HM Treasury commissioned Mott MacDonald to undertake a study to review the outcome of large public procurement projects in the UK over the last 20 years as part of an exercise to revise the Green Book1. The objective of the study is to provide guidance, for the public sector, to evaluate and reduce excessive optimism in project estimates during appraisals.
The paper demonstrates the existing high level of optimism in project estimates arising from underestimating project costs and duration or overestimating project benefits. In order for projects to be delivered to time and cost, the optimism in project estimates has to be minimised. An explicit method for determining optimism, based on the results of the study, in current and future projects has been developed and is described in Section 4. The term 'optimism bias' is used, both in the Green Book and in this paper, as a measure of optimism in project estimates. The study has identified the critical project risk areas that cause cost and time overruns, resulting in high optimism bias levels for different project types. To minimise optimism in project estimates and thus reduce overruns, these project risk areas have to be managed. This paper provides guidance for managing project risk areas through the application of best practice to minimise optimism in project estimates. The guidance is based on the results of the study, and takes into consideration optimism bias trends over time and the application of current procurement best practice.
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1 'The Green Book: Appraisal and Evaluation in Central Government' HM Treasury