Table of Contents | Appendix C-2 | Appendix C-4

APPENDIX C-3

COST-BENEFIT ANALYSIS

The Cost Benefit Analysis (CBA) analyzes and evaluates, from a cost and benefit perspective, the candidate solutions to meet the stated need. It will also describe the feasible alternatives, all tangible and intangible benefits, and the results of the analysis. The feasible alternatives may be documented in more detail in a separate document, shown in Appendix C-4, Feasibility Study. This CBA will discuss which system costs are analyzed, present the total costs for all the years the analysis covers, and outline the comparison between the costs of each alternative and the tangible benefits of the same.

Note: An urgent business need or external stakeholder pressure may dictate the use of an alternative development work pattern that may not identify, evaluate, or document alternative solutions. If no feasible alternatives are identified, the CBA methodology must be tailored to evaluate the costs and benefits of the proposed IT investment, without extensive analysis of alternative solutions.

1.0      OVERVIEW

This section describes and discusses the value added to the systems project by the CBA, and the justification for it as documented in various OMB publications.

1.1      Purpose

This section discusses the business need the CBA is trying to address, that is, the decision the DOJ (or component) is trying to make.

1.2      Scope

This section states the scope of CBA.

1.3      Methodology

This section describes and discusses the CBA methodology employed and its relationship to the SDLC work pattern to be used by the project team.

2.0      ASSUMPTIONS, CONSTRAINTS, AND CONDITIONS

This section discusses assumptions, constraints, and conditions that may effect the results of this CBA. These assumptions, constraints, and conditions form the foundation on which the CBA is based; a change in any one of these could cause a change in benefits as well as costs.

2.1      Assumptions

The assumptions are explicit statements used to describe the present and future environment on which an analysis is based. The assumptions relative to the project system may include:

•      All data (that is, cost figures, workload statistics, benefit values, etc.) used in this analysis
       are assumed to be accurate, reliable, and valid.
•      The reslts of this analysis could be skewed by inaccurate or different data.
•      The expected useful life of the system is 5-7 years.

2.2      Constraints

The constraints are factors, external to the program, which can limit the development of the application or the availability of performance data from the current system. The constraints relative to the project may include:

•      Any technology considered must be able to meet the minimum business requirements of
        the DOJ (or components).
•      The programs and investments become cost ineffective if this is not the case.

2.3      Conditions

•      The conditions are unique factors in the operating environment that may influence system
        processes. The conditions relative to the project may include:

•      The technology used must allow integration into the existing or proposed environment.

•      Redundant investment if more than one production platform is used

•      All alternatives must adhere to the DOJ Technical Reference Model.

•      Alternatives implementing intranet or internet services will be in accordance with
        Departmental policy.

3.0      FEASIBLE ALTERNATIVES

This section identifies alternative solutions that will meet the needs and requirements outlined for the Program. The results of the corresponding Feasibility Study are used as a starting point into an analysis of costs and benefits for the Feasible Alternatives identified in that document. Each Feasible Alternative is analyzed as described in the subsequent sections.

This section discusses the Feasible Alternatives, which are technology solutions that meet the outlined high-level functional requirements. Feasible Alternatives could also be identified in a Feasibility Study (see Appendix C-4).

Also describe, in a few sentences, the architecture on which the system will operate. This can be related to the local area network, wide area network, office automation, workstation, and e-mail architecture already in place at the locations of deployment. The analysis should address conformance with the Technical Reference Model (TRM) and all costs associated with upgrades or new development efforts. This section may need to be updated during the life of the system development project to include any changes or additions to the architecture.

Note: An urgent business need or external stakeholder pressure may dictate the use of an iterative alternative development work pattern that may not identify, evaluate, or document alternative solutions. If no Feasible Alternatives are identified, mark this section as Not Applicable.

3.1      Alternative 1

This section briefly describes the alternative, its components, and how it will work. Describe how this alternative meets the high-level functional requirements. Explain how this alternative was chosen from a wide variety of alternatives, if a separate feasibility study is not developed.

3.2      Alternative n

Repeat Section 4 for as many alternatives as exist for the Feasibility Study. At a minimum every system investment has a minimum of two alternatives: fund on-going maintenance or status quo, and fund on-going maintenance plus enhancements.

4.0      COST ANALYSIS

The Cost Analysis presents the costs for design, development, installation, operation, maintenance and disposal, and consumables for the system to be developed. This profile is used to analyze the costs of the system for each year in its life cycle, so those costs can be weighed against the benefits derived from using it. In accordance with OMB Circular A-94, the system is fully cost-accounted, including all spending resources, whether appropriated or non-appropriated.

