Guidance notes - Reality check

The type of reality check or review of cost estimates conducted depends largely on the complexity of the project. The extent of the review process can range from a comprehensive audit of the calculations in the model to independent advice on the raw cost estimates.

It is considered an important exercise to ensure that the estimated costs are consistent with the scope of the project, as it is usual for the scope to change during the development of the PSC. As stated in the terms of reference for the raw cost estimates (see Section 14), a constant check to the reference project and communication between the client, technical advisers and financial advisers regarding changes to the scope of project services will help to ensure that the assumptions underlying the PSC are robust.

A review of the risk adjustments could be done by comparing the percentage likelihood of the risk occurring and associated cost impact, to empirical evidence from previous projects. A report commissioned by HM Treasury, Review of Large Public Procurement in the UK, July 2002,20 investigates the 'optimism bias' in the cost estimates provided for public projects and the results and recommendations in this report may be a good starting point in reviewing project costs and risks.

A useful question to ask is whether the final estimate of the PSC is one which would be used if this were a whole-of-life risk-adjusted budget estimate to complete the project, rather than completion by a private sector consortium under PPP delivery.

It should be noted that the PSC can be refined and finalised during the procurement of the project, up to and including evaluation of the submissions received in response to the RFP. In general, refinement during the remainder of the procurement should only occur if the scope of the project changes, or it becomes apparent that a significant component has been mispriced or omitted.

It may sometimes be useful to compare the final PSC to the preliminary PSC compiled at the business case stage to assess any major changes to the costs. However, it should be noted that it is not unusual for the scope of the project to change significantly after the business case has been written and therefore this may decrease the effectiveness of this comparison.