Maximising project impact with cost benefit analysis: insights from a practitioner

Here are some key insights and processes that have worked well to improve MSD project design, especially for setting the right targets with a Value for Money (VFM) focus

I recently read the latest BEAM Evidence Review and found the section on VFM thought-provoking. While VFM tools such as Cost Benefit Analysis (CBA) are essential for programme monitoring, evaluation and learning (MEL), they often fall short of fully supporting it. 

Reflecting on my journey with VFM tools since 2013, I have had the opportunity to refine my approach through various assignments. 

The VFM framework acts as a complementary tool for assessing projects based on indicators such as economy (minimising costs), efficiency (maximising output), and effectiveness (achieving intended results). It integrates both economic and financial analyses to offer a quantitative perspective on a project’s potential value. 

Setting targets

At the design stage, new projects often face the challenge of selecting intervention areas that will deliver scalable results. While we aim for adaptive management, we also need to set realistic, achievable targets that stakeholders can endorse. 

Committing to targets four years in advance is challenging, especially when balancing these commitments with scalable interventions and realistic outcomes. Tools such as Results Chains, Adopt-Adapt-Expand-Response (AAER), and VFM can provide structure and clarity. Their (and others) at various design stages makes the task more manageable.

For example, if a project invests $1 million over four years to reach 1,000 farmers, each projected to increase their income by $200 annually through productivity gains, the direct income generated is $200,000 per year. Extending this over two years, in line with the DCED attribution timeframe, results in $400,000. While this may not represent the highest return, using the VFM lens enables us to assess beyond direct financial returns. 

Using a VFM lens

Instead of simply raising targets to improve VFM figures, VFM encourages us to examine broader project contributions - such as building relationships, introducing previously unavailable services, and mobilising private partners who absorb some of the ongoing service delivery costs. 

Using the VFM lens, we can clarify assumptions about the private sector’s financial and non-financial contributions toward strengthening core systems for target groups - a perspective I find immensely valuable. 

For project teams working on pathways to systemic change, VFM provides insight into potential risks and third-party costs. However, to conduct an effective VFM analysis and fully realise its benefits, a solid foundation is essential; otherwise, it risks becoming a ‘garbage in, garbage out’ exercise.

Key considerations for a compelling VFM analysis

Whether applied to skills development, enterprise projects or other initiatives, the following form the foundation of any successful VFM analysis:

• Donor requirements: the need for VFM analysis often depends on donor expectations. Some projects require it at the inception stage, others may not. Understanding these requirements early is crucial for ensuring compliance and effective planning.
• Theory of Change (ToC): a well-developed ToC is critical to a successful VFM analysis. It links the project’s objectives and expected outcomes with financial resources. Using SMART indicators (Specific, Measurable, Achievable, Relevant, Time-bound) and providing detailed information - such as baselines, activity plans and budgets - is essential.
• Credible assumptions: the VFM model is based on estimates that range from activities to results. Assumptions need to be credible, supported by data, and regularly updated to maintain accuracy.

Challenges of ex-ante VFM analysis

While VFM is an excellent tool for evaluating a project’s potential value, its effectiveness relies on accurately predicting future costs and benefits. In practice, several challenges may arise:

• Data availability: Ex-ante VFM requires detailed data on sectors, SMEs and target groups—data that is often scarce, especially in Market Systems Development projects. Action research during the inception phase can help fill these gaps, though it may not always be sufficient for generalising early trends.
• Team composition: a VFM analysis requires expertise from multiple disciplines, such as economics, finance and project management. This approach is crucial but can complicate the analysis due to differing perspectives and methodologies.
• Time-consuming: developing financial and economic models that are tailored to a project’s specific context can take significant time. Each sector has unique dynamics—such as regulatory environments and competitive landscapes—requiring specialised knowledge and deep analysis.
• Scenario analysis and sensitivity testing: VFM analysis often involves creating complex scenario models and conducting sensitivity tests. In fast-changing environments, assumptions can quickly become outdated, reducing the relevance of the analysis.

Tips for mitigating challenges in ex-ante VFM analysis

Each VFM analysis is unique and must be adapted to the project’s specific impact. Over the years, I have implemented the following strategies to address common challenges and improve the accuracy of assessments:

1. Engage early with donors: clarify donor requirements from the start. Determine whether the focus should be solely on monetary impacts or if non-monetary factors also need to be included in the analysis.
2. Ensure team alignment on ToC: the entire team must have a shared understanding of, and agreement on, the ToC. This will enhance multidisciplinary collaboration, ensuring that data sources are validated through pilot studies or expert consultations.
3. Leverage the inception phase: use this phase for action research and stakeholder engagement. Collecting data early from both primary and secondary sources helps lay a solid foundation for more detailed analysis later.
4. Validate the model: involve the team in refining the VFM model and ensure that macro and micro data are sourced from credible outlets. External consultants may offer additional insights, but it’s important that the core team maintains control over project-specific nuances.
5. Develop dynamic models: create flexible models that can be easily adjusted and re-evaluated as new data becomes available. Engage experts to validate the assumptions behind these models, ensuring their continued relevance.
6. Allocate adequate time: plan enough time for a thorough VFM analysis. Ideally, the analysis should run in parallel with market research and ToC development. Regular updates and refinements will transform the VFM model into a powerful tool for making informed decisions.

When executed properly, ex-ante VFM analysis can offer vital insights into the potential value and impact of a project. By getting ahead of the challenges—through careful planning, aligning the team’s strengths, and using dynamic modelling—you can develop a custom tool that supports the project through both design and implementation phases. 

For more information on the topic, I find the following resources from Swiss Agency for Development and Cooperation (SDC) very practical and comprehensive - see the related links below (and please do leave your comments too!)