Cost-Benefit Analysis of Housing Program - Essay Example

Cost Benefit Analysis of Housing Program Name Institution Cost benefit analysis of housing program Introduction Globally, the population continues to rise thus putting more pressure on the available lands. Housing units are not sufficient to accommodate the growing population. While intending to invest in the housing programs, most organization often plan a set of identified specific activities with an aim of achieving a desired goal or outcome. These activities form the baseline of the project, therefore, it is important to monitor and evaluate the outcome at every stage to ensure the project activities are in line with the objectives and likely to result in the desired outcome. CBA helps the planners housing of the housing project to compare the cost of investing in such programs and alternative projects. While conducting evaluation on any project, testing, management, and documentation of the result plays an important role considering the fact that evaluation is a continuous activity; as a result, documentation offers an insight and opportunity to compare various outcomes. In addition, evaluation employs a systematic investigation method of identifying the worth or merits of any project (Reh, 2011). Understanding the concept of cost benefit analysis When valued in monetary terms, the cost of operating housing program is quite high; however, the project plays an important role in addressing health related issues resulting from poor housing conditions, proper sanitation, and improved environmental conditions. In order to achieve these benefits, all projects must have specific objectives they intend to achieve. Thus, evaluation assists the project managers to identify the benefits and risks associated with the project. The housing developers should conducts a cost-benefit analysis to establish whether the project is worth executing or not. The results obtained from the evaluation process might be helpful in deciding on the course of action to redesign the project activities in order to acquire the stipulated result (Research and Evaluation Associates, & United States, 2001). In housing programs, financial evaluation of the project demonstrates the level of accountability among the stakeholders. Additionally, it offers the mangers an opportunity to improve the performances of the project, increasing their probability of acquiring external funds, and fulfilling the objectives of the organization. The essence of executing any project is to realize a specific objective; therefore, without an evaluation process, any project has a slight chance of realizing the desired outcome (Neubert, 2000). When conducting financial evaluation, financial benefits and costs, it is important to design a cash flow statement that offers an insight on how the program is utilizing resources in monetary form. The analysis should also consider non-market impact of the housing program. Analyzing non-market resources is often the most difficult especially in monetary forms. Impacts Financial Economic Benefit Cleaner environment Saving on money spent of medication Improved sanitation Improved health care Reduced medical expenditure Healthy nation Job creation Increased disposable income Increased housing units Improved security Reduced expenditure on security agencies Safer environment Cost Employment Wages and salaries Reduced unemployment rates Construction cost Rent Inflations Laws and policies Taxes collection Compliant programs Figure 1: All costs and benefits associated with housing program With proper housing programs for the homeless, there is guarantee of improved sanitations and general environmental conditions. As a result, there is reduction in the cost invested in combating environmental related diseases. The government might use the money in alternative projects, which also aims at improving the quality of life. Before beginning the project evaluation process, the project managers must create an evaluation plan, which must clearly state what it is evaluating, reasons behind the evaluation, the stakeholders involved in the evaluation process, and the expected results. Conducting CBA within the sector is mainly to assist in analyzing the social feasibility and viability of the program. Moreover, while evaluating the effects on environmental resources, it is important to critically analyzing all the resources relation to biological, chemical, and physical aspect (Dunn, 2008). Identification of the consequences relating to housing programs is not the only factor considered while conducting the analysis. However, there is also need to consider the implications of the program. It is important to note that the consequences are identified in relation to social benefits and losses, which results due to program implementation. In some cases, the cost of investing in a project might be higher than the benefits resulting from successful implementation. Every project is prone various risks which are likely to increase the project cost while trying to mitigate them. Most organizations prefer investing in projects whose benefits are more compared to the cost, hence, before executing any project, cost benefit analysis of the project assist to determine whether the project is worth investing in or not. International and local donors often want to know if the projects they are funding and implementing are worth their efforts within the public and private sectors. Through project evaluation, the project managers are able to acquire the answers often raised by the donors regarding the ongoing projects. While valuing environmental resources, the evaluators must assign each consequence a value and discount rates with time in order to ascertain the benefits and costs likely to result in the future. Furthermore, while conducting CBA, it is important to adhere to internationally established principles of analyzing the impact of a project. It is the responsibility of the project managers to ensure all activities involved in evaluation process complies with internationally set guidelines. Therefore, cost benefit analysis should be credible and independent with an ability of reinforcing accountability and transparency. The entire