Cost-effectiveness is a quantitative method for comparing the costs of alternative means of achieving the same stream of benefits for a given objective. The benefits in the context of hazard mitigation are avoided future damages and losses.
The Stafford Act and the NFIA authorize FEMA to fund mitigation measures that are cost-effective or in the interest of the National Flood Insurance Fund (NFIF). FEMA has several methodologies for determining cost-effectiveness. Cost-effectiveness is typically demonstrated by the calculation of a Benefit Cost Ratio (BCR), which divides total discounted annualized project benefits by total annualized project cost. Projects where benefits exceed costs are generally considered cost-effective. Benefits may include avoided damages, loss of function, and displacement.
Applicants must use a FEMA-approved methodology to demonstrate cost-effectiveness. For more information about FEMA-approved cost-effectiveness methods, see the Benefit-Cost Analysis entry in this digest.
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