The HMT Green Book requires risk to be accounted for at all stages of project appraisal, and therefore this will be applicable at Stages 1 to 3 of the VfM guidance. This will be quantified generally in the form of an uplift for risk and or Optimism Bias. Optimism Bias and risk analysis are closely linked. A key concept is that risk analysis operates to eliminate the effect of Optimism Bias.
In accordance with the Green Book, where a full project risk analysis would not be feasible for the range of options being assessed at the various stages, an indicative adjustment for Optimism Bias should be used to account for the fact that the initial estimates of costs, timescales and benefits are likely to be over-optimistic.
In respect of capital costs and time overruns, Procuring Authorities may use their own historic evidence of how much outturn costs have diverged from initial estimates, or they may refer to the Optimism Bias paper provided as supplementary guidance to the Green Book or other relevant studies (e.g. Bent Flyvbjerg BDT study). The HMT guidance on Optimism Bias provides useful comparative data and also a framework for assessing a project's and procurement option's susceptibility to these risks. Any sector specific evidence or studies should be applied (e.g. recognised assessment models and OB parameters in Health, Transport etc). Objective data and evidence should, wherever possible, support adjustments to costings within VfM assessments.
For calculating capital cost and time overruns, the HMT Green Book framework first enables the project itself to be categorised into risky or less risky bands according to the type of construction involved. Secondly, the guidance provides a set of "contributory factors" to risk, each of which is weighted. By reviewing the project in the light of these, its susceptibility to risk can be further assessed. The data can then be adjusted according to the project's own inherent riskiness.
As well as capital related time and cost overruns elements, Optimism Bias should also be assessed in respect of shortfalls and increases in operating costs (including lifecycle costs).
In general "Optimism Bias" refers to the under-estimating of costs both pre and post FBC. However, whilst most elements of pre FBC Optimism Bias (eg., due to changes in scope or a project) are likely to apply equally to all procurement options, post FBC Optimism Bias (e.g. due to unexpected construction cost overruns) will vary between procurement options. The concept of Optimism Bias has therefore been further developed in the HMT VfM Guidance and in the application of the HMT VfM model.