6.17 Appraisals are generally made up of estimates that are forecast some time in advance of either the projected costs being incurred or benefits being realised. Any estimate made well in advance may or may not prove to be correct once a project has been implemented. The less well developed an appraisal, the greater the variability there is likely to be between the estimated value attached to a cost or benefit and the outturn.
6.18 By transferring risk away from the public sector in different ways, different procurement options provide procuring authorities with choices about how they might manage and mitigate certain risks around estimated costs and benefits. For example, typically PFI contracts transfer to the PFI partner the risk that capital costs will exceed estimates made by the procuring authority in a way that some conventional contracts may not. Equally, a payment mechanism that calibrates payments made under a contract with the delivery of well-defined benefits provides procuring authorities with a way of ensuring that certain costs are incurred only if certain benefits are delivered.
6.19 The level of confidence that public bodies can have that estimated costs and benefits will be similar to eventual outturn will depend on:
❑ The length of time between the cost or benefit estimate being made and the date of contract award; and,
❑ The procurement option chosen.
6.20 In relation to the latter, for example, costs which are fixed under contract and which become payable against measured milestones of physical progress in construction will have a higher probability of being incurred than costs which, although fixed under contract, are only payable to the extent that defined benefits, outcomes or contractual outputs associated with the contract are delivered. Comparisons between various procurement options need to take account of the impact that different contractual terms have on the likelihood that, in fact, certain costs will be incurred and benefits realised at the level estimated by the procuring body.