Iowa Corn and Soybean Club) https://www.devtreks.org/agtreks/preview/crops/operationgroup/Nutrient Management, Nashua corn and beans research plots, N application/326/none https://localhost:5001/agtreks/preview/crops/operationgroup/Nutrient Management, Nashua corn and beans research plots, N application/326/none Construction Examples (Reconstruction Science Club) https://www.devtreks.org/buildtreks/preview/commercial/operationgroup/ NPS Trailhead Life Cycle Cost Group/757/none/ https://localhost:5001/buildtreks/preview/residential/operationgroup/National Park Trailhead Improvement Group/760/none * Outcomes URI: Construction Examples (Reconstruction Science Club) https://www.devtreks.org/buildtreks/preview/commercial/outcomegroup/National Park Recreation Outcomes/33/none/ https://localhost:5001/buildtreks/preview/commercial/outcomegroup/Life Cycle Outcome Examples/33/none * Capital Budgets URI: Construction Examples (Reconstruction Science Club) https://www.devtreks.org/buildtreks/preview/commercial/investmentgroup/Public Infrastructure Analysis Example/275505677/none/ https://localhost:5001/buildtreks/preview/commercial/investmentgroup/Public Infrastructure Analysis Example/275505677/none * Operating Budgets URI: Agricultural Examples (Iowa Corn and Soybean Club) https://www.devtreks.org/agtreks/preview/crops/budget/Plot 01/273071700/none https://localhost:5001/agtreks/preview/crops/budget/Plot 01, v1-2-0/273071700/none Construction Examples (Reconstruction Science Club) https://www.devtreks.org/buildtreks/preview/commercial/budget/Public Infrastructure Operating Budget/273083901/none/ https://localhost:5001/buildtreks/preview/commercial/budget/Public Infrastructure Budget 01/273083903/none * Multimedia URI: https://www.devtreks.org/agtreks/preview/crops/resourcepack/Agricultural Production, Capital Investment Media Pack/260/none/ * Story URI: https://www.devtreks.org/agtreks/preview/crops/linkedviewpack/Randomized complete crop block, tillage treatment analysis, 1990-1992 crops/32/none https://www.devtreks.org/agtreks/preview/crops/linkedviewgroup/Economics/13/none/ Examples of Progress Analysis data sets can be found in the Earned Value Management 1 reference. Examples of Input and Output Price Analysis data sets can be found in the Price Analysis 1 reference. C. Work Breakdown Structure (WBS) The construction data analyzed in this reference uses the UNIFORMAT WBS. Some output data was able to use that WBS as well. The remaining data was classified using fictitious WBSs. All of the data used in these analyses were aggregated using these WBS Labels. D. Domain Calculators versus Generic Calculators Readers with a deep understanding of fields such as natural resources conservation, health care, malnutrition analysis, food security, safety efficacy, or human capital performance, will recognize that the generic cost and benefit tools explained in the NPV, LCA, Monitoring and Evaluation (M&E), and Resource Stock, tutorials, fail to capture the full depth of the costs and benefits associated with their field. They are right. Several DevTreks’ calculators, including Machinery, Irrigation, and Malnutrition, demonstrate how to integrate domain-specific knowledge with these more generic tools. The Social Performance tutorial demonstrates how to use generic algorithms to run domain-specific calculations. E. Net Present Value (NPV) Calculations The Net Present Value 1 and 2 tutorials document the base NPV calculations that will be aggregated and analyzed in this reference. A typical NPV calculation result is displayed in the following image. These analyzers only use the “Annual”, or “Ann”, totals, which reflect annual amortized costs (i.e. see the dairy heifer, alfalfa, or almonds examples in the Net Present Value 1 reference). Discounted cash flows (the Totals column) are not analyzed. Cash flows were not included because the resultant quantity of data is hard to interpret and the “resource flows” data gives a truer picture of net benefits. The Input, Output, Operation, Component, Outcome, Operating Budget, Capital Budget, elements in these calculations and analyses are referred to as base elements throughout these tutorials. F. NPV Analyses Separate NPV analyzers are available for all base elements. The Calculator and Analyzer 1 reference documents how all DevTreks’ Analyzers work. The Analysis Type property of NPV Analyzers is used to specify the type of analysis to run. The Performance Analysis 1 references explain how to use the results of these analyses to make decisions involving costs, benefits, and performance. Analysis Result Properties The results of running analyses are displayed using the following basic properties for Operations, Components, Outcomes, Operating Budgets, and Capital Budgets (which are defined more thoroughly in the Net Present Value 1 reference): Operation, Component, or Budget Cost Properties Total AMOC: Total Annual Operating Costs Total AMAOH: Total Annual Allocated Overhead Costs Total AMCAP: Total Annual Capital Costs Total AMTotal: Total Annual Costs Total AMIncent: Total Annual Incentive-Adjusted Costs Outcome or Budget Benefit Properties Total AMR: Total Annual Benefits Total AMRIncent: Total Annual Incentive-Adjusted Benefits Output Properties (2*) Total RAmount: Total Output Amount Total RPrice: Total Output Price Total RCompositionAmount: Total Composition Amount (3*) Budget Net Properties Total AMNet: Total Annual Net Returns Total AMIncentNet: Total Annual Incentive-Adjusted Net Returns (4*) Input and Output Properties The Price Analysis 1 reference documents the properties used in Input and Output Price Analysis. Multipliers Multipliers, such an Operation Amount, are not used directly in these analyzers. The base NPV calculations that are aggregated are multiplied by the standard multipliers found in most base elements. G. NPV Analyzers The current version supports the following analyzers: 1. Totals Analysis A Totals Analysis sums NPV calculations for all base elements in an analysis. All analyzers run this analysis for each aggregated base element before carrying out additional calculations. With the exception of Inputs and Outputs, the initial values used in all analyzers derive from NPV calculator results. No separate NPV calculations are run in any analyzer (unlike the LCA Analyzers which do run Life Cycle calculations first). So why duplicate the NPV calculator results in this particular analysis? The results of this analysis are more compact and can be aggregated using an analyzer’s standard aggregators. The following Outcome Totals Analyses displays typical results. Note that these properties coincide with the “Annuals” columns found in NPV calculator results (see the Net Present Value 1 tutorial). Compare the level of detail in these results versus a LCA Totals Analysis. These analyzers offer a much more compact analysis of costs and benefits compared to the LCA Analyzers or the base NPV calculators. They are also much faster to complete. Note that the Outcome includes aggregated Output Price and Amount properties. The following Operation Total Analysis shows that unlike Outputs, the Input prices and amounts are not being aggregated in the Operation totals. Do you know why? The following Capital Budget Total Analysis shows how Benefits and Costs appear in budgets. Again, note the Output Price and Amount aggregation. Why are Outputs being aggregated, while Inputs are not? Think of a typical crop or livestock budget, or basic cost effectiveness analysis. 2. Statistics 1 Analysis A Statistics Analysis uses the Totals calculations to measure basic statistical properties of aggregated base elements. Total, Median, Mean, Variance, and Standard Deviation statistics are generated for all of the base elements that use the standard aggregators. The following Component Statistical Analysis displays basic statistics associated with construction Components. Note that these Components have zero operating costs and allocated overhead costs. Closer inspection of the underlying NPV calculations will reveal that this analysis is measuring discounted cash flows. The following Outcome Statistical Analysis displays basic statistics associated with natural resources Outputs. Note the aggregated Output properties, including Prices and Amounts. Also note that multiple Outcomes, with multiple Outputs, are being aggregated. If the aggregated Outputs are so dissimilar that they can’t be aggregated, the Price and Amount aggregated properties may not be meaningful. The following Operating Budget Statistical Analysis displays basic statistics associated with public infrastructure investments. The following Capital Budget Statistical Analysis displays basic statistics associated with public infrastructure investments. The following analysis derives from the Operating Budget dataset. When this analysis was first run it set the Aggregate Using property to Labels and returned 1 observation per Outcome with 6 Outcomes. When the Aggregate Using property was changed to Groups, it aggregated the 6 Outcomes because they belonged to the same Outcome Group in the base elements. 3. Change 1 Analyses The Change 1 Analyses use the Totals calculations to measure incremental changes in aggregated base elements. The NIST 135 reference demonstrates how to use these types of measurements to make decisions based on benefits and costs. A Change by Year Analysis measures incremental changes between aggregated base elements that have different Years. A Change by Id Analysis measures incremental changes between base elements that have different Ids. A Change by AlternativeType Analysis measures incremental changes between aggregated base elements that have different AlternativeTypes. Changes are analyzed in ascending order (Id = 1,2,3; Year = 2000, 2001, 2002; AlternativeType = A, B, C). The first member of the sequence will be used as a “Base” element to make comparisons. The sibling sequence member immediately before the current sequence member will be used as an “x-1” element to make comparisons. Gaps in the sequence, such as a missing Year, will be ignored. Further documentation about these analyses can be found in the Change Analysis 1 reference. The following image displays a typical result: The following image displays a typical Comparative Change NPV Analysis. 