Cost Appraisal

Cost analysis in project appraisal is significant in senses that:

1. It presents necessary information to decision-makers (or audience of the evaluation) in choosing the best alternative;
2. Because of the rigorous methods that have been developed, it could give us credible evidence on which decisions regarding selection of alternatives are based; and
3. It usually deals with both cost factors and effects of alternative interventions, which are necessary to choose between multiple alternatives.

There are several methods of cost factor analysis for evaluating alternative interventions: cost-benefit analysis; cost-effectiveness analysis; cost-utility analysis; and cost feasibility analysis.

Cost-benefit analysis in principle evaluates alternative interventions by measuring costs and effects in monetary terms. In the contemporary project appraisal, it is common that economic factors as well as financial factors must be taken into account. Thus, cost-benefit analysis is also categorised under the broader umbrella of "economic analysis." In cost-benefit analysis, both costs and effects need to be calculated by either market prices or shadow prices, which refer to prices that cannot be found in the market, or those estimated from, for example, market prices of similar items due to absence of market of perfect competition. One of the advantages of cost-benefit analysis is its possibility to compare alternatives with quite different objectives, or even those in defferent sectors. On the other hand, weaknesses mainly reside in significant risks of omitting factors that are difficult to find out appropriate prices from the evaluation, even though these omissions are allowed only if the factors can be regarded trivial, or these are shared among alternatives to be evaluated.

Cost-effectiveness and Cost-utility analyses are close cousins each other, which evaluate alternatives according to which alternative will generate greatest effectiveness (or utility) at a given cost, or a given level of effectiveness (or utility) at the lowest cost. Effectiveness will be identified as effects of the alternative in relation to the objectives of it. Utility refers to aggregated satisfaction of individuals who may have any stake of the alternative interventions being evaluated. Major difference between the two is the number of measures to be evaluated. Cost-effectiveness analysis assumes that it would measure relatively smaller number of effects. On the other hand, cost-utility analysis can combine different measures of effects into a single measure of utility by putting appropriate weights on respective measures. Both of them, however, cannot determine worth of any alternative in an absolute term. That is, they do not show whether effectiveness (or utility) will exceed costs. Furthermore, in selecting indicators, both analyses require evaluators to be cautious about reliability and construct validity, both of which determine overall rigor of the evaluation. Construct validity refers to consistency between indicators and underlying concepts that they are intended to reflect. As for reliability, if a test yields the same results when applied on repeated occasions to the same individuals, the test is said to possess reliability. As has been implied, since selecting indicators usually involves more or less evaluators' subjective judgement, we need to pay special attention to these regards.