An element of risk and optimism bias should be included in both the CPAM and the shadow bid model in the VfM assessment.
By maintaining a risk matrix the Procuring Authority can identify and quantify the risks to which the procurement is exposed. These risks can then be allocated to the party best placed to manage them, whether that be the private sector, public sector, or shared by both. The risk premium charged for transferring risks should also be included in the cost of risk to the public sector.
An Optimism Bias adjustment to cover all the risks that cannot be quantified should also be applied to both the CPAM and the shadow bid model. Such an adjustment compensates for the overstatement of benefits and understatement of costs typically found in the procurement of large projects.
At the outset of a procurement it is expected that Optimism Bias will account for most of the risk attributed to the project. As the procurement progresses, detailed risk analysis is performed and the level of confidence in the capital / time assessments increases, thereby allowing some risks to transfer from the unquantified Optimism Bias category to quantified risk.
The quantified risk retained by the public sector will invariably differ across procurement options. The Procuring Authority is likely to retain more risk under a conventional procurement than under a privately financed option such as an NPD. Under an NPD solution significant risk will be passed to the private sector and therefore the cost of mitigation and the risk premium will be incorporated into the shadow bid model costs.