Public sector financial cost

5.22 Public sector financial costs are the estimated resource and capital costs for a spending proposal over its expected lifetime. They include all costs and receipts to the public sector but do not include wider social costs. As set out in the HM Treasury Business Case Guidance, public sector costs and benefits appear differently in economic and financial cases. In economic analysis they are recorded in real terms whereas in financial analysis they are recorded in current, nominal terms (on the same basis as organisational budgets) and adhere to different accounting rules. Discounting is applied in economic analysis, but not to analysis of public sector financial costs.

5.23 Public sector financial costs should be calculated using the international National Accounts statistical framework produced for the UK by the Office of National Statistics. Public sector financial costs are recorded on an accruals basis consistent with departmental budgets, as per the Consolidated Budgeting Guidance. These distinctions apply to any intervention with financial impacts on the public sector.

5.24 For new public spending proposals the financial dimension of a business case would usually require 3 major financial statements, which are the source of public sector financial costs when calculating NPSV:

a budget statement based on accounting principles as per the Consolidated Budgeting Guidance. This shows the resource and capital costs over the lifetime of the proposal. For strategic initiatives, the budget will often include forecast financial statements of a whole organisation over a number of years.

a cashflow statement showing the costs that will be spent on the preferred option if it goes ahead.

a funding statement showing the sources of funds and other resources required i.e. which internal departments, partners and external organisations would provide the resources and funding required.

5.25 Contingency is an allowance made for the cost of known risk and any unforeseen outcomes. Contingency provision and arrangements should be included in financial projections, based on the risk analysis completed during appraisal of social value (see Uncertainty, Risk and Optimism Bias below). The contingency provision should reflect the sum of measured risk (costs of risks avoided, shared and mitigated on an expected likelihood basis) and the optimism bias adjustment estimated in nominal prices. Contingency provision should be allocated to the reserves of the overseeing or approving body, not the project or programme.

5.26 Monitoring of costs and benefits during and after implementation is necessary for management, control and transparent accountability. Longer running programmes and larger projects over several years should maintain regular monitoring against and updates of original projections. This is vital to managing the delivery of social value through benefit realisation and cost control, providing information that supports the design of future interventions.

5.27 Public sector organisations responsible for public expenditure need to undertake cost monitoring, cost modelling and risk monitoring. Forecasting error and associated risks can be reduced by maintaining active cost monitoring systems and improving unit cost estimates by employing cost modelling techniques.