Cost effectiveness is the measure of the relationship between the costs and outcomes of a program, project, or intervention. It is a key consideration in decision-making, as it helps organizations determine whether the resources invested in a particular activity are justified by the benefits or outcomes that are achieved.

There are several ways to measure cost effectiveness, including:

1. Cost-benefit analysis: This is a method of evaluating the costs and benefits of a program or project by comparing the total costs to the total benefits. It is often used to compare alternative courses of action and to determine the most cost-effective option.
2. Cost-utility analysis: This is a method of evaluating the costs and benefits of a program or project by comparing the costs per unit of benefit. It is often used to compare alternatives that produce different types of outcomes, such as health interventions that produce different levels of quality of life.
3. Cost-effectiveness analysis: This is a method of evaluating the costs and benefits of a program or project by comparing the costs per unit of outcome. It is often used to compare alternatives that produce similar outcomes, such as different treatments for the same medical condition.

By considering cost effectiveness, organizations can make informed decisions about how to allocate resources and ensure that they are achieving the greatest possible value for money. The following are some illustrative examples.

Calculation

The benefit here is usually non-financial as techniques such as cost-benefit analysis or return on investment are used for a purely financial analysis. Cost effectiveness is calculated as the ratio of cost to benefit.

ex. cost effectiveness = cost / benefit

Health

A program to fight infectious disease in a developing country costs $3 million per year and is estimated to save 4400 lives.

ex. cost per life saved = (3,000,000/4400) = $681.82

Air Quality

It might be possible to translate this into health benefits such as increased life expectancy for millions of people with enough data. A program to improve air quality in a city improves average atmospheric particulate matter from 110 PM2.5 to 100 PM2.5. The program costs $40 million dollars.

ex. cost per PM2.5 improvement = 40,000,000 / (110 – 100) = $4 million per PM2.5 improvement

Transport

Transportation strategies can be compared with cost effectiveness metrics such as cost per mile. This may include costs such as energy, the value of people’s time, environmental impact and the cost of capital such as trains and roads. For example, a bicycle that costs $200 and can be used for 1500 miles.

ex. cost per mile = ($200 / 1500) = $0.13 / mile

If you include the cost of people’s time at $40 an hour and the assumption a bicycle can travel 13 miles an hour in traffic.

ex. cost per mile = $0.13 + ($40/13) = $3.93 / mile

Bicycles generally don’t cause much environmental damage so this cost is close to zero. Cost per mile can be used to compare bicycles to other forms of transport including all costs related to capital, land, infrastructure, operations, energy, environmental impact, people’s time and quality of life.

Cost variance (CV) is a project management metric that measures the difference between the budgeted cost of a project and the actual cost. It is calculated by subtracting the budgeted cost from the actual cost, and is expressed as a percentage of the budgeted cost.

For example, if the budgeted cost of a project is $100,000 and the actual cost is $110,000, the cost variance would be calculated as follows:

CV = Actual Cost – Budgeted Cost = $110,000 – $100,000 = $10,000

CV = $10,000 / $100,000 = 10%

A positive cost variance indicates that the project is over budget, while a negative cost variance indicates that the project is under budget.

Cost variance is an important metric for project managers and stakeholders to track, as it provides insight into the efficiency of project cost management and the likelihood of the project being completed within budget. By monitoring cost variance, project managers can identify and address any cost overruns or inefficiencies early in the project, which can help to minimize the impact of these issues and improve the chances of project success.

Project metrics are methods for measuring the progress and performance of a project. They are typically tracked continuously in order to provide management with information that can be used to steer and manage the project. Many project metrics reveal whether a project is on schedule and budget, while others measure secondary factors such as risk. By using project metrics, organizations can monitor the status and performance of their projects and make informed decisions about how to allocate resources and address any issues that may arise. The following are common project metrics.

Actual Cost
The total expenditures of a project or activity to date.

Defect Density
The number of defects expressed as a ratio to complexity. For example, defects per thousand lines of code is a common measure of defect density. Used as an indicator of deliverable quality.

Defect Resolution Rate
The percentage of defects that are currently resolved, often reported by defect severity. Used as an indicator of release quality.

Cost Performance Index
The ratio of earned value to actual cost. Measures the percentage of expenditures that have achieved a deliverable.

Cost Variance
The amount that a project is over or under budget at a point in time. Calculated as earned value – actual cost.

Design Stability
The number of change requests that have required design or architecture changes.

Earned Value
Earned value is the budget authorized for work completed. It is used to measure how much you have delivered to date as a financial figure.

Estimate To Complete
Estimate to complete is the cost required to complete the remaining work for a project or activity at a point in time.

Estimated Time To Complete
The estimated time required to complete the remaining work for a project or activity.

Milestone Achievement
The percentage of project milestones that are met successfully.

Payback Period
The amount of time for an investment in a project to break even, often expressed in months.

Percent Complete
An estimate of the currently completed portion of work for activities and the project as a whole.

Project Velocity
The amount of work that a team completes in a sprint often measured in story points. A common agile metric.

Requirements Volatility
The sum of all changes to requirements including new, changed and dropped requirements. Often expressed as a percentage of the original number of requirements. For example, if there are 20 changes and there were 100 original requirements, requirements volatility is (20/100)*100 = 20%.

Resource Utilization
The percentage of available hours for assigned resources that are currently being charged to project activities. A figure over 100% indicates overtime.

Return On Investment
The projected return for a project investment.

Risk Exposure
The total risk the project currently faces after risk treatment. Project risk is typically modeled with risk matrices. It is calculated as the sum of all probabilities × impacts for identified risks.

Risk Management Effectiveness
The percentage of project issues that were identified as risks and managed in advance of the event.

Schedule Performance Index
The ratio of earned value to planned value.

Schedule Variance
The difference between committed dates and actual dates in days.

Scope Changes
The number of change requests that have resulted in a change to scope. An indicator of project stability.

Story Points
The number of story points yet to be completed. Commonly used to measure epics and sprints for agile projects. Typically depicted on a burn down chart that plots outstanding story points versus time.

Variance At Completion
The budget surplus or deficit at completion of a project.

Budget variance is the difference between the budgeted amount and the actual amount spent on a department, team, project, or activity. It is often expressed as a percentage of the budget. For instance, if a project has a budget of $100,000 and the actual spend is $120,000, the budget variance is 20% and is classified as an overspend. On the other hand, if the actual spend is only $50,000, the budget variance is 50% and is classified as an underspend. Although an underspend may seem favorable, it may also indicate poor financial planning and control, as unnecessary funds were committed to the project. Therefore, budget variance is often used to evaluate the effectiveness of financial planning and control, regardless of whether it is a positive or negative variance.