Benefit Cost Analysis for
Flood Hazard Mitigation: The
Federal Emergency
Management Agency (FEMA)
Method
(selected excerpts from FEMA EMI Training Course)
FEMA does benefit-cost
analysis to . . .

Meet the statutory eligibility requirement.

Determine whether or not a project is worth
doing.

Have a common basis on which to compare
projects.

Show that mitigation works.
Section 404 (a) of the Stafford
Act:
“The President may contribute up to 75%
of the cost of hazard mitigation
measures which the President has
determined are cost-effective and which
substantially reduce the risk of future
damage, hardship, loss or suffering in
any area affected by a major disaster.”
44 CFR Part 206 Section
206.434 (b) (5) (ii)
“The Grantee must demonstrate (that the
project is cost effective) by documenting
that the project…will not cost more than
the anticipated value of the reduction in
both direct damages and subsequent
negative impacts to the area if future
disasters were to occur. Both costs and
benefits will be computed on a net present
value basis.”
TRUE or FALSE?
“All well-designed mitigation
projects reduce future
damages and losses.”
TRUE or FALSE?
“All well-designed mitigation
projects reduce future
damages and losses.”
TRUE or FALSE?
“All well-designed mitigation
projects reduce future
damages and losses and
thus all are cost-effective
projects.”
TRUE or FALSE?
“All well-designed mitigation
projects reduce future
damages and losses and
thus all are cost-effective
projects.”
Is It Worth $1 Million To . . .?
Probably
1. Protect one doghouse
or one outhouse?
2. Protect one house that
floods infrequently?
3. Protect a flood-prone
hospital, city hall,
school, and other
important buildings?
4. Protect 150 floodprone houses?
Probably
Not
Is It Worth $1 Million To . . .?
Probably
1. Protect one doghouse
or one outhouse?
2. Protect one house that
floods infrequently?
3. Protect a flood-prone
hospital, city hall,
school, and other
important buildings?
4. Protect 150 floodprone houses?
Probably
Not
Flood Hazard and Flood Risk
FLOOD
HAZARD
(FREQUENCY &
SEVERITY)
Probability
of Damaging
Floods
x
PROPERTY
EXPOSED
TO FLOODS
Value and
Vulnerability of
Property
Exposed
to Flood
Hazard
=
FLOOD
RISK
(DOLLARS)
Severity
of Threat
to the Built
Environment
Mitigation
 Mitigation
is an action taken
specifically to eliminate or
reduce the potential for
FUTURE damages and losses
from the hazard being
addressed.
Cost-Effective
 Cost-effective


means:
The benefits of a hazard mitigation project
exceed the costs, or
The benefit-cost ratio is greater than one.
The Benefit-Cost Model
“Model” vs. “Modules”
The MODEL is the MATH.
The economic theory, hazard and risk
assessment methods, and mathematical
formulas on which FEMA bases the benefit-cost
analysis of hazard mitigation projects.
The MODULES are the
SOFTWARE.
FEMA’s software programs for conducting
benefit-cost analysis. The benefit-cost modules
are based on the benefit-cost model.
The Benefit-Cost Model
BENEFITS
COSTS
= BC RATIO
Mitigation Project Benefits:
Definition
 BENEFITS

The expected avoided damages and
losses over the lifetime of the mitigation
project.
Project Benefits
Direct Damages and Losses Avoided

Damages to buildings and other facilities
such as infrastructure

Damages to contents

Loss of function costs

Casualties

Emergency management costs
Project Benefits
Indirect Damages NOT Considered



Changes in gross regional economic
product, incomes, or employment
Changes in future economic development or
tourism
Criminal justice system costs for disasterrelated crime (e.g., looters)
Mitigation Project Benefits
 The
project benefits calculation is based
on four key elements:

