Several general issues exist in relation to costs. When doing a cost benefit analysis, it is important that these issues be considered. In the first place, a decision has to be made on which costs are to be included and those that are not to be included in the analysis. Direct costs are mostly considered in the evaluation of costs. These costs can be measured in monetary terms. They can also be traced directly to the project. An example of a direct cost includes labour costs. The wages paid to the labors and the cost of purchasing a machine can be easily traced and included in the project. On the other hand, some costs cannot be included even though they are felt. The costs of pollution are difficult to include but the decision maker should be aware of these costs (Remenyi, 2000).
The benefits that are to be included in analysis also are the ones that accrue directly from the projects. An example is the revenue that is got from the project. There should also be a standard measure of the costs and benefits to be included in the project. The management should make the decision on the standard measure. It may be in terms of the domestic currency or foreign currency (Lock, 2007).
Another important issue is time value of the costs and benefit. The management has to decide whether the time value of costs and benefits is to be included in the project evaluation.
There are also risk factors. These are the expected deviations from the projected costs and benefits. It is important that a decision be made on whether to cover unexpected deviations in costs and benefits. The evaluators should also determine whether the costs are to be incurred instantly or in future. Some benefits are also received immediately after the project is implemented while others are received several years after the implementation of the project. This is an important issue to evaluate when evaluating costs and benefits of a project (Taplin, 2005).
Measurement of benefits in EMR/EHI is difficult. In the first place, the treatment that an individual receives from the organizations benefits him or her for a long period. This means that these benefits cannot be evaluated because there is no means of measuring these long run benefits. Secondly, the services that one receives can also benefit others. An example is whereby vaccination to one individual benefits other people in the society who have not paid for the vaccination since spread of the disease is prevented. These costs therefore cannot be accounted for.
It is difficult to measure the cost of advice that is given to patients. In most of the cases, the advice is not charged hence cannot be measured in monetary terms. This means that it is difficult to include these benefits in the evaluation of projects. Generally, EMR/EHI benefits are indirect such that they cannot be traced to one particular individual. In addition, the benefits cannot be measured in monetary terms and this is why they are difficult to include in cost benefit analysis (Remenyi, 2000).
Many cost variables are evaluated when analyzing a project. The easiest variables to measure are the opportunity costs, direct costs and the explicit costs. Opportunity costs are easy to measure because the cost of the forgone investment is known with certainty. The cost of the forgone investment is therefore the opportunity cost. Direct costs are the costs that can be traced directly into the final product of an investment. An example is the cost of raw materials. The price of raw materials is known and to get the total cost, the price is multiplied with the quantity of raw materials purchased. Usually, the cost of raw materials can obtained from receipts. Explicit costs are the costs that need monetary outlay. An example is the cost of purchasing a machine. These costs are direct because the price of the machine is known and then the money is set aside for the purpose of purchase. Explicit costs include the costs of transporting the machine, which can easily be accounted for due to the available records (Taplin, 2005).
Quality is a variable of cost that cannot be measured easily. In the first place, there may be no standards set to measure the quality of benefits. In this regard, it becomes impossible to evaluate the quality aspect. Secondly, different people will quantify the quality of same benefits differently. This becomes difficult to give a specific measure of the benefits that accrue from a particular project. Quality of benefits cannot also be measured in monetary terms. As a result, the quality of a service or a good may fail to be included in the final project analysis (Sprague, 1969).
Proxy measures are important when it is not possible to measure what is exactly needed. An example is measuring the quality of health care services. In this case, the option becomes measuring what is measurable. In a hospital, the proxy measure that may be applied is measuring the number of patients that come for services in the same hospital in the future. If each patient never comes back to the hospital or never brings a relative in the same hospital, it means that the quality of the services of the hospital are poor and this is why people prefer never to receive treatment in the same hospital again. On the other hand, a high number of people bringing their relatives to the same hospital mean that the quality of the services in the hospital is good and hence people benefit a lot from these services. In this case, the people that come for repeat service or an increase in the number of people seeking for the same service in the same hospital shows that the quality of services is good and this is a proxy measure (Lock, 2007).
Even though costs of a project are greater than the benefits, other factors may be evaluated to determine whether the project should be invested in. This is especially so in the case of government projects. The objectives of the investor should be evaluated. In some cases, projects are started to help the society. The government may start a project to create employment to people in a given region. This may be regardless of the fact that the costs are greater than benefits (Sprague, 1969).
It is also important to consider the external benefits of the project. These benefits accrue to other people and are not included in the project benefits. Some benefits that may not be measured in monetary value such as increased market share or good reputation and this may make it necessary to implement a project whose costs are greater than benefits. In the case of merit goods such as education, the government may be forced to implement such projects considering that the services are highly preferred by the society.
Taplin, J. H. E. (2005). Cost-benefit analysis and evolutionary computing: Optimal scheduling of interactive road projects. Cheltenham, UK: E. Elgar Pub.
Lock, D. (2007). The essentials of project management. Aldershot, Hampshire, England: Gower.
Sprague, J. W. (1969). A method of measuring the costs and benefits of applied research. Washington, D.C.: U.S. Dep. of the Interior, Bureau of Mines.
Remenyi, D., Irani, Z., Money, A. H., & Sherwood-Smith, M. (2000). The effective measurement and management of IT costs and benefits. Oxford [u.a.: Butterworth-Heinemann.