The economic analysis of projects goes back at least to the 1930’s with the evaluation of U.S. federal water development projects. Since that time, economic analysis has been integrated into the decision making process of most if not all U.S. federal agencies and influenced issues ranging from nuclear power to environmental regulation. Building owners use of economic analysis to determine the most economically efficient or cost-effective choice among building alternatives.
Formally defined, economic analysis is the monetary evaluation of alternatives for meeting a given objective. For example, to meet the need for additional office space a decision maker might consider new construction, renovating an existing facility, or leasing another building. The evaluation is based on a comparison of discounted costs and benefits over a fixed time period of time. Alternatives can be summarized in terms of the ratio of total benefits to total cost (benefit-cost ratio) or equivalently, the total net benefits (net present value).
The Economic Analysis Process
The steps to estimate the economic consequences of a decision, as listed in Ruegg’s and Marshall’s Building Economics—Theory and Practice, are summarized below:
- Define the problem and the objective.
- Identify feasible alternatives for accomplishing the objective, taking into account any constraints.
- Determine whether an economic analysis is necessary, and if so, the level of effort which is warranted.
- Select a method or methods of economic analysis.
- Select a technique that accounts for uncertainty and/or risk if the data to be used with the economic method are uncertain.
- Compile data and make assumptions called for by the economic analysis method(s) and risk analysis technique.
- Compute a measure of economic performance.
- Compare the economic consequences of alternatives and make a decision, taking into account any non-quantified effects and the risk attitude of the decision maker.
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