Over the period of the chosen procurement route, Optimism Bias adjustments should be reviewed. The reason for this is two fold:-
• as appraisers of projects are uncertain about the future, objectives, requirements and risks that cannot originally be envisaged are often ignored, and
• experience shows new objectives, requirements and risks emerge during the course of a project and therefore should be planned for.
Certainty will therefore be less at the Programme Level Stage as opposed to the Procurement Level Stage. Thus it is expected that over the course of a procurement Optimism Bias will be reduced to the extent that there is increasing confidence in the capital cost/time assessments and project-specific risk analysis has been undertaken relative to the type of procurement (NPD or Conventional) and the technical solution envisaged.
It is expected that conventional and NPD procurement are affected similarly in respect of changes to scope and service requirements, however, under NPD procurement it is expected that once awarded, uncertainties that remain inherent in a project will not impact on a Procuring Authority to the same extent and exposure as conventional procurement. The greater development of an NPD project and greater associated risk transfer at FBC stage will also provide more certainty of costing.
A key element in relation to the outcome of the VfM assessment between different procurement routes (for example NPD and non NPD) is how Optimism Bias is applied to the cost inputs of different options. The following general guidance should be applied:-
• it is appropriate to add in an element of OB and risk to both the CPAM and NPD options. The application of OB to the shadow bid enables a more realistic affordability test and VfM test at Stage 2 (and Stage 1 if applicable).
• the quantitative economic test at the Stage 2 Project Level Assessment will often use similar capital costs for both the CPAM and NPD assessment. Hence the key area that Optimism Bias is addressing (being the systematic tendency of evaluators to underestimate time and costs and overstate benefits) will affect both investment options if similar cost inputs are used. Note, in reality it is likely that the private sector would have different base costs given the perceived risk profile of an NPD, as opposed to the public sector pricing a publicly procured solution. Technical advisers should be consulted in respect of this. Adding an uplift for OB but mitigated as appropriate to the shadow bid affordability model (if one is being utilised) addresses this potential systematic tendency to under-price costs.
• the HMT spreadsheets differentiate between Optimism Bias Pre FBC (from OBC to FBC) and Optimism Bias Post FBC. These assessments look at actual costs vs. estimates at these stages for both CPAM and NPD procurement options. The Pre FBC Optimism Bias factor represents the increase in the estimated costs or shortfall in the income or benefits of a project between OBC and FBC. The post FBC Optimism Bias Factor represents the increase in addition costs or income shortfalls between the details provided in the FBC and the completion of the associated asset.
• it is generally expected that for the post FBC assessment, Optimism Bias will be higher for the non NPD option. However, it is recognised that contractual arrangements can be put in place under conventional procurement that provides NPD type protections to mitigate some time and cost overruns (e.g. Design and Build Contracts). However, generally Post FBC Optimism Bias should be significantly greater for the Conventionally Procured option due to the contractual structure of the NPD.
• Additionally, in order to ensure comparability, Optimism Bias post the construction phase of a conventionally procured scheme should also be assessed. This reflects that under traditional or conventional procurement as well as time and cost overruns, there may be additional costs which will not be the case under NPD (for example once the service or asset is in operation under NPD, costs of repair from design fault etc cannot be passed onto the public sector whereas often they will be under conventional procurement).
• the levels of Pre and Post FBC Optimism Bias Factors will invariably vary from sector to sector and from project to project. Going forward public sector bodies should retain and share data bases. Guidance to Procuring Authorities will be produced in respect of this.
• in calculating OB under the Mott MacDonald study template (HMT Green Book), it is anticipated that the same classification of "building type" will be used for different investment options, but the NPD option will be significantly more mitigated because of the NPD commercial and contractual structure and procurement methodology that will be in place for that type of procurement
• Optimism Bias and any bespoke project risk uplift on the CPAM will typically reduce as the procurement develops (typically base costs of the CPAM would be adjusted as additional information becomes available). When allowing for this, it must be considered in the context that the CPAM will often be a hypothetical public sector solution
• generally in a CPAM, a cost premium should be added to operating and lifecycle expenditure to reflect Optimism Bias that is inherent in the Procuring Authority's estimate of costs incurred and / or service performance achieved. It is expected that these risks are priced in an NPD model or shadow bid model
• a unique or unusual project, (therefore not covered by the Optimism Bias guidance), should be adjusted for using data from the nearest equivalent project type.
For further details, refer from paragraph A55 of the HMT Quantitative Assessment User Guide.