Last updated on Jul 3, 2024

How do you incorporate environmental and social impacts in cost-benefit analysis?

Cost-benefit analysis (CBA) is a widely used tool in cost engineering to compare the advantages and disadvantages of different alternatives for a project or decision. However, CBA can be limited by its focus on monetary values and its difficulty in capturing the environmental and social impacts of the options. In this article, you will learn how to incorporate these impacts in your CBA using some practical methods and examples.

1 Why consider environmental and social impacts?

Ignoring the environmental and social impacts of your project or decision can lead to inaccurate or misleading results, as well as ethical and legal issues. For example, if you only consider the direct costs and benefits of building a dam, you may overlook the negative effects on the ecosystem, the wildlife, the local communities, and the cultural heritage of the area. These effects can have long-term consequences for the sustainability and well-being of the stakeholders and society. Therefore, it is important to consider these impacts in your CBA to ensure that you account for the full costs and benefits of your alternatives.

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2 How to identify environmental and social impacts

You can use various tools and frameworks to help you with this task, such as stakeholder analysis, life cycle assessment, environmental impact assessment, and social impact assessment. These tools can help you define the scope, objectives, and criteria of your CBA, and identify the relevant stakeholders, their interests, and their values. They can also help you collect and analyze data on the environmental and social effects of your alternatives, such as emissions, waste, resource use, health, safety, equity, participation, and quality of life.

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3 How to measure environmental and social impacts

This can be challenging, as some of these impacts are intangible, qualitative, or subjective, and may not have a clear market value. However, there are some methods that you can use to estimate or assign a monetary value to these impacts, such as market prices, shadow prices, contingent valuation, hedonic pricing, and cost of illness. Alternatively, you can use non-monetary methods —such as multi-criteria analysis — to rank or score the alternatives based on the environmental and social criteria.

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Varun Bhargava

Cost Engineer
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Cost analysis not only gives insights into the different constituents of the cost structure, it also gives information on the manufacturing process that can be used to manufacture a part. Each of these manufacturing processes would have an energy consumption associated with them which are directly being taken from the energy grid. Based on the energy mix of the grid, we can measure the amount of impact that an activity would have on the environment. Additionally, factories and manufacturing locations directly involved with an activity can provide data into their consumption and disposal of hazardous waste through stringent government regulations for disclosure. This can help in quantifying how the are and its people will be impacted.

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Utku Yıldırım

Italy R&D, Design and Cost Manager
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Preliminary, it is important to identify and prioritize the most significant environmental and social issues that can affect an organization and its stakeholders by using the Materiality Analysis method.

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4 How to compare environmental and social impacts

You can use various indicators and metrics to help you with this task, such as net present value, benefit-cost ratio, internal rate of return, and social return on investment. These indicators can help you calculate the net benefits or the efficiency of your alternatives, taking into account the environmental and social impacts. You can also use sensitivity analysis, risk analysis, and scenario analysis to test the robustness and uncertainty of your results, and to explore the trade-offs and synergies between the environmental and social impacts.

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5 How to communicate environmental and social impacts

A key aspect of incorporating environmental and social impacts in your CBA is to communicate them effectively to the decision-makers and the stakeholders. You can use various methods and formats to help you with this task, such as tables, charts, graphs, maps, dashboards, and reports. These methods can help you present the data, the assumptions, the methods, the results, and the recommendations of your CBA. You can also use storytelling, visualization, and engagement techniques to convey the environmental and social impacts of your alternatives in a compelling way.

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6 How to improve environmental and social impacts

Incorporating environmental and social impacts in your CBA can help you identify the opportunities and challenges of your project or decision, and improve your performance and reputation. You can use various strategies and practices to help you with this task, such as green design, circular economy, social innovation, corporate social responsibility, and stakeholder engagement. These strategies can help you reduce the negative environmental and social impacts of your alternatives, and enhance the positive ones. They can also help you create value for yourself, your clients, your partners, and your society.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Oseghale Okohue BEngr. Msc. MBA. DBA. Prince2®Practitioner

Project Manager, Senior P6 Planner & Data Analyst | EPICM, Offshore Engineering, Renewable Energy (Solar, Wind, Electrical Power Systems, HVDC Power Cables, BESS, Grid Code Compliance (G99, G5/5, P28) & Integration)
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In engineering management, integrating environmental and social impacts into cost-benefit analysis is crucial. For energy projects, factors like carbon emissions, community displacement, and ecological disruption must be quantified. This involves assessing long-term sustainability, stakeholder engagement, and regulatory compliance. For instance, in wind farm development, evaluating habitat preservation alongside economic gains ensures holistic decision-making and sustainable outcomes.

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Cost Engineering

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How do you incorporate environmental and social impacts in cost-benefit analysis?

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1 Why consider environmental and social impacts?

2 How to identify environmental and social impacts

3 How to measure environmental and social impacts

4 How to compare environmental and social impacts

5 How to communicate environmental and social impacts

6 How to improve environmental and social impacts

7 Here’s what else to consider

Cost Engineering

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