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How Do I Conduct an Economic Analysis of a Project?

By Jan Fletcher
Updated May 17, 2024
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The first step in conducting an economic analysis of a project is to define the boundaries and what data will be gathered. The next step is the preliminary interpretation of the data, as well as understanding what variables may impact the findings. Typically, a subsequent step is to evaluate the cost effectiveness or efficiencies of various strategies or alternatives proposed in the project. Stakeholders may be consulted to ensure that the original rationale for the analysis still meets corporate or societal expectations, or if the preliminary data indicates a need to shift the focus in a different direction. Long-term sustainability of a project is another aspect that may be included in an analysis.

In order to conduct an economic analysis of a project, you will usually collect and tabulate numerical data pertinent to the project. For example, if it involves the construction of a new factory that will employ hundreds of workers, an economic analysis would typically include such data as the area's prevailing wage, estimation of size and availability of a labor pool, and energy costs. If any significant factors are left out of the analysis, the project's rate of return may be inaccurate. Interpretation of data will generally flow organically from the findings, but it may be skewed due to a bias arising from one or more stakeholders.

Since there are often vocal advocates for a project, you may have to guard against this bias. For example, there may be special interest groups strongly promoting that a new, very expensive highway be developed. An economic analysis of the proposed project may include expected traffic counts, number of miles driven, and estimated annual cost of highway maintenance. Other factors could include the number of ancillary jobs that the development may bring as a secondary effect. Such projections of secondary effects are often difficult to pin down in an economic analysis of a project and, as a result, can skew findings.

Sometimes, an economic analysis of a project may lead a researcher to the conclusion that the data collected is insufficient and should be broadened to include additional variables. This can be particularly true in cases where the economic analysis of a project could be inaccurate due to the unpredictability of future social trends or demographic changes. For example, unforeseen changes in the marketplace, such as a drop off in the number of affluent shoppers at a mall, can have a negative impact five years down the road, despite an economic analysis that indicated vigorous growth in the near term.

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