4. Progress 1 Analysis A Progress 1 Analysis uses the Totals calculations to measure actual versus planned progress for aggregated base elements. The U.S. GAO (2009) emphasizes using Earned Value Management (EVM) best practices to ensure cost of work completed aligns with the value of work performed. A key requirement of EVM is to measure budget variances and scheduling variances. Budget variances measure the costs (and benefits) of work planned versus actual work completed. Scheduling variances measure the amount, quality, and timeliness of work planned versus actual work completed. EVM uses both variances to measure changes in the value of work planned versus actual work completed. A Progress 1 Analysis measures all of these variances. DevTreks’ best practices extend EVM to include Outputs (work progress), Outcomes (technical performance), Benefits (earned value), and M&E and Resource Stock indicators (performance effectiveness). Further documentation about these analyses can be found in the Earned Value Management Analysis 1 reference. The following image displays a typical result: 5. Other Analyses Future releases will include additional types of analyses. H. Performance Analysis The Performance Analysis 1 reference demonstrates how to use various Performance Measures, such as Net Savings or Cost per Unit Output, to make decisions involving cost and benefit data. Note that NPV Analysis only uses annual costs and benefits in these Performance Measures. LCA Analysis can use cash flow, life cycle, or unit, costs and benefits. In addition, LCA Analysis includes both aggregated Output and Input Amounts and Prices which support a wide assortment of productivity measurements. The Social Performance Analysis references demonstrate how to use Performance Measures to value the services generated by public goods. That reference documents techniques that include Monitoring and Evaluation, Performance Monitoring, Impact Evaluation, Life Cycle Analysis, and Cost Effectiveness Analysis. Those references also demonstrate running Life Cycle Input and Output cost and benefit calculations using TEXT datasets and custom algorithms. I. NPV Analysis, Life Cycle Analysis (LCA), Monitoring and Evaluation Analysis (M&E), and Resource Stock Analysis These analyzers match the same set of analyzers found in the Life Cycle Analysis, Monitoring and Evaluation Analysis 2, and Resource Stock Analysis references. Section M’s Sample Data Sets contain both NPV and LCA Analyzers that demonstrate how the NPV and LCA techniques relate to one another. The LCA totals in these data sets are always somewhat lower than the NPV totals because these particular LCA calculations did not use discounted costs and benefits. In addition, LCA Analysis does not aggregate Inputs or Outputs that have not been calculated using LCC or LCB calculators. LCA Analysis is more appropriate to use when costs and benefits need to be defined in greater detail, or with more flexibility, than in NPV Analysis. The Life Cycle references give examples of breaking Inputs into SubCosts, such as Material, Equipment, and Labor and breaking Outputs into SubBenefits, such as Willingness to Pay, Educational Capital, and Concession Stand Sales. Each Input and Output used in an LCA Analysis can be calculated in the same manner as the Operations, Components, and Outcomes used in NPV analysis. The greater detail comes at a cost (at least for now) –the NPV Analyzers can handle larger data sets. M&E and Resource Stock Analysis are often used together with NPV and LCA Analysis to tie monetary benefits and costs to nonmonetary indicators of performance and outcomes. Cost effectiveness analyses are conducted using both sets of data. See the Social Performance Analysis references for examples. J. Input and Output Price Analyses All NPV Analyzers are available for Input and Output Analysis. The Price Analysis 1 reference documents how these analyzers are used to carry out Price Analysis. K. Multimedia (Resources) All analysis should be accompanied by multimedia that help to explain the benefit cost analysis. The multimedia can include graphs and other visual aids that help users to interpret all of the data. The economic and resource stock characteristics of the following types of agricultural production, in this case mixed