Welcome to IS-276.a Benefit-Cost Analysis (BCA) Fundamentals.
The purpose of this course is to provide you with an understanding of the basic BCA theory and concepts so that you can effectively comply with the cost-effectiveness requirements of Hazard Mitigation Assistance (HMA) grant programs.
At the end of this course, you will be able to:
- Explain basic BCA theory
- Explain basic flood concepts
- List and locate additional BCA resources
Students must complete the entire course and pass the final exam to receive credit for the course. Each lesson takes a variable amount of time to complete. If you are unable to complete the course in its entirety, you may close the window and reopen the course at any time. However, depending on the system used to take the course, it is possible you may have to repeat a portion of the last lesson you were studying.
Lesson 2 will discuss basic BCA theory.
At the end of this lesson, you will be able to:
- Describe the regulatory requirement of cost-effectiveness of HMA grant programs
- Explain key BCA terms
BCA Regulatory Background
FEMA has developed and updated the BCA Tool to meet the guidelines published in the Office of Management and Budget’s (OMB) Circular A-94 Revised, “Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs.”
The guidelines in Circular A-94 apply to any analysis used to support Government decisions to initiate, renew, or expand programs or projects that would result in a series of measurable benefits or costs extending for three or more years into the future.
Hazard Mitigation Assistance (HMA) projects must be cost-effective to be eligible for Federal funding assistance.
What Is Benefit-Cost Analysis?
- BCA is the method by which the future benefits of a mitigation project are determined and compared to its costs.
- A BCA always involves looking at damages and losses twice: “Before vs. After” or “With vs. Without” to determine the project’s impact.
- The end result is a Benefit-Cost Ratio (BCR), which is calculated by a project’s total benefits divided by its total project costs.
- The BCR is a numerical expression of the “cost-effectiveness” of a project. A project is considered to be cost-effective when the BCR is 1.0 or greater.
What Is a Benefit-Cost Ratio?:
When we say it’s important to demonstrate that a proposed mitigation project is cost-effective, we mean that the benefits must be greater than the costs.
The mathematical equation looks like this: The benefits, B, are divided by the costs, C, to get the BCR, or Benefit-Cost Ratio. If the project is cost-effective, the BCR will have a value of one, or higher.
This presentation looks at the two elements of the equation: the benefits and the costs.
First, let’s look at the benefits. Benefits are any future costs that can be avoided as a result of completing a mitigation project. That’s why mitigation benefits are often called “losses avoided.”
Benefits can include:
- Reducing physical damages
- Avoiding loss of function
- Preventing casualties, and
- Reducing emergency management costs
Now let’s talk about the other elements of the equation: project costs. As with benefits, all project costs must be calculated to determine the total cost for your project—the C in our formula.
Here’s what to consider:
- Cost estimates must be accurate because when your application is approved, those estimates become the basis for the amount of the grant.
- In addition, the costs must be realistic. Otherwise, you may find yourself with unfinished tasks and little of the grant remaining to complete them.
- Make sure you have a well-developed Scope of Work. The Scope of Work is the blueprint for calculating all project costs and ensures a complete and accurate total cost.
- Also, don’t overlook additional costs. For example, when buying homes in a flood-prone area, the price of the house may not be its total cost. There may be a property appraisal, legal fees, title search, closing costs, and demolition and restoration.
- We’ve covered the main elements of the BCR equation: Benefits and Costs. Remember: divide Benefits by Costs to get the Benefit-Cost Ratio. If the result is one or greater, the project is cost-effective.
Aside from BCA and BCR, additional key BCA terms include:
- Project Useful Life
- Project Effectiveness
- Net Present Value of Future Benefits
- Discount Rate
- Present Value Coefficient
Project Useful Life (PUL)
The estimated amount of time (in years) that the mitigation action will be effective; how long it will physically last on the landscape. The PUL data field is important in the calculation of the BCR because it establishes the timeframe to calculate annualized benefits. Higher PUL values extend the duration over which benefits are calculated, thus raising the final BCR.
How well the project will reduce future damages, or, the difference between the “after project” annualized damages versus the “before the project” annualized damages. Only structure acquisition and demolition and structure acquisition and relocation projects can assume that a project is completely effective. Other project types assume that there is still some (but reduced) hazard risk upon project completion—this is called “residual risk.”
Net Present Value of Future Benefits
The number of annual benefits that will occur for each year of the life of the project, represented in a present or current dollar value. This brings the value of future benefits in line with the current value of the project cost. Future benefits are discounted by using a discount rate.
Often called the “time value of money.” Future benefits are worth less in current-dollar figures, and the discount rate is the rate at which each consecutive year’s benefits are reduced. The discount rate is determined by the OMB.
Present Value Coefficient
Each combination of PUL and discount rate has a fixed present value coefficient. The annualized project benefits (annualized damages before mitigation minus annualized damages after mitigation) is multiplied by the present value coefficient to determine the project’s total benefits, which becomes the “B” in the BCR.
