In assessing risk and Optimism Bias, it should be ensured that there are no elements of double counting (for example construction cost over-runs) from separate calculation of Optimism Bias and a full risk assessment. Under NPD procurement, once a full risk analysis has been carried out, and figures have been firmed up in the light of prices and completion dates committed to by bidders, there should be little or none of the Optimism Bias adjustment left. Any contingency element that is not part of base costings should be considered as part of the risk pricing.
The pricing of OB does not remove the requirement to undertake a bespoke project risk uplift when assessing VfM. The bespoke project risk uplift in the CPAM will assess certain unfavourable events happening and their cost, on a probability basis linked to the base value of the scheme (typically by an expected value approach). In addition, contingency allowances should be applied to cover any remaining unanticipated risks. By the time that bids have been received, generic assessments of Optimism Bias should be replaced by specific risk assessments in the CPAM at Stage 3. Note, it is acknowledged that in many cases the CPAM is a hypothetical project and therefore will not be developed to the same degree as the NPD. Given it will not be tested in the market, there will be little project-specific risk, therefore, a large element of OB may remain.
Utilising the HMT model and addressing pre and post FBC Optimism Bias may negate or remove the requirement to undertake a bottom up bespoke risk adjustment to the CPAM (via workshops and risk a pricing exercise etc) at Stages 1 and 2 if it is demonstrated that all relevant risks are assessed and priced within the Optimism Bias assessments. However, in Scotland it is recommended that as a minimum, Procuring Authorities should complete a risk analysis and risk pricing exercise. This methodology will be applied to develop the risk adjustment to the CPAM in Stage 3.
As well as risk pricing, Procuring Authorities must undertake an internal risk identification and risk management strategy on a project by project basis.
At all stages, Procuring Authorities should refer to previous evidence, previous procurements and risk workshops to support levels of Optimism Bias and risk.
| VfM Assessment Stage | Risk Assessment Details | Comments |
| Programme Level | Optimism Bias uplift (use Green Book OB study or sector specific models) or other information to inform level | If bespoke risk figures are available through historical evidence or via a risk workshop, reduce OB accordingly. Risk would be added to both NPD and conventional procurement methodologies (but different levels, mitigation etc) Pre FBC Optimism Bias added to NPD and Conventional procurement assessments Post FBC Optimism Bias added to conventional procurement |
| Project Level | Run bespoke risk workshop / Optimism Bias assessment . | As above Contingency Allowances can cover any unanticipated risks Need to refine Optimism Bias up to the point of procurement to inform affordability estimates |
| Procurement Level | Use Optimism Bias studies, bespoke risk workshop outputs and any contingency elements noted by technical advisers Refine Optimism Bias against live bids Assess Optimism Bias impact post construction phase for each procurement method (it will be different under each methodology) | As above Differentiate between different levels of pre and post FBC Optimism Bias for NPD and Conventional procurement (taking into account contractual risk responsibilities) Reduce Optimism Bias as confidence in capitals costs etc increases - greater the development of the project, the greater the confidence in risk information Ensure no double counting of risk / Optimism Bias |