C.1. Key Elements of the Benefit-Cost Ratio

According to OMB Circular A-94, the BCR is expressed as the net present value of the benefits of the project divided by the costs. OMB Circular A-94 states that BCAs should count benefits and costs to society—meaning that the BCA should capture all benefits and costs of the project, not just benefits or costs accruing to particular entities.

To calculate the BCR, the BCA Toolkit uses hazard and risk data as well as information about the mitigation project such as project effectiveness. The four key elements of the BCR calculation are:

1. The benefits of the project.
2. The costs of the project.
3. The hazard risk (the likelihood and consequences of the hazard causing damage).
4. The economic factors of the analysis (i.e., discount rate and project useful life).

These four key elements are described in the following sections.

The benefits of a hazard mitigation project are any future costs or losses that can be avoided by completing a mitigation project. In other words:

The following “costs before mitigation” should be counted regardless of who pays for them, whether that be the federal government; state, local, tribal and territorial governments; or the property owner, and can include the following:

• Physical damage.
• Loss of service/function.
• Injury or death.
• Displacement costs.
• Emergency management costs.
• Maintenance costs.
• National Flood Insurance Program (NFIP) administration costs.

The “costs after mitigation” includes costs after the mitigation project has taken place. For example, if a home is elevated, it will not be damaged until the floodwaters reach the elevated first floor. Costs after mitigation are also known as residual damage. All project types have residual damage except for acquisitions, which demolish a structure and then leave the property as open space in perpetuity. The costs after mitigation reflect the level of protection that the mitigation measure provides (i.e., a house elevated to the 1% annual chance flood level or hurricane shutters that provide protection for up to 120 mile per hour winds).

BCAs should capture all project benefits to the extent feasible, even after the project has already achieved a BCR greater than 1.0. Capturing all possible benefits provides a more comprehensive account of a project’s benefits and helps ensure the project remains cost-effective if a cost increase occurs.

Avoided physical damage is one of the primary categories of benefits in FEMA BCAs. Buildings, contents, infrastructure, landscaping, vehicles, agricultural assets and equipment can be damaged by hazard events. This damage has a dollar value (i.e., the cost to repair or replace the damaged property). The benefits of a mitigation project are the reduction in future damage attributable to a mitigation project.

Another major benefit of a hazard mitigation project can be avoided loss of service or function of the facility. This benefit is only applicable to facilities that provide a service to the public, such as utilities, emergency operations facilities (i.e., police, fire), government facilities, infrastructure such as roads and bridges, and educational facilities.

For critical facilities such as police and fire stations and hospitals, the value of services is estimated based on the service population, impacts to service (e.g., increased distance to the nearest fire station, reduced number of hospital beds) and the societal benefits of maintaining that facility in the aftermath of a disaster. For critical and other public facilities such as emergency operations centers, schools or government buildings, the annual operating budget is used as a proxy to estimate the value of services.

For some types of hazard mitigation projects, a major benefit may include avoided human injury and/or loss of life. This benefit is applicable to project types that address hazards with little to no warning time, that protect populations that cannot evacuate (e.g., emergency personnel) or protect critical facilities that provide life safety services (such as hospitals).

The BCA Toolkit allows for benefits from avoided human injury and/or death for the following project types:

• Tornado safe rooms.
• Hurricane safe rooms.
• Seismic retrofits.
• Wildfire mitigation.
• Landslide acquisitions.

Injury or death are also considered within the BCA Toolkit methodology for projects mitigating risk to certain critical facilities (i.e., hospitals, emergency medical services and fire stations) based on service populations. Subapplicants may also include benefits for avoided injury and/or loss of life for additional project types, such as extreme temperature, tsunami vertical evacuation structures and dam retrofits, by including supporting documentation to demonstrate the avoided losses.

Avoided displacement costs may be counted as a benefit. Displacement costs occur when occupants of residential, commercial or public buildings are displaced to temporary quarters while damage is repaired. These costs include rent and other monthly costs, such as furniture rental and utilities, and one-time costs, such as moving and utility hookup fees.

Some projects may have the benefit of avoided emergency management costs. Emergency management costs include a range of disaster response and recovery costs that communities may incur during and immediately after a disaster. In many disasters, these costs are much smaller than physical damage or loss of service impacts.

Some hazard mitigation projects may reduce long-term maintenance costs for the owner or operating entity. These benefits may be included in the BCA. For example, if power lines are buried, the utility company may no longer need to trim the trees surrounding the power lines. However, in some cases, the maintenance costs for the mitigation measure could increase and should be reflected in the maintenance cost section of the BCA.