process of evaluation should integrate the ethical methods of handling confidential information. In order to ensure transparency and accountability, the project managers should encourage public participation and stakeholders’ involvement in order to identify both negative and positive impact of housing program (Eckstein, 2008). Through participation, the managers are able to acquire external impacts of the project on the end-users. Moreover, public participation assists in creating a pool of available option for making decisions with an aim of redesigning the project activities, which have the ability of improving the status of the project. Besides increasing the accountability of the project activities, public participation in CBA creates a sense of project ownership among the public thus improving their level of participation and effectiveness of the project. Most organization often employ the services of an external evaluation consultant to strengthen the credibility and accountability of the entire process. Considering the nature of housing program, it is important to set aside adequate finances for the entire valuation process during the project budgeting period to prevent compromising the outcome of the project. In addition, while designing CBA plan, the evaluation should encourage integrative and interactive measures to ensure exhaustion of all the issues likely to emerge during the implementation phase of the project. The percentage of the total budget meant for the evaluation process should be able to evaluate both the internal and external results of the projects. Housing organizations employ different types of valuation techniques depending on the scope of the program. These techniques ranges from simple methods to technical methods. They include self-evaluation, internal, independent, and external evaluation. In self-evaluation, the staff members, project management team, and technical specialist within the organization are responsible for conducting the CBA while internal valuation is the responsibility of independent officials within the organization especially those involved designing and backstopping the project activities (Corrie, 2002). On the other hand, independent project valuation involves activities conducted by the independent organizational officials in the presence of an external evaluator who acts as the lead expert. External analyst must have no connection with project activities from planning, designing, and execution. Finally, external valuation of a housing program is entirely the responsibility of the external analysts with no previous connection with the project. In addition, donor agencies are responsible for financing external evaluation while the project management are responsible for making follow-ups on the evaluation process. While conducting CBA, it crucial to integrate sensitivity analysis to the whole process to ascertain reliability of the future costs and benefits. In housing program, changes in discount rates consider sensitivity analysis. Timing plays an important role in project evaluation. Moreover, a properly structured analysis should follow a well-defined procedure to acquire efficient and reliable information. In projects relation to housing activities, uncertainties and discount rates are the factors that analysts should take into consideration. Under most circumstances, the level of uncertainties in discount rates is likely to increase after the execution of the program. Prevailing interest rates and inflation problems are the factors that often contribute to uncertainties. To forecast the social feasibility and viability of the housing program when there are changes in discount rates, it is important to subject factors influencing uncertainties to sensitivity analysis through employing two distinct interest rate, higher and lower. Financial and economic evaluation of Homelessness Program Housing program consequences are factors likely to increase the cost. They include the cost of inputs from labor, raw materials, machineries, and construction capital. Moreover, the cost of mitigating environmental problems is likely to influence the overall cost. From the bill of quantity prepared by the constructor, the analysts are able to estimate construction cost. Most organization often set a given percentage of the for maintenance purposes annually which is subject to annual increment due to inflationary cost and ageing cost of the facilities. All costs are estimated based on prevailing market forces, and contractors is likely to draw the labors from the company. Considering the impact of the growing population on the natural resources like the forest, the housing program is likely to reduce such effect. Most homeless people rely on firewood and timber for domestic uses and with execution of the housing program; such negative effects are like to reduce drastically by 75% due to establishment of modern facilities. Most homeless people consume about 5000 tons of firewood annually with each ton costing about £350. Estimation of tons of wood saved by the program is: 75/100 * 5000 = 3750 tons Estimated cost of saving £ (3750 * 350) = £1,312,500 For efficiency, project evaluation does not only require the expertise of qualified and skilled personnel, but also organizational support (Corrie, 2002). Therefore, the organization has to offer management support through resource allocation, modification of challenges influencing the project, and engaging in decision-making process. The organization must all offer a conducive environment that encourages trust among the stakeholders. Moreover, technical support is crucial when developing tools for data analysis and provision of organizational information deemed important for positive evaluation outcome. Most project evaluators use indicators to establish the progress of projects’ success or achievements. The indicators are either quantitative or qualitative. Qualitative indicates relates to the number of people involved in the evaluation process, rates, and ranking of options while qualitative indicators are factors relating positive or negative feedback, comments, and complaints originating from the beneficiaries. Financial and Economic Evaluation of benefits