| Step | Main Procedures in Brief | Guidance |
| 1. Explain the Strategic Context | • Refer to underlying policy or strategy, e.g. • Indicate how the proposal is expected to • Relevant strategic aims and objectives. | |
| 2. Establish the Need for Expenditure | • Establish the need for expenditure by:- • analysing the expected demand for services; and • identifying deficiencies in current service provision. • Justify and quantify the proposed level of service • provision over the appraisal period. | |
| 3. Define the Objectives & Constraints | • Define the expected outcomes and outputs. • Specify targets that are SMART i.e. Specific • Include implementation targets e.g. dates, milestones. • State the key constraints on the project, e.g. • Indicate the relative priority of individual • elements of the proposals. • Provide sufficient detail to enable option | |
| 4. Identify & Describe the Options | • Identify and describe a baseline option, usually • Consider variations in scale, quality, technique, • Examine alternative procurement options • Choose a suitable number of options for full • Where some are rejected before full appraisal, | |
| 5. Identify & Quantify the Monetary Costs & Benefits Of Options | • Detail capital costs, including any refurbishment costs, and annual recurrent costs and benefits of all options. • Express costings in total rather than incremental terms, to expose full resource consequences. • Include opportunity costs and residual values for all assets employed, whether already owned or not. • Assess displacement, and adjust costings accordingly. • Adjust for inflation and (where relevant) tax differences. • Where cost savings or efficiency improvements re projected, indicate whether they will represent financial savings or redeployment of resources. • Consider costs and benefits to other parts of the public and private sectors. | Option Appraisal Guide section 2.5 Green Book chapter 5 and Annex 3 HMT supplementary guidance on the taxation of PFI and the public sector comparator |
| 6. Appraise Risks And Adjust For Optimism Bias | • Prepare a risk log identifying and quantifying the main risks associated with the proposal. • Consider how risks compare under the different options. • Adjust costs, benefits and timing assumptions for optimism bias. • Develop suitable risk management and risk reduction strategies | Option Appraisal Guide section 2.6 Green Book chapter 5 and SGHD guidance on Optimism Bias Annex 4; HMT supplementary guidance on the treatment of Optimism bias. |
| 7. Weigh Up Non-Monetary Cost & Benefits | • Identify relevant non-monetary costs and benefits. • Quantify them in suitable units where possible. • Employ appropriate technique to show how they compare under the different options e.g. "list and describe" in simpler cases; "impact statement" or "weighted scoring method" in others. • Consider distributional issues • Explain assumptions clearly e.g. weights and scores should be explained individually. • Interpret the results of the non-monetary analysis. | |
| 8. Calculate Net Present Values (NPVs) And Assess Uncertainties | • Identify phasing of monetary costs and benefits over suitable time period, adjusted for inflation, optimism bias and (where relevant) displacement and tax differences. • Calculate NPV (or NPC) for each option, using correct discount rate. • Include spreadsheets detailing the calculations, including disaggregation of cost/benefit items. • Show, for each year, the discount factors used, the total • NPV for the year, and the cumulative NPV to that year. • Identify the price basis and base year for discounting. • Test and interpret the sensitivity of the NPVs (or NPCs) to changes in important assumptions, and explain choice of variations covered. • Interpret the results e.g. estimate the probability of various • Possible outcomes and implications for option ranking. • Provide sufficient detail to enable checking ofcalculations. | |
| 9. Assess Arrangements for Financing, Management, Procurement, Marketing, Monitoring & Ex Post Evaluation | • Financing: Include budget, cash flow and funding • statements, phased over time. • Management: Give details of proposed personnel, • Procurement method, timetable, benefits realisation plan, • Accommodation needs, staffing issues etc. • Marketing: Provide market assessment and marketing plan • As appropriate • Monitoring: Indicate how the proposed option will be Monitored during and after implementation. • Evaluation: Record pre-implementation levels of resource use and service provision. Indicate factors to be evaluated, when, how and by whom. • Where funding the non-Govt sector is in view: • Assess Viability i.e. examine cash flows, management & financial arrangements to ensure that funding is not wasted on proposals that will fail prematurely. | |
| 10. Assess the Balance Between the Options & Present the Results & Conclusions | • Write up the steps of the appraisal in the order shown here. • Give details of assumptions & calculations, using appropriate appendices. • Include summary of main results (i.e. NPVs/NPCs, unquantifiables and uncertainties) for each option. • Draw out the balance of advantage among options, assess VFM and affordability, and record conclusions and recommendations. |