18. Double counting - Care must be taken not to 'double count' for risks. Double counting can distort the investment appraisal decision by artificially inflating the PSC. For example some projects use a notional insurance charge as a first approximation of the value of a risk where more detailed data on the costs of risk is not available. Care must be taken in such circumstances, as a notional insurance charge would cover some risk that may have been valued explicitly elsewhere.
19. Sensitivities - Care should be taken to ensure that the risk model for the project has an appropriate level of detail and accuracy to support the investment appraisal process. It is possible for the risk model to be sensitive to the value or timing of a particular risk, which would suggest that further work is required to confirm the assumptions and data supporting that element of the risk analysis. It is highly recommended that the risk model is tested through sensitivity analysis to ensure that the model is robust to potential changes in probability or impact.
20. Upside and Downside - It is common for a project to be very focused on the potential negative effects of any risk. However it is important to note that there are potential positive benefits to many risks which should be taken into consideration.
21. Operational Risk - It is often said that ultimately the MOD always bears the consequences of risk, because if the contractor fails to deliver the service or the equipment fails, the armed forces are unable to do their job. This statement is true in relation to the operational impacts but it is important not to forget the effects of project risk by focusing solely on the operational risk. The MOD always owns the operational risk, that is it always bears the operational impact if a capability is not available when required. The MOD chooses to manage this risk by procuring effective equipment and services through appropriate commercial strategies. It is very important therefore, when considering alternative procurement strategies and when considering bidders' proposals, to take account of the operational impacts of each proposal. The risk that the contractor will fail in service delivery is a project risk. Although there is a related operational risk, in managing the project it is important to address the project specific issues: who bears the cost of recovery, what are the mitigation strategies to restore service delivery etc; whilst having in mind the best outcome for operational commanders.
22. Re-circulation of Risk - Re-circulation of risk describes a situation where a risk that the Authority has transferred to the contractor is transferred back to the Authority by some other means. In such circumstances the Authority can end up paying for the management of the risk and finding itself responsible for the consequences of the risk. Re-circulation of risk can occur for a number of reasons but commonly arises due to obligations passed back to the Authority in relation to essential Government Furnished Equipment or Services, or services or equipment subcontracted to another Government or MOD Agency. Care should be taken to avoid the re-circulation of risk, and if this does occur the relevant risk must be treated as a retained risk within the investment appraisal, and the cost of risk added on to the contractor's price.
23. Historic data - Risk analysis relies heavily on the use of historic data. A lack of robust data for project teams to specify their requirements and the risks being transferred to contractors has been an issue for a number of the case studies examined. Project teams should ensure that the initial planning stage of each project includes the production of suitable data on any existing use of the required service, forecast usage and the condition of assets being transferred to the private sector.