Flood frequency and severity

Damages and losses before mitigation

Damages and losses after mitigation

Economic factors including the discount
rate and the mitigation project useful
lifetime
The Benefit-Cost Model
Flood Frequency and Severity
100-year flood = 2,310’
10-year flood = 2,302’
FFE = 2,300’
Mitigation Project Benefits:
Damages Before Mitigation
Flood
Depth
(feet)
Annual
Probability
of
Flooding
Scenario
Damages
and
Losses
Expected
Annual
Damages and
Losses
0
0.2050
$ 6,400
$1,312
1
0.1234
$14,300
$1,765
2
0.0867
$24,500
$2,124
3
0.0233
$28,900
$ 673
4
0.0098
$32,100
$ 315
5
0.0034
$36,300
$ 123
Total Expected Annual
Damages and Losses
$6,312
Mitigation Project Benefits:
Damages After Mitigation
Flood
Depth
(feet)
Annual
Probability
of
Flooding
0
0.2050
$
0
$ 0
1
0.1234
$
0
$ 0
2
0.0867
$
0
$ 0
3
0.0233
$
0
$ 0
4
0.0098
$ 6,400
$ 63
5
0.0034
$14,300
$ 49
Total Expected Annual
Damages and Losses
Scenario
Damages
and
Losses
Expected
Annual
Damages and
Losses
$112
Mitigation Project Benefits:
Annual Avoided Damages and Losses
Flood
Depth
(feet)
Expected Annual Expected Annual Expected Annual
Damages
Damages
Avoided
Before
After
Damages and
Mitigation
Mitigation
Losses
0
$1,312
$ 0
$1,312
1
$1,765
$ 0
$1,765
2
$2,124
$ 0
$2,124
3
$ 673
$ 0
$ 673
4
$ 315
$63
$ 252
5
$ 123
$49
$
$6,312
$112
Totals
74
$6,200
The Benefit-Cost Model
Economics Terminology and Concepts
NET PRESENT VALUE
The value “today” of money that you will receive
in the future.
DISCOUNT RATE
An interest rate used to determine the time
value of money. For Federally funded
mitigation projects, the discount rate is
determined by the U.S. Office of Management
and Budget (OMB).
The Benefit-Cost Model
Economics Terminology and Concepts
NEVER factor inflation
into estimates of future
damages or benefits.
The Benefit-Cost Model
Economics Terminology and Concepts
PROJECT USEFUL LIFETIME
The estimated time period over which the
mitigation project will maintain its effectiveness
in preventing or reducing damages and losses
from future disasters.
The Benefit-Cost Model
Economics Terminology and Concepts
PRESENT VALUE COEFFICIENT
(PVC)
The PVC expresses the combined effect of the
discount rate and the project useful lifetime on
the net present value of future benefits.
Mitigation Project Benefits:
Benefit-Cost Analysis Results
Expected
Annual
Benefits
Present
Value
Coefficient
Net Present
Value of
Future
Benefits
$6,200
12.41
$76,942
Costs
BenefitCost Ratio
$20,000
3.85
$6,200 x 12 .41 =
(PVC based on a 30-year project life and 7% discount rate)
Benefit-Cost Model
Flood
Depth
(feet)
Expected Annual
Damages
Expected Annual
Damages
Mitigation
Mitigation
Before
After
Expected Annual
Avoided Damages
and Losses
0
$1,312
$ 0
$1,312
1
2
$1,765
$2,124
$ 0
$ 0
$1,765
$2,124
3
4
$ 673
$ 315
$ 0
$63
$ 673
$ 252
5
$ 123
$49
$
Totals
$6,312
$112
74
$6,200
PVC (7% Discount Rate, 30 years)
12.41
Net Present Value of Future Benefits
$76,942
Costs
$20,000
Benefit-Cost Ratio
3.85
The BC Modules
 BC Analysis
Modules:

Full-Data (FD)

Limited-Data (LD)

Very-Limited-Data (VLD)
The BC Modules
FD
Module
LD
Module
VLD
Module
Basis
Engineering
information
and flood
hazard data
Historic
damage data
Historic
damage data
Data
Required
Site-specific
project data
and flood
hazard data
Damage data
from 2 or
more flood
events
Damage data
from 1 flood
event
Accuracy
Most
Accurate
(When flood
hazard data
available)
Accurate
(Most accurate
when flood
hazard data
unavailable)
Least
Accurate
Demo
Dr. Shane Parson, PE, CFM
Senior Project Associate
Virginia Tech
Center for Geospatial Information Technology
200 Patton Hall
Blacksburg, VA 24061
Office: (540) 231-7147
Fax: (540) 231-7532
E-mail: [email protected]
Website: www.cgit.vt.edu