associated with housing program The current settlement among the homeless is unhygienic, unplanned, and poor infrastructural development that exposes them to diseases thus threatening their lives. Therefore, while valuing the benefits, it is important to consider how the program would save lives. The housing program has an ability of reducing mortality rates. Most studies indicate that out of 1000 people living without homes, five people face higher chances of premature deaths due to intolerable living conditions. In order to reduce such deaths, the people must be willing to pay for the reduction of immortality. Calculation of total willingness to pay is an example of social valuation used for saving people’s lives. The government spends many resources within the health sector due to vulnerability of the homeless to environmental hazards, but with the housing program, proper health and resources utilization reduction is a guarantee. The program would also offer jobs to the locals besides encouraging social externalities. Moreover, the project would contribute greatly to the reduction of people sleeping on the streets, thus an improved standard of living. The survey conducted shows that the project would greatly reduce overdependence of on the government welfare due to available jobs created. With lower cost of renting these houses, there is an expected projection in the demand considering the level of affordability and other benefist associated with the project. Financial & economic cost These constraints are like to increase the overall cost of the project. They include unacceptable risks associated with the project, which the project managers must allocate resources for their mitigation. Every project is prone constraints. Thus, it is important to identify them and calculate the monetary associated with mitigation and control (Portney, 2012). Some costs associated with housing programs are budget allocation for paying workers, hiring of vehicles, and environmental management (Boardman et al., 2001). Most projects often have negative impacts on the environment . Thus, it is important to measure environmental cost. In addition, construction of the program will lead to displacement of people; therefore, it is important that the project management must set aside a given amount for compensating the displaced people (Nassar and Al-Mohaisen, 2006). For example, a displacement of 10,000 people will require compensation cost of about $40,150,772 if the housing program is to compensate each person $4015.0772. Even though housing program reduces unemployment by hiring the locals, it also means that the project must set aside cost meant for remunerating them. External consultants also increases the cost since the project must be law compliant, thus there is need for them to create time and offer their opinion and advice regarding the project. CBA Evaluation method While conducting an analysis, it is important to consider various methods of evaluation. They include financial impact of measuring the effect of the project and Revealed preference and stated preference methods for evaluating non-monetary effects of the project. Every decision made to invest in a given project, there always costs associated with alternative projects. This is the opportunity cost. Revealed preference method analyzes the decisions made to invest in any period through making comparison of the costs and benefits associated with the project. The technique analyzes non-monetary factors like time and cost for people involved in the project. For example, the professional consultants create time to advices relating to the project at some cost. In addition, the locals also volunteer their services to the housing program to ensure prosperity of the project at some cost. Some non-monetary benefits associated with the project are improved health-care, which is an opportunity cost for wages. In order to ensure improved living conditions and hygiene, there is need to set aside some cost for improvement of environmental conditions. This is achievable to stated preference method, which involves conducting interviews and administering questionnaires to acquire the views of the people. Improved environment plays a key role in enabling a healthier environment; however, the cost of creating such environment is the responsibility of the locals. The locals must be willing to pay for the cost of creating safe environment. The total willingness to pay (TWP) of each homeowner determines nature of the environment of the newly constructed homes. Most of the observable financial impact of the project are reduced rents, cost of hiring machines and vehicles, and maintenance cost. References Boardman, A. E., Greenberg, D. H., Vining, A. R., & Weimer, D. L. (2001). Cost-benefit analysis: Concepts and practice. Upper Saddle River, NJ: Prentice Hall. Corrie, R. K. (2002). Project evaluation. London: Telford. Dunn, W. N. (2008). Public policy analysis: An introduction. Upper Saddle River, NJ: Pearson Prentice Hall. Eckstein, O. (2008). Water-resource development: The economics of project evaluation. Cambridge: Harvard University Press. Nassar, K., & Al-Mohaisen, A. (2006). A Practical Approach for Cost/Benefit Analysis of Early Design Decisions: Application to Architectural Daylighting. Architectural Science Review, 29(2), 931-952. Neubert, S. (2000). Social impact analysis of poverty alleviation programmes and projects: A contribution to the debate on the methodology of evaluation in development cooperation. London: Frank Cass. Portney, P. R. (2012, April 13). Benefit-Cost Analysis: The Concise Encyclopedia of Economics | Library of Economics and Liberty. Retrieved from http://www.econlib.org/library/Enc/BenefitCostAnalysis.html Reh, J. F. (2011, June 10). Cost Benefit Analysis. Retrieved from http://management.about.com/cs/money/a/CostBenefit.htm Research and Evaluation Associates, & United States. (2001). Interim report for the Department of Labor Youth Offender Demonstration Project process evaluation. Washington, DC: U.S. Dept. of Labor, Employment and Training Administration. Weimer, D. L., & Vining, A. R. (2005). Policy analysis: Concepts and practice. Upper Saddle River, NJ: Pearson Prentice Hall. Read More