4.1      Cost Categories

Exhibit 4A, Cost-Related Terms, defines cost-related terms used in the Cost Analysis [the suggested line items may not be a complete list]:

Exhibit 4A: Cost-Related Terms

4.2      Project Cost Analysis

The costs for system design, development, installation, operations, and maintenance are presented in Exhibit 4B, Cost Analysis. This section gives a brief explanation of the cost calculations for each year.

This section explains that the costs for future years are discounted as per OMB A-94, Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs. The Year of OMB Circular real discount rate for the number of years, and the percentage rate from OMB A-94, are used to derive the discount factors used in the cost calculations. Discount factors are applied to the future years to provide an appropriate net present value (NPV) for the system costs. Because of inflation, a dollar today is worth less than in the future. It is important to recognize that dollar values of both benefits and costs associated with a project decrease over time because of inflation.

Exhibit 4B: Cost Analysis

A detailed description of cost breakdowns should be developed to explain exactly how all cost calculations are presented. Discount rates should be applied where appropriate and documented as part of the explanation. Current OMB acceptable rates to be used can be found in a current version of the OMB Circular A-94. If necessary, a line by line cost accounting should be presented if the analysis is placed under any scrutiny.

5.0      BENEFIT ANALYSIS

This section analyzes the alternatives' individual ability to meet the goals of the project.

5.1      Key Benefit Terms

Exhibit 5A, Key Benefit Terms, lists and defines key terms used in this section. Definitions for other terms used in this section may be found in Section 11, Glossary and Acronyms .

Exhibit 5A: Key Benefit Terms

5.2      Tangible Benefits

This section provides a detailed description of the tangible benefits. Because each alternative may not provide the same benefits, it is necessary to note which alternatives provide which benefits.

This section also describes, in detail, the source(s) of data used to quantify the benefit for each alternative and presents a chart that depicts the calculations for that benefit. It is important to provide sufficient documentation of data sources and calculations so that readers can follow the logic of the quantification of benefits.

Exhibits 5A, Tangible Benefit 1, and 5B, Annual Savings (Based on Average X Million Transactions per Annum), detail this information. Repeat this for each tangible benefit.

Exhibit 5A: Tangible Benefit 1

Exhibit 5B: Annual Savings (Based on Average X Million Transactions per Annum)

In a paragraph or two following the benefit description, each calculation should be explained and data sources, such as the current Federal general schedule, should be cited for any data used. Each benefit should be calculated out for the number of projected years for each alternative. Benefits and costs for each alternative should be calculated for the same number of years to provide an accurate cost benefit comparison.

5.3      Summary of Tangible Benefits

Exhibit 5C, Tangible Benefits, summarizes the quantifiable benefit value for each alternative.

Exhibit 5C: Tangible Benefits

Exhibit 5D, Summary of Project Tangible Benefits: Expected Return, summarizes the tangible benefits described above. Exhibit 5E, Intangible Benefits Alternative 1, shows the expected return from tangible benefits for three years, allowing for an accurate comparison with the three year costs in Section 4, Feasible Alternatives. Exhibit 5F, Intangible Benefits Alternative n, illustrates a comparison of the tangible benefits for each alternative as well as each technology solution as part of each alternative.

Exhibit 5D: Summary of Project Tangible Benefits: Expected Return

If any of the alternatives does not provide one of the benefits, be sure to indicate this by placing a zero in the box and providing a brief explanation of why.

5.4      Intangible Benefits

Although no quantifiable dollar value has been placed on these benefits, if they need to be related to value in some way if they influence the decision. The intangible benefits for each alternative may either be the same or different. It is important to include all intangible benefits.

Exhibit 5E: Intangible Benefits Alternative 1

Exhibit 5F: Intangible Benefits Alternative n

For each alternative, include a table in the same format as the above exhibits.

5.5      Summary of Intangible Benefits

Exhibit 5G, Summary of Intangible Benefits: Expected Return, summarizes the values of intangible benefits.

Exhibit 5G: Summary of Intangible Benefits-- Expected Return

This table should be used to indicate if an alternative provides an intangible benefit for comparison purposes. A checkmark can be placed in each alternative box that does provide the particular benefit. It should be noted that if a tangible benefit can be valued in unit terms but cannot be valued in dollars, the unit valuation should be presented in some manner and the alternatives should be ranked for that intangible alternative.

