How to Avoid Common Pitfalls in Cost-Benefit Analysis

A Cost-Benefit Analysis (CBA) is a powerful decision-making tool, but it’s only as good as the data and assumptions you put into it. Even experienced analysts can fall into common traps that skew results and lead to poor decisions. By being aware of these pitfalls and implementing simple safeguards, you can ensure your CBA provides a reliable foundation for your projects.

Overlooking Intangible Costs

While it’s easy to list tangible costs like software subscriptions or equipment purchases, intangible costs are often missed. These can include the time and productivity lost during employee training on a new system, the disruption to workflow during a transition period, or the cost of external consultation not tied to a specific line item.

To avoid this, involve a wide range of stakeholders from different departments when identifying costs, and think beyond simple dollar amounts to the resources and effort required.

Underestimating Project Timelines

Optimism bias can lead to underestimating the time a project will take, which in turn leads to underestimating associated costs. For example, a project that is delayed by two months will incur two additional months of team salaries, recurring software fees, and operational overhead. To create a more realistic timeline, consult with subject matter experts, use historical data from similar projects, and build in buffer time to account for unforeseen challenges.

Misjudging the Value of Benefits

It’s tempting to inflate the value of a project’s benefits to make the case more compelling. However, this lack of objectivity can undermine your entire analysis and damage your credibility with stakeholders.

For example, overestimating the revenue increase from a new marketing campaign or the cost savings from a new process can make a poor investment look like a good one. To avoid this, use a conservative approach to estimating benefits. Base your figures on market research, industry benchmarks, and realistic projections rather than guesswork. Validating your estimates with multiple data points from a variety of reliable sources will significantly strengthen the integrity of your analysis.

The Sunk Cost Fallacy

The sunk cost fallacy is the tendency to continue investing in a project because of the resources you have already spent, even when the CBA indicates it’s no longer a sound investment. This emotional attachment to a project can cloud your judgment and lead to throwing good money after bad. A CBA should be an objective, forward-looking tool. By regularly re-evaluating the analysis, you can make an evidence-based decision to either continue or stop the project, regardless of how much has already been invested.