Reducing Project Failures through Comprehensive Cost-Benefit Analysis
Introduction
Studies show that only around 65% of projects worldwide are successful. The most common causes include information asymmetries, conflicting objectives between the project team and stakeholders and inadequate internal communication. To minimise these risks, solid project appraisal and transparent processes are essential. This article looks at the role of systematic project evaluation, particularly through comprehensive cost-benefit analysis (CBA), in reducing project failure and fraud. Project failures not only undermine business objectives but also have a significant economic impact, making effective project management critical to overall success.
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What Should be Included in a Thorough CBA and Project Appraisal?
A comprehensive CBA serves two main purposes: verifying that a project's benefits outweigh its costs and aiding project selection based on benefit-cost ratios. Key components of a thorough CBA and project appraisal include:
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Integrating CBA into Project Appraisal: Good Business Practice
Conducting thorough CBAs for significant investments offers invaluable insights for organizations, beyond typical financial analyses. It aids the Board of Directors' oversight role and contributes to informed decision-making. Let's explore the value-added of CBA at various project stages:
1.????? Planning Initialization Phase
2.????? Project Planning Phase
3.????? Project Execution Phase
4.????? Project Benefit Realization Phase
5.????? Project Closure Phase
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1.????? Project Initialization Phase
In the Initialization phase business needs have to be defined and alignment of the stakeholders have to be reached. Reliable deliverables, risks, estimated costs, estimated benefits and resource requirements have therefore to be prepared and defined. Conducting a thorough CBA in the initial stage of a project is therefore of enormous importance. Some advantages of a thorough CBA in the initialization phase could be:
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2.????? Project Planning Phase
In the project planning phase specific requirements, tasks, timelines, project team, roles, control and coordination instruments have to be defined. A reliable project plan, work breakdown structure, budget, risk management and communication plans have to be finalized. Some advantages of a thorough CBA in the planning phase:
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3.????? Project Execution Phase
In the project execution phase the project team executes and follows through on tasks based upon the project plan. Tasks, resources, teams, suppliers, risks etc. should be objectively managed.
During the project execution phase, a thorough Cost-Benefit Analysis (CBA) remains especially valuable as a reference point for decision-making, resource management, and performance evaluation. Some advantages of a thorough CBA in the execution phase:
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4.????? Project Benefit Realization Phase
In the benefit realization phase the progress of the project is being managed and monitored.? In this phase it should be ensured that the project’s planned benefits are realized. Some advantages of a thorough CBA in the benefit realization phase:
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5.????? Project Closure Phase
In the project closure phase, the operations and support responsibilities have to be handed over to the normal business organization. Acceptance and sign off of the project deliverables have to be obtained by the stakeholders. Some advantages of a thorough CBA in the project closure phase:
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Enhancing CBA with a Comprehensive Approach
Most CBA models propose 4 to 6 analysis steps, but the Swedish "PENG" model offers an extended 10-step framework.
This expanded approach with more steps provides several advantages:
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Short overview of the “PENG” model
The "PENG" model, based on ten steps, offers enhanced support in preparing and analysing CBAs and project appraisals, particularly for large and complex projects. Developed within the framework of the Swedish National Board for Industrial and Technical Development (NUTEK), this model provides a systematic approach to assess the benefits of investments and projects.
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Preparation Phase in the “PENG” model:
Compared to other models the PENG model proposes a more thorough preparation phase (steps 1 to 4). A clear definition of the purpose of the project benefit evaluation has to be given. The project’s scope has to be understood, the relevant processes, systems and stakeholders have to be in depth described and defined. The pre-preparation phase demands that a suitable analysis team and framework for the analysis work is chosen. The strong focus on the preparation phase reduces the problems with asymmetric information and project failures. To improve the preparation phase even more for significant projects, facilitated Control-Self Assessment workshops could be included to clarify goals, controls, and risks where needed.
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Analysis phase in the “PENG” model:
In the analysis phase (steps 5 to 8), a lot of care is needed. People who are responsible for the area where the project is going to be introduced should make sure that all areas that could be affected by the project are represented. Techniques like brainstorming or objectives analysis should be used to reduce eventual asymmetric information between the project team and its stakeholders. For significant projects, facilitated Control-Self Assessment workshops to clarify project risks could be included. Input data for the PENG model includes project costs, anticipated benefits, implementation timelines, adoption rates, productivity improvements, and other relevant factors. A reliable data collection and analysis are critical to ensuring the accuracy and reliability of the cost-benefit analysis. To get a trustworthy PENG evaluation, it is essential to identify as many benefit effects as possible. With the help of the process, the anticipated benefits resulting from the project should be quantified.
Benefits could be classified into three different categories;
?Examples;
The reliability of the evaluation should be verified with questions about if the evaluated benefits are realistic in relation to the total value of the complete area under investigation. It’s equally important to understand the possible costs of the proposed decision or project. The relevant costs could be assessed and classified in three categories;
Examples:
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Calculating and comparing phase in the “PENG” - model:
The benefits and the costs should be mapped on a timeline when they are likely to occur. It must also be ensured all costs and all benefits are recorded in the same monetary unit. All assumptions used to estimate the benefit and cost values should be thoroughly documented and discussed with project members and stakeholders.
Calculating the net benefit is usually the easiest step, as it simply reduces the gross benefit by the costs. It typically also involves discounting future costs and benefits to account for the time value of money and assesses the net present value (NPV) and the CBA ratio of the project.
?? NPV = ∑ Present Value of Projected Benefits – ∑ Present Value of Projected Costs
?? CBA ratio = ∑ Present Value of Projected Benefits / ∑ Present Value of Projected Costs
The formula for a cost-benefit analysis ratio can be expressed as: Projected benefits / projected costs = CBA ratio. The CBA ratio provides value by calculating the ratio of the sum of the present value of the projected benefits against the sum of the present value of the projected costs. The greater the value above 1, the greater are the benefits associated with the alternative considered. Sensitivity analysis may be conducted to evaluate the robustness of results under different scenarios and assumptions.
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Conclusion:
A comprehensive CBA process provides a solid framework for assessing the costs and benefits of a project. A detailed and systematic approach can reduce the risk of project failure. Some of the underlying causes, such as internal information asymmetries, conflicting goals between the project team and stakeholders and inadequate internal communication, can be reduced with the help of a thorough CBA process
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