vegetable cropping, are easier to interpret with fuller multimedia support. L. Stories (Linked Views) All analysis should be accompanied by stories that explain the data, technology, and business practice. M. Knowledge Bank Standards All NPV analyses should be entered into online knowledge banks (i.e. production servers as contrasted to development servers) that can be used to analyze the costs, benefits, and performance of production processes, business practices, and technologies. That structured evidence must be passed down to future generations. These knowledge banks aggregate and analyze all of the data in a network. Future references will demonstrate how these knowledge banks will evolve (i.e. semantic data, forecasts) to support future decision making needs. The flexibility offered by DevTreks in documenting costs and benefits means that networks need to develop “rules” explaining the “standards” that should be followed by clubs in their network. The “standards” make it possible to build knowledge banks. Summary Clubs using DevTreks can start to carry out the basic analysis of costs and benefits. Clubs can solicit help when production falters, technology fails, or best practice doesn’t work. They can share structured evidence explaining how to balance benefits with costs. Networks can build knowledge banks that explain why production processes, best or worse business practices, and new or old technologies, succeed or fail and pass that knowledge down to future generations. The result may be farmers who grow better corn, managers who make more profitable widgets, hospitals that treat patients more efficiently, schools that educate children more effectively, workers who work more productively, companies that treat workers more equitably, governments that mitigate climate change more convincingly, and people who improve their lives and livelihoods. Footnotes 1. Benefit Cost Analysis has a long tradition that includes more advanced analytic techniques than those used in this reference. Future releases are expected to include some of these techniques. 2. An aggregated Output element uses descriptive properties, such as name and description, from the first Output element being aggregated. 3. Careful review of Output properties will reveal three multipliers can be used with Outputs: Amount, Composition Amount, and Times. We chose not to display the Times property. Instead, the Composition Amount property is a multiplication of Output Times * Output Composition Amount. Due to display considerations, Change and Progress Analyzers do not display Composition Amount totals. Instead, the Total RAmount property is a multiplication of Output Amount * Output Composition Amount (and the latter property is a multiplication of Output Times * Output Composition Amount). The display of this type of data will always present challenges. 4. Change and Progress Analyzers do not include this metric, but the TAMRIncent and TAMIncent properties can be used to derive it, as follows: Incentive Adjusted Net Returns = Benefit Incentive Adjusted Net Returns – Cost Incentive Adjusted Net Returns. Note that LCA Analyzers do not show Incentive Adjusted Benefits or Costs in their results. DevTreks recommends that Incentives be defined in LCA analysis using SubCosts or SubBenefits, rather than base element, properties. 5. The cost and benefit numbers generated by these analyzers were tested within the limitations of existing data sets. While these data sets were built with a broad array of prices, amounts, dates, and multipliers, and compared to the LCA Analyzer results, they were not tested using every combination possible. Initial testing supported our conclusion that the numbers are accurate, but you are encouraged to carry out your own testing. They’ll continue to be tested using new combinations of base elements, prices, amounts, dates, amortization periods, and multipliers. References U.S. Department of Commerce, National Institute for Standards and Technology. Handbook 135, Life-Cycle Costing Manual. 1996 Edition. United States Government Accountability Office. Applied Research and Methods. GAO Cost Estimating and Assessment Guide. Best Practices for Developing and Managing Capital Program Costs. March, 2009. Hallam, Eidman, Morehart and Klonsky (editors). Commodity Cost and Returns Estimation Handbook, Staff General Research Papers, Iowa State University, Department of Economics, 1999 References Note We try to use references that are open access or that do not charge fees. Improvements, Errors, and New Features Please notify DevTreks (devtrekkers@gmail.com) if you find errors or can recommend improvements. Video tutorials explaining this reference can be found at: https://www.devtreks.org/commontreks/preview/commons/resourcepack/Benefit Cost Analysis 1/506/none/ DevTreks –social budgeting that improves lives and livelihoods 1