To undertake an Economic Analysis, we work with organisations using a Costing methodology, which captures three main types of cost;
- Direct project expenditure
- Estimates of the value of public resources used by the intervention
- Estimates of the costs of services or facilities used by the intervention that are free or discounted
These cost data can them form the basis for a variety of economic analyses including Social Return on Investment (SROI) and long-term models of economic return. Two methodologies we use regularly are Cost Benefit Analysis (CBA) or a Break-even Analysis.
Cost Benefit Analysis – is an assessment of the benefit-cost ratio associated with any intervention requires a clear understanding of the intervention being examined, in particular how it achieves a particular outcome. To calculate the cost benefit ratio the following three pieces of data are then required;
- The extra outcome achieved by the intervention compared with the alternative intervention (the incremental effect, which will come from the impact evaluation).
- The economic value of these outcomes, which will be derived from existing, published studies; and
- The extra cost of implementing the intervention compared with an alternative intervention (the incremental cost).
Break-even analysis – In the event that the impact evaluation is inconclusive and we are unable to identify an incremental effect for the intervention we could use a break even analysis. This demonstrates how the costs saved as a result of the intervention vary depending upon the impact the intervention has. This can be used to determine the minimum effect required for the costs saved as a result of the intervention to outweigh the cost of the intervention. We can then use existing published evidence (from a similar project) to assess whether the project has the potential to achieve the level of impact required for it to ‘break-even’.