HSE principles for Cost Benefit Analysis (CBA) in support of ALARP
This guide has been drawn up to help explain the uses and limitations
of Cost Benefit Analysis (CBA). This guide is particularly concerned with
the correct use of CBA
as part of ‘as low as reasonably practicable’ (ALARP) decisions
and is in accordance with HSE’s aim to create,
“A culture in HSE that values the principles of risk assessment and
management; and working practice that embeds proportionate and effective
risk governance.” 
It should assist HSE staff in assessing a duty holder’s case. A separate
checklist has been developed detailing individual
points that Inspectors may wish to consider when reviewing a duty holder’s
‘Reducing Risks, Protecting People’ (R2P2) discusses reasonable
practicability and affirms the expectation that risk reduction action is
to be taken using established relevant good practice as a baseline. Where
relevant good practice is a good fit to the circumstances, then decisions
on risk reduction action are straightforward.
In circumstances where established good practice does not exist, is out
of date or the situation is complex and the relevance of individual good
practices is questionable (e.g. the combination of discrete hazards is not
foreseen in the good practice documents), the decision making process on
risk reduction action is less straightforward. CBA
aids the decision making process by giving monetary values to the costs
and benefits and to enable a comparison of like quantities. The analysis
can help make an informed choice between risk reduction options.
A CBA cannot form the sole argument of an ALARP
decision nor can it be used to undermine existing standards and good practice.
For many ALARP decisions, the HSE does not expect duty holders to undertake
a detailed CBA, and a simple comparison of costs and benefits may suffice.
Where major health and safety issues are being considered, a more rigorous
CBA may be of value.
What is a CBA?
In a CBA, all costs and benefits are expressed in a common currency, usually
money, so that a comparison can be made between different options. It is
a defined methodology for valuing costs and benefits that enables broad
comparisons to be made between health and safety risk reduction measures
on a consistent basis, giving a measure of transparency to the decision
In undertaking a CBA, all relevant costs which accrue from the inputs into
a health and/or safety intervention must be identified and costed. Inputs
are defined as any additional human, physical and financial resources that
are used to undertake an intervention.
Likewise, all relevant health and safety and non-health and safety benefits
arising from the intervention must be identified and expressed in monetary
terms. Health and safety benefits include the avoidance of actions that
would be taken after an incident such as evacuation, food bans, land use
restrictions, etc. Non-health and safety benefits are savings and should
be included in the CBA as an offset to the duty-holder’s costs.
Issues arising from CBAs
There are several processes to bear in mind when completing a CBA. The
processes below are particularly relevant to ALARP decisions.
What is Gross Disproportion?
- The concept of gross disproportion requires duty-holders to weigh the
costs of a proposed control measure against its risk reduction benefits.
Specifically, it states that a proposed control measure must be implemented
if the 'sacrifice' (or costs) are not grossly disproportionate to the
benefits achieved by the measure "
Why do we use Gross Disproportion?
- The Courts (notably in Edwards v. National Coal Board (1949: 1 All
ER 743) have decided that, in judging whether duty-holders have done enough
to reduce risks, practicable measures to reduce risk can be ruled out
as not ‘reasonable’ only if the sacrifice (in money, time,
trouble or otherwise termed costs) involved in taking them would be grossly
disproportionate to the risk.
- there is no authoritative guidance from the Courts as to what factors
should be taken into account in determining whether cost is grossly disproportionate;
- the duty-holder needs to take account of both the level of individual
risk and the extent and severity of the consequences of major accidents;
- for a given benefit, the higher these risks, the higher the degree of
disproportion (i.e., the ratio costs to benefits) can be before being
- HSE has not formulated an algorithm which can be used to determine,
in any case, when the degree of disproportion can be judged as ‘gross’;
the judgement must be made on a case by case basis;
- rules of thumb adopted by D/Ds;
- NSD takes as its starting point the HSE submission to the1987 Sizewell
B Inquiry that a factor of up to 3 (i.e., costs three times larger
than benefits) would apply for risks to workers; for low risks to
members of the public a factor of 2, for high risks a factor of 10;
- HID uses similar rules of thumb;
What is sensitivity analysis?
- A sensitivity analysis consists of varying one or more of the parameters/assumptions
of the CBA to see how these variations affect the CBA outcomes. Duty-holders
ought to conduct a sensitivity analysis, particularly if the CBA is being
used to “show” further measures are not reasonably practicable
Why do we use sensitivity analysis?
- When undertaking a CBA duty holders are likely to have limited information
about some of the key inputs such as the frequency of events and the number
of potential fatalities involved. Sensitivity analysis is a way to deal
with these uncertainties.
- A sensitivity analysis highlights whether suitably cautious assumptions
have been made and allows the duty holder and HSE to assess the robustness
of the outcomes of the CBA. The more robust are the results of a CBA,
the more suitable it is as a tool for ALARP decisions.
What is annualisation?
- Annualisation is a procedure through which the average cost and the
average benefit per year are worked out. This is simply done by summing
up all discounted costs and all discounted benefits over the appraisal
period and by dividing the outcomes by the length of the appraisal period.
Why do we use annualisation?
- Usually the costs of a health and safety intervention are not constant
over time. There will often be initial costs occurring in the first year
and then (possibly lower) recurring costs in each subsequent year. Benefits
could also vary from year to year, though they are more likely to be fairly
- In general, the annual cost will be smaller than the actual cost in
the first year and larger than the actual cost in subsequent years. The
annual benefit will generally be of similar magnitude of the actual benefit
accruing each year.
What is discounting?
- Discounting is a procedure that allows a comparison between costs and
benefits arising in different time periods. In general, the costs of implementing
a risk reduction measure will comprise an initial capital outlay and occasional
later payments for maintenance and replacement. The benefits will recur
year upon year. It is conventional practice in a CBA to (a) choose an
appraisal period (e.g. 10 years) and (b) discount the values of all costs
and benefits arising each year to the first year of the appraisal period,
before comparing them.
Why do we use discounting?
- The principal behind discounting is that normally people prefer to
receive benefits sooner rather than later, and prefer to incur costs later
rather than sooner. In line with this, more weight is given to earlier
costs and benefits than later ones by applying a discount rate.
Recommended discount rates;
- The Treasury recommended discount rate for both costs and benefits
is 3.5% . However, it is considered
that individuals place an increased value on health and safety benefits
as their living standards increase. This leads, currently, to an effective
discount rate for health and safety benefits of 1.5% .
Where can I get more information?
The following links highlight the key sources of information available;
- Annex: Summary of RPU Embedding programme.
- This before discounting has been applied (see next section).
- Lower discount rates apply to costs and benefits accruing more than 30 years
into the future
- It is considered that the value of preventing a fatality has a constant
utility value over time and it is therefore uprated in real terms each
year by real GDP per capita growth (i.e., currently, by about 2% per year,
since at the moment the real per capita GDP growth is forecast at around
2% per annum). This uprating, coupled with a 3.5% discount rate, gives
an 'effective' discount rate for health and safety benefits of 1.5% (lower
effective discount rates apply to health and safety benefits accruing
more than 30 years into the future). It needs to be noted that the real
per capita GDP growth forecast could change over time. For further details
see The Greenbook.