5. Hegland To Council re cost benefit analysis for fire departmentTo: Scandia City Council
From: Robert Hegland
Councilman
Gentlemen:
When we recently voted on whether to approve the purchase of a new tanker for the fire
department. I voted against the purchase. My purpose was that it is my belief that our city needs
to consider implementing a more structured process for certain capital expenditures that the city
makes. We need to have much more information to justify the spending of hundreds of
thousands of dollars beyond “the old one is shot and we need a new one”. Do we allow such
casual analysis on all major capital expenditures?
In business any such an expenditure is preceded by a cost/benefit analysis. Don’t be intimidated
by what sounds like a complex process. I have taken the liberty of including a brief description
of the process of cost/benefit analysis from Wikipedia. Please note that it is used by both
business and government.
It’s implementation can be as complex or as simple as is desired. We usually know the cost
element. What did it cost to buy? Add to that what it cost to operate. We know most of that
already as we keep maintenance logs on all equipment. What we don’t know is the other half,
the benefit side. Once we’ve bought whatever piece of equipment is desired we just assume it is
being used as intended.
Since City Councils such as ours are typically made up of average citizens, it would not be
unusual for a council member to be voting on something which he or she has little knowledge in.
This enables a department head to make their case with uninformed people. Only by having
more complete information available to us can we make good judgments on major expenditures.
For instance, what does it cost the city on average for each fire run it makes? When we send
equipment to assist a mutual aid member city what does it cost us? Correspondingly, when we
ask them to send us equipment, what does it cost them? I guarantee you that at some point one
or more of these partners will be charging for such items as they are stressed to meet budgets.
If a truck goes out on a call, how many firemen were involved, how much water was used, how
long did the call take, how many water runs were required, etc. Knowing s uch information helps
the City Council to judge new equipment purchases. Are they timely, is the equipment sought
the right equipment, etc.
This is a timely subject as we are coming up to budget time for the fire department. I believe
there are lots of questions which should be asked.
I am recommending that we request the fire department to fill out a call sheet for every call. I
am including a suggested format. Most people, especially volunteer personnal do not like to deal
with such issues. However, to properly to our job, it is required. We have a Chief and 2 or 3
Assistant Chiefs. This task can be easily spread among the existing personnel.
I prepared the format as we will only get back what we provide a format for. Please review and
comment.
Sincerely,
Bob Hegland
Cost–benefit analysis
From Wikipedia, the free encyclopedia
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Cost–benefit analysis (CBA), sometimes called benefit–cost analysis (BCA), is a systematic
approach to estimating the strengths and weaknesses of alternatives that satisfy transactions,
activities or functional requirements for a business. It is a technique that is used to determine
options that provide the best approach for the adoption and practice in terms of benefits in labor,
time and cost savings etc.[1] The CBA is also defined as a systematic process for calculating and
comparing benefits and costs of a project, decision or government policy (hereafter, "project").
Broadly, CBA has two purposes:
1. To determine if it is a sound investment/decision (justification/feasibility),
2. To provide a basis for comparing projects. It involves comparing the total expected cost
of each option against the total expected benefits, to see whether the benefits outweigh
the costs, and by how much.[2]
CBA is related to, but distinct from cost-effectiveness analysis. In CBA, benefits and costs are
expressed in monetary terms, and are adjusted for the time value of money, so that all flows of
benefits and flows of project costs over time (which tend to occur at different points in time) are
expressed on a common basis in terms of their "net present value."
Closely related, but slightly different, formal techniques include cost-effectiveness analysis,
cost–utility analysis, risk–benefit analysis, economic impact analysis, fiscal impact analysis, and
Social return on investment (SROI) analysis.
Theory
Cost–benefit analysis is often used by governments and other organizations, such as private
sector businesses, to appraise the desirability of a given policy. It is an analysis of the expected
balance of benefits and costs, including an account of foregone alternatives and the status quo.
CBA helps predict whether the benefits of a policy outweigh its costs, and by how much relative
to other alternatives (i.e. one can rank alternate policies in terms of the cost –benefit ratio).[3]
Generally, accurate cost–benefit analysis identifies choices that increase welfare from a
utilitarian perspective. Assuming an accurate CBA, changing the status quo by implementing the
alternative with the lowest cost–benefit ratio can improve Pareto efficiency.[4] An analyst using
CBA should recognize that perfect appraisal of all present and future costs and benefits is
difficult, and while CBA can offer a well-educated estimate of the best alternative, perfection in
terms of economic efficiency and social welfare are not guaranteed.[5]