Economic evaluations are used to compare the value of the impact created by a project or organisation with the cost of creating that impact. Economic evaluations help organisations, funders and project managers decide how best to allocate resources.
There are two main categories of economic evaluations:
- Those that help with appraisal of policy options, allocating resources and project evaluations.
- Those that focus on performance management and improvement.
The short guide to value for money assessment approaches provides a breakdown of the methods which fall under these two types of economic evaluation.
We usually focus on two methods of economic evaluations: Cost-Benefit Analysis and Social Return on Investment. To help you understand these two types of evaluations and how and when to undertake them, we have a couple of guides for you to use.
What is a cost-benefit analysis?
Cost-benefit analysis (CBA) compares the costs of undertaking a project with the benefits achieved, from the perspective of society. For a CBA you have to estimate the value of costs and the value of benefits in monetary terms and the results are typically shown as a ratio.
CBA considers both the direct cost, such the project manager’s salary, and costs that are one step removed, such as costs to other providers. It also considers the costs and benefits which are not usually expressed in monetary terms, for example, volunteer time, and benefits such as improvements in quality of life. There are techniques which can be used to determine the value of these for the purpose of CBA.
Undertaking a cost-benefit analysis
CBA is a useful tool to consider during any strategic planning to help ensure your resources are being used to their full potential. Having the evidence to demonstrate whether the benefits of your project outweigh the cost is often an important consideration for us and other funders when making decisions on the types of projects to support.
Download our cost-benefit analysis guide for more information on CBA including top tips and other useful links and resources.
Social return on investment
What is social return on investment?
Social return on investment (SROI) is a method for understanding the economic, social and environmental value that is created by a project.
An SROI places a stronger focus on the value of what was created over the monetary figure. It aims to produce a ratio that tells you how much value you would get for every £1 invested in a project. So a ratio of 3:1 means for every £1 invested, £3 of social value is created. This estimation includes non-financial returns, both positive and negative, such as the impact on wellbeing or the environment.
One of the big differences between CBA and SROI is stakeholder involvement. In the SROI approach, stakeholders are fundamental in determining outcomes or the changes that result from the activity. Stakeholders are also key in determining the monetary value of the identified benefits, i.e., how much are these benefits worth to the stakeholders. CBA doesn’t require the involvement of stakeholders in deciding what outcomes are, though they may be consulted.
Undertaking a social return on investment
Similar to a CBA, a SROI is a useful tool to start discussions, helping to guide the choices that managers face when deciding where they should spend time and money. It can help ensure services are designed to meet stakeholders’ needs and allows them to hold your organisation to account. An SROI is helpful for communicating the value of your organisation, including the non-financial benefits. It also helps to raise the profile of your service, improve your case for further funding and make your funding applications more persuasive.
Download our social return on investment guide, for more information on SROI including top tips and other useful links and resources.