Properties insured under the NFIP incur administrative fees to run the program. If a property is acquired and demolished, there is no longer an administrative cost to the government for that property; it is therefore an avoided cost and may be counted as a benefit in the BCA. Avoided NFIP administration costs do not have to be calculated; these are standard values that are incorporated into the BCA Toolkit.

Any hazard mitigation project that eliminates or reduces the need for volunteer labor can claim this benefit.

It must be clearly demonstrated in the application that the proposed project will reduce or eliminate the future need for the volunteer effort that is being claimed.

Extensive epidemiological research shows there is a causal connection between natural disaster events and the onset of mental health issues, which can be valued as the cost of mental health treatment and lost productivity at work. Social benefits capture the avoided costs associated with mental stress, anxiety and lost wages that disaster survivors would otherwise experience when displaced from their primary residence.

Only projects that protect residential structures and are intended to keep residents from being displaced from their primary residence may include social benefits in the BCA. Social benefits do not apply to projects such as seismic retrofits or residential tornado safe rooms, where the primary benefits are life-safety protection.

Where applicable, a project’s BCA may include the precalculated values for social benefits in Table 5. These values are one-time benefits, meaning they do not occur on an annual basis. Any updates to these values will be accounted for in the BCA Toolkit.

Table 5: BCA Social Benefits Values

Social Benefit	Value
Mental stress and anxiety	$2,443/person
Lost productivity	$8,736/person

Ecosystem service benefits are the contributions the project provides to an ecosystem that benefits the environment and human populations such as air quality, water filtration and recreational space. These benefits accrue when a parcel’s land use is changed or enhanced by a mitigation activity to one that provides a higher level of natural benefits. For example, the change from urban land use to green space because of mitigating a structure within an acquisition/demolition project will mean improved ecosystem services benefits for water infiltration, habitat, nutrient cycling, climate regulation and other natural environmental and floodplain functions.

Values for these depend on the post-mitigation land cover category and may be found in Table 6. These benefits apply to any project type that results in an improved or restored natural environment. Eligible project types include but are not limited to acquisitions; relocations; post-wildfire revegetation; and floodplain, stream, or coastal restoration. Certain types of projects, such as vegetation management or bank stabilization, may be eligible for ecosystem services benefits depending on the project. These benefits occur on an annual basis over the project useful life. Ecosystem service benefits may only be used when performing a BCA to demonstrate cost-effectiveness; they cannot be combined with precalculated benefits.

Wildfire mitigation projects may qualify for ecosystem services benefits if they protect an existing natural area. Applying ecosystem services benefits to wildfire mitigation projects should be evaluated on a case-by-case basis, as the design of these projects can vary widely. In general, defensible space and ignition-resistant construction projects are not likely to qualify for ecosystem services benefits. A wildfire mitigation project may not include ecosystem services benefits if:

• It does not protect at least one contiguous acre of natural space, such as a forest or grassland.
• It involves the application of chemicals or other unnatural substances.

Table 6: Ecosystem Services Benefits Values

Land Cover Category	Value (2021 U.S. Dollars per acre per year)
Forest	$12,589
Urban Green Open Space	$15,541
Rural Green Open Space	$10,632
Riparian	$37,199
Coastal Wetland	$8,955
Inland Wetland	$8,171
Coral Reefs	$7,120
Shellfish Reefs	$2,757
Beaches and Dunes	$300,649

The land cover category definitions can be found in the FEMA Ecosystem Service Value Updates report (June 2022). Any updates to values for ecosystem services benefits can be found in the BCA Toolkit and the FEMA “Benefit-Cost Analysis” webpage.

In general, the following benefits may not be counted in FEMA BCAs:

• Anything that is subjective or unquantifiable (e.g., ease of implementation or aesthetic value of project).
• Anything not impacted by the proposed project.

A definitive connection must be made between the project and claimed benefits. This is especially important when using historical damage in the BCA; the project must reduce or eliminate this damage to include them.

In addition, OMB Circular A-94 guidelines also do not allow the inclusion of the following benefits:

• Employment or output multipliers intended to measure the secondary effects of government expenditures on employment and economic output.
• Anything that is considered a transfer payment may not be counted as an avoided cost. A transfer payment is the reallocation of money by means of an entity (such as the government or a homeowner) making a payment without goods or services being received in return. For example:
  • Insurance premiums.
  • Government subsidies.
  • Fines or penalties, such as Environmental Protection Agency fines.