Lesson 2 discussed basic BCA theory, including:
- The regulatory requirement of cost-effectiveness of HMA grant programs
- A BCA always involves calculating damages and losses twice: “Before vs. After” or “With vs. Without” project
- How the BCR is calculated
- Key BCA terms
Flood mitigation projects are the most common sub-applications submitted under the HMA grant programs. Thus, understanding basic flood concepts will ensure that you collect the right information and documentation to meet a project’s cost-effectiveness requirements.
Lesson 3 will explain basic flood concepts using a video presentation.
At the end of this lesson, you will be able to explain basic flood concepts, including:
- 10-, 50-, 100-, and 500-year flood event elevations and discharges
- First Floor Elevation (FFE), Base Flood Elevation (BFE), and Streambed Elevation
Flood Insurance Rate Map and Flood Insurance Study Tutorials
Before watching the Basic Flood Concepts video, you may wish to take the Flood Insurance Rate Maps (FIRM) and Flood Insurance Study (FIS) tutorials that provide useful information to the basic flood concepts discussion. These tutorials are available on the FEMA website. Make a note of these tutorials for future reference.
Basic Flood Concepts: Video Transcript
Flood mitigation projects are the most common applications submitted for FEMA mitigation funding. Understanding basic flood concepts and terms will ensure that you collect the right information and documentation for FEMA’s cost-effectiveness requirements.
These concepts include:
- Floor Elevation (FFE)
- Flood Elevations and Discharges, and
- Streambed Elevation.
Flood mitigation projects protect structures from flood damage.
In general, the first floor elevation, or FFE, is the lowest floor. For a one-story house without a basement, the FFE is where a person enters the front door.
Flood elevation is how high the water rises in a flood event. Flood events are often referred to as 10-year, 50-year, or 100-year flood events.
A 100-year flood is not a flood that happens once every hundred years. The number “100” is a measure of probability in any given year, in this case, the probability of the flood occurring is 1 in 100. Since 1 divided by 100 is .01, the 100-year flood has a .01, or 1%, chance of occurring in any given year.
Similarly, a 10-year flood has a 1 in 10 chance, or 10%, annual chance of occurring. A 50-year flood has a 1 in 50 chance or 2% annual chance. A 500-year flood has a one-fifth of one percent annual chance.
Larger floods will have higher flood elevations. Here’s a residential structure and the flood elevations for that structure. Here’s the flood source and the elevations for the channel and surrounding area.
The 100-year flood elevation is also known as the Base Flood Elevation or BFE. The BFE is the same as the 100-year or 1% annual chance flood elevation for the structure.
The community’s Flood Insurance Study (FIS) provides flood elevations information. Here’s a residential structure and the flood elevations for that structure. Here’s the flood elevations data, usually depicted in a graph in the FIS.
The same graph provides the streambed elevation—the elevation for the bottom of the flood source, and the baseline for flood elevations.
The FIS also provides peak discharge values for the four flood events. “Discharge” is the rate of flow for each flood event—the larger the flood event, the larger the discharge value.
Lesson 3 discussed basic flood concepts, including:
10-, 50-, 100-, and 500-year flood events, flood elevations, and discharges
Base Flood Elevation (BFE), First Floor Elevation (FFE), and Streambed Elevation
Lesson 4 will provide a course summary and a list of additional BCA learning resources.
At the end of this lesson, you will be able to:
Compare individual learning accomplished to course objectives
List and locate additional BCA learning resources
Lesson 1 Review
Lesson 1 covered the course goal and objectives.
At this point of the course, you should have met the course goal of understanding basic BCA theory and concepts. This will help you effectively comply with the cost-effectiveness requirements of HMA grant programs.
You should have met the course objectives and should now be able to:
Explain basic BCA theory
Explain basic flood concepts
List and locate additional BCA learning resources
Lesson 2 Review
In Lesson 2, you learned basic BCA theory, including:
The regulatory requirement of cost-effectiveness of HMA grant programs as laid out in OMB Circular A-94 Revised, “ Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs”
A BCA always involves calculating damages and losses twice: “Before vs. After” or “With vs. Without” project
How the Benefit-Cost Ratio is calculated
The definition of key BCA terms, including benefits, costs, Project Useful Life, project effectiveness, net present value of future benefits, discount rate, and present value coefficient
Lesson 3 Review
In Lesson 3, you learned basic flood concepts including:
How to explain and illustrate 10-, 50-, 100-, and 500-year flood event elevations and discharges
The definition of First Floor Elevation (FFE), Base Flood Elevation (BFE), and Streambed Elevation
BCA Learning Resources
The following resources can provide you with the skills and knowledge needed to conduct a BCA or review a completed BCA:
FEMA BCA Website: http://www.fema.gov/benefit-cost-analysis
OMB Circular No. A-94 Revised: https://obamawhitehouse.archives.gov/omb/circulars_a094/
IS-277 Benefit-Cost Analysis: Entry Level independent study course: https://training.fema.gov/is/courseoverview.aspx?code=IS-277
E0276 Benefit-Cost Analysis: Entry Level classroom course
To apply for the course, follow the EMI Application Procedures: https://training.fema.gov/apply/
Lesson 4 Summary
Lesson 4 reviewed the content covered in the course, allowed you to compare your learning to the course objectives, and provided a list of additional BCA learning resources.
You are now ready to take the Final Exam.