The interaction between risk, optimism bias and contingency

A5.36 As set out previously, as an appraisal is developed, risks and risk costs should be identified and the optimism bias allowance included at the outset should be reduced.

A5.37 The contributory factors leading to the need for optimism bias should be reviewed by appraisers. The main strategies for reducing the adjustment are:

  full identification of stakeholder requirements (including consultation)

  realistic scoping when selecting the shortlisted options

  accurate costing

  risk mitigation and management

A5.38 The contingency provision should reflect the sum of measured risk (costs of risks avoided, shared and mitigated on an expected likelihood basis) and optimism bias adjustment estimated in nominal prices. This reflects potential liabilities. Contingency provision should be allocated to the reserves of the overseeing or approving body, not a project or programme budget.