The project cost is the denominator in the BCR equation. Any annual maintenance costs associated with the project are discounted by 7% over the project useful life and added to the total project cost.^[185]

The costs captured in the BCA must reflect the total project cost required to complete the mitigation activity, not just the federal share. Similarly, some subapplicants may not request HMA up to the available federal cost share. In these cases, the BCA must still use the sum of all required (not just requested) costs necessary to achieve the hazard mitigation purpose of the project. Management costs, as defined in this guide, may be excluded from the project cost for the purpose of the BCA.

Costs should be consistent with the project budget. Refer to Part 6.B.3. Costs of a mitigation project include (but are not necessarily limited to):

• Construction costs.
• Any other project-related costs, such as title searches, appraisals and permits.
• Maintenance costs specifically related to the project that are necessary to sustain the mitigation function.
• Any in-kind contributions or match from the recipient or subrecipient.

Hazard risk is a key factor in the benefit calculation. The Department of Homeland Security defines risk as “the potential for an unwanted outcome resulting from an incident, event, or occurrence as determined by its likelihood and the associated consequences.”^[186]

The BCA Toolkit factors in risk by calculating the likelihood of a hazard event occurring and the projected impacts of that event. The BCA Toolkit measures the likelihood of an event using recurrence intervals and calculates different impacts based on the size and severity of the hazard.

The BCA Toolkit weights higher-frequency events more than those that occur less frequently. The probabilities of future events profoundly affect whether a proposed mitigation project is cost-effective.

Recurrence intervals are also location specific. The BCA Toolkit requires location information to assess risk. For example, the Midwest has a higher probability of tornadoes than the Northeast or the Pacific Northwest because that area experiences more tornadoes on an annual basis.

Additionally, risk is not always uniform across hazards within a single event. A hurricane might have windspeeds with a 200-year recurrence interval, but the storm surge might have only a 25-year recurrence interval in the same location.

Calculating risk also considers the potential consequences (or impacts) of a hazard event, which can vary based on facility type. For example, the estimated flood damage for a one-story building will typically be a larger proportion of the total building value than that of a multistory building or a building with a closed versus open foundation. Likewise, estimated deaths and injuries from a tornado are greater for individuals in mobile homes than in concrete structures. Hazard risk data can be found in the applicant’s or subapplicant’s hazard mitigation plan, including data on previous occurrences, probability (reoccurrence intervals) and potential consequences (impacts).

Future benefits must be reduced because benefits that are experienced sooner are worth more. The rate at which future benefits are reduced is called the discount rate.

FEMA must use a 7% discount rate in its BCAs for hazard mitigation projects.^[187] The discount rate is built into the calculations in the BCA Toolkit and cannot be changed.

The project useful life is the estimated amount of time the project is expected to remain effective, assuming proper maintenance. In the BCA, the project useful life is the period during which the benefits are accumulated and then discounted to net present value. For example, a project with a 30-year life is assumed, on average, to produce a stream of benefits each year for 30 years. Each year’s benefit is discounted to net present value and the sum of these annual benefits is the total benefits of the project.

More information may be found on the FEMA “Benefit-Cost Analysis” webpage.

Because of the unpredictable nature of hazard events, the BCA Toolkit estimates the benefits of a hazard mitigation project on an annual basis rather than in specific years. The BCA Toolkit uses hazard frequency, damage data and project effectiveness to estimate annualized benefits.

Annual Benefits=Annual Damages Before Mitigation-Annual Damages After Mitigation

Guidance on appropriate documentation for the data elements in the BCA Toolkit can be found on the FEMA “Benefit-Cost Analysis” webpage. If FEMA standard values are used when completing the BCA Toolkit inputs, no additional documentation is required. If non-standard values are used documentation is required. Documentation must be accurate and sufficiently detailed for the analysis to be validated. FEMA recommends that supporting documentation be obtained from credible sources, such as a Flood Insurance Study or a signed and stamped engineering study.

When using the BCA Toolkit to demonstrate cost-effectiveness, FEMA requires the submission of:

• The exported BCA file or Excel template file for the project.
• The BCA report PDF file for the project.
• All supporting documentation for the values entered in the BCA Toolkit.

For HMGP and HMGP Post Fire, the BCA documentation is required prior to FEMA approval. For BRIC and FMA, the BCA documentation is required at the time of subapplication submission unless otherwise specified in the NOFO.

If BCA file submission requirements change due to a version or platform update, the information will be reflected on the FEMA “Benefit-Cost Analysis” webpage.