6.0      COMPARISON OF COSTS AND BENEFITS FOR PROJECT

Once you have determined the discounted values of costs and benefits, you need to compare each alternative. Several tools commonly used to rank projects and compare alternatives are Net Present Value (NPV), Benefits cost Ratio (BCR), Return on Investment (ROI), Discounted Payback Period (DPP), and Internal Rate of Return (IRR).

This section compares the discounted costs and benefits for the project. The first part of the comparison examines the tangible benefits and the second part examines intangible benefits. The purpose of this comparison is to identify if tangible and intangible benefits outweigh the total cost of the system.

6.1      Results of the Comparison for Project-- Tangible Benefits

Exhibit 6A, Project Cost to Tangible Benefit Comparison, compares the costs and tangible benefits of the Project. Identify which comparison tool was used.

Exhibit 6A: Project Cost to Tangible Benefit Comparison

6.2 Results of the Comparison for Project-- Intangible Benefits

Exhibit 6B, Intangible Benefit Comparison-- Expected Return, compares the intangible benefits of the Project.

Exhibit 6B: Intangible Benefit Comparison-- Expected Return

7.0      SENSITIVITY ANALYSIS

A sensitivity analysis assesses the potential effect on inputs (costs) and outcomes (benefits) that depends on the relative magnitude of change in certain factors or assumptions. A change in any factor (that is, area of uncertainty) can necessitate a revision to the cost-benefit projections or can influence system performance outcomes. This section examines key sources of uncertainty in the operational environment of the Project and what it is going to do. This may also rank the alternatives and see how sensitive they are to basic assumptions or externalities (political, social, and environmental). After costs and benefits are determined for each alternative, the alternatives are ranked and a sensitivity analysis is performed.

7.1      Key Sources of Uncertainty

Exhibit 7A, Sensitivity Results, lists the key factors that have implications for the Project. Projected costs and benefits could change depending on the extent of change in these factors.

Exhibit 7A: Sensitivity Results

7.2      Sensitivity Results

Each of the key sources of uncertainty could have an effect on the benefits and costs of the project. The effect of each source of uncertainty is discussed in the subsequent section.

8.0      RESULTS OF THE ANALYSIS

The project CBA results are based on the work described in the previous sections. This work assesses the costs and benefits, both tangible and intangible, of the project and what it will do. The sensitivity of its costs and benefits to key sources of uncertainty are described in Section 8, Sensitivity Analysis. This section should list what the system will provide the agency. It should also discuss how well each alternative will achieve the goals of the system in context to the relative cost of that alternative. No specific recommendation should be made. Any CBA should be used by decision makers as a tool in conjunction with other studies and factors to determine the most appropriate investment choice for the agency to achieve its mission.

Appendix A: REFERENCES AND DOCUMENTATION

Documents used to obtain information for this CBA, including project alternatives, costs, benefits, uncertainties, and information regarding cost-benefit methodologies, are listed in the subsequent sections.

Appendix B: GLOSSARY AND ACRONYMS

The definitions and acronyms presented in this section are specific to this analysis. Although these terms and acronyms may have other meanings, those included in the subsequent sections are used in this analysis.

Cost-Benefit Analysis Outline

Cover Page
Table of Contents

Executive Summary

1.0       Overview
            1.1       Purpose
            1.2       Scope
            1.3       Methodology

2.0       Assumptions, Constraints, and Conditions
            2.1       Assumptions
            2.2       Constraints
            2.3       Conditions

3.0       Feasible Alternatives (If Applicable)
            3.1       Alternative 1 (repeat, as necessary, for additional alternatives)
            3.2       Alternative n

4.0       Cost Analysis
            4.1       Cost Categories
            4.2       Project Cost Analysis

5.0       Benefit Analysis
            5.1       Key Benefit Terms
            5.2       Tangible Benefits (repeat, as necessary, for additional benefits)
            5.3       Summary of Tangible Benefits
            5.4       Intangible Benefits
            5.5       Summary of Intangible Benefits

6.0       Comparison of Costs and Benefits for Project
            6.1       Results of the Comparison for Project-- Tangible Benefits
            6.2       Results of the Comparison for Project-- Intangible Benefits

7.0       Sensitivity Analysis
            7.1       Key Sources of Uncertainty
            7.2       Sensitivity Results

8.0       Results of the Analysis

Appendix A: References and Documentation

Appendix B: Glossary and Acronyms

Table of Contents | Appendix C-2 | Appendix C-4