Optimism Bias is the demonstrated systematic tendency for appraisers to be over-optimistic about key project parameters - appraisers tend to over-state benefits and understate timings and costs. The HMT Green Book recommends that a quantitative adjustment is applied to project costs to compensate for this tendency. Optimism Bias effectively represents all risks which cannot be quantified and should reduce as costs become more certain and risks are identified and quantified.
The application of Optimism Bias throughout the procurement process allows the Procuring Authority to make a more reliable estimate of the total cost of the project. As such, it is anticipated that the overall cost level (including risk and Optimism Bias) will not increase materially throughout the procurement.
Adjustments should be made to both capital and operational costs to compensate for such bias. This will have the effect of increasing cost estimates and decreasing and delaying the receipt of benefits.
Adjustments should be based on empirical evidence from past similar projects, taking project specific factors into account.
The HMT Green Book provides recommended adjustment ranges for various project types and detailed guidance on the application of these adjustments. This guidance can be found both in the main body of the Green Book and at:
http://www.hm-treasury.gov.uk/media/D/B/GreenBook_optimism_bias.pdf
Annex B of this guidance note provides a summary of the Green Book Optimism Bias section. Please note, NHS organisations should apply SCIM guidance and templates at: