2.4  Optimism Bias

2.4.1  The Treasury Green Book (TGB) requires specific assessment of optimism bias (OB) in all appraisals and this is reflected in the Model.

2.4.2  OB is derived from a systematic tendency for public sector appraisals to underestimate project costs and duration and overestimate benefits. Evidence presented with the TGB from a study by Mott Macdonald suggest in the past this has averaged to 24% for capital expenditure and 41% for operational expenditure in standard building projects.

Consequently this value is a given assumption in the Model, although it is expected that authorities will have queried these figures in building their OBC and amended the given assumption by mitigating the specific areas that make up the Upper Bound OB factors as appropriate.

2.4.3  The TGB sets out an approach for incorporating OB including parameters that could be used to do so. These parameters are based on a study of 50 large-scale public procurement projects. The Treasury figures are purely guidance and Authorities are encouraged to present their own percentages but these must be justifiable. It is also expected that as procurement progresses, the OB level will decline as risks are managed and reduced. Authorities can change the Upper Bound figures but any changes must be based on substantial evidence, which must accompany submission of the Model. Alteration will not otherwise be accepted.

2.4.4  The outcome should be project cost and benefit estimates that better reflect actual outcomes, leading to more robust appraisals.