Decide with confidence: a simple cost-benefit analysis template

Although we—or our clients—might want us to, limited resources preclude organizations from taking on every new project idea under the sun.

One of the key roles of a project portfolio manager is to design and implement a project selection and prioritization process that evaluates the costs and benefits of potential projects.

In this article, I’ll guide you through streamlining project planning and prioritizing projects using a cost-benefit analysis template. I’ll share practical insights based on my 15 years of experience as a program manager to help you make informed decisions fast.

What is a cost-benefit analysis template?

A cost-benefit analysis template is a repeatable framework for calculating the costs that you expect to incur during project execution versus the benefits that you expect to gain following project completion.

Using a template for this exercise offers several benefits as it:

• Helps you make data-driven decisions around project selection and prioritization, rather than defaulting to the beloved pet project favored by the loudest voice in the room
  
• Standardizes how costs and benefits are calculated across a project portfolio. This ensures that prioritization decisions use consistent data, removing a source of potential bias from your decision-making process
  
• Improve project risk management with better cost category documentation and reduce the time that the project manager spends on crafting the analysis

5 steps to conduct a cost-benefit analysis

Here are the five steps I use as a program manager when conducting a cost-benefit analysis for a project, along with the information you’ll need to execute each step:

1. Scope the project properly

Make sure to define the scope during the discovery phase to align stakeholders on the intended outcomes of the effort.

You won’t be able to estimate costs and benefits if you can’t agree on what your project is trying to accomplish. In addition to scope, clarify the anticipated time horizon for the project to be able to forecast total costs accurately.

Information needed: project scope statement, high-level project schedule.

2. List the expected costs and benefits

Put together a list of all of the costs and benefits that apply and categorize them based on type. Categories include:

Costs

• Direct costs: these include materials, equipment, and labor expenditures
  
• Indirect costs: overhead costs required for day-to-day business operations. These costs may be fixed across a project portfolio (e.g., licensing costs for enterprise project management software, utility costs for an office)
  
• Intangible costs: these types of costs tend to be more subjective. An example might be the opportunity costs of doing this project versus something else. If you find it too subjective to try to assign currency to these costs, you could substitute with other metrics (e.g., expected conversion rates for a technology product)
  
• Risks: the costs incurred if something goes wrong with your project (e.g., a schedule delay that increases planned direct costs)

Benefits

• Direct benefits: these are the financial benefits (e.g., projected revenue)
  
• Indirect benefits: these are intangible benefits that might look like an improved relationship with an existing client or a diversification of your portfolio that helps attract future business

Information needed: anticipated types of costs, anticipated types of benefits, risk register.

3. Estimate costs for each of the categories you identified

It’s really important to have a reliable view of cost estimations. If you decide not to use currency estimates for intangible costs, make sure you’re comparing similar types of data in this category. For example, you might decide to measure the percentage change in conversion rate month over month.

To get this information, you can turn to your previous projects—which is especially easy if you’re using a resource management tool. For example, Float’s people report offers historical data about people’s billable and non-billable hours to help inform future hours estimates that translate in labor costs.

You can also consult Float’s project report as a source of historical project data to forecast anticipated revenue and assess the impact of potential schedule delays. Your business development, sales, and/or finance team may also be able to analyze the expected returns from pursuing the project.

For indirect costs, consult with your finance team. For intangible costs in tech projects, your product team should be able to furnish performance data that helps you measure success.

Information needed: cost estimates

4. Compare costs versus benefits

It’s time! If you want to get fancy, you could incorporate net present value (NPV) and/or discount rates to see how your costs and benefits are expected to change over the course of the project lifecycle.

You could also conduct a sensitivity analysis to assess the best and worst-case scenarios for realizing the forecasted benefits and costs.

Or, you could decide to forego the more complex calculations and simply compare costs and benefits based on differences in rough order of magnitude. You’ll be able to understand whether a project is worth pursuing based on relative differences.

5. Decide which projects to prioritize

You can use the results of the previous steps to make informed decisions. You may need to rework the cost-benefit analysis if project costs are deemed too high. This might involve reducing project scope and/or adjusting the resource mix.

Your cost-benefit analysis template + how to use it

Using a cost-benefit analysis template helps you consistently analyze project costs and benefits across your portfolio. Using the same data sources and looking at the same cost elements gives confidence that you’re evaluating potential projects based on similar criteria.

To help you get started, we’ve included a free downloadable cost-benefit analysis template. Get it from the links below.👇

➡️ Make a copy in Google Sheets

➡️ Download to your computer from File > Download

(Note: Please don't request editing access as the template needs to stay intact for everyone to see! Just download it to your computer or make a copy with your Google account and it's all yours!)

Next steps

Conducting a cost-benefit analysis is not a foolproof exercise. Forecasting unknown information with imperfect data necessarily involves a degree of subjectivity.

But, you can still use the results of your analysis to make data-informed business decisions about how to allocate limited resources to those projects in your portfolio that are most likely to be successful.