LIT 10420 Short Form Business Case Template - … · Web view‘I confirm that this project meets our quality assurance requirements, environmental obligations and Defra investment

Short Form Business Case with guidance for a FCERM change project for Local Authorities, Internal Drainage Boards and other risk management authorities

[Link to GOV.UK Flood and coastal defence: develop a project business case] This business case template should be used for justifying schemes where the total scheme cost is less than £2 million. For a flood risk scheme, send us your business case with a completed FCERM 2.

For a coastal scheme, send us your business case with a completed CPA1 and include a copy with a completed CPA2.

The procedures when applying for grant are set out in the Grant Memorandum and you should follow them to make sure that the total cost for approval is eligible for a grant. Once the scheme is approved you are eligible for a grant for the cost you have incurred in preparing your business case. This cost should be included in your application.

Exclude the cost of studies if you have previously claimed grant under a separate FCERM7. The whole life cost includes all development and study costs.

The business case describes your application for Flood and Coastal Erosion Risk Grant in Aid (FCERMGiA). It should contain all relevant evidence to satisfy a reader with no knowledge of the scheme that in technical, environmental and economic terms, your recommended investment decision is correct and deserves public investment.

We have provided this template with advice to help you compile your business case. Within the headings you can vary the content and material you wish to include. Include supporting information in appendices.

The template contains guidance notes. Please delete them from the completed the business case.

Contact your local Environment Agency Area Flood and Coastal Risk Manager and Partnership & Strategic Overview teams. They can provide advice and support you to prepare your business case.

RMA short form business case template – May 2018 Page 1 of 20

https://www.gov.uk/guidance/flood-and-coastal-defence-appraisal-of-projects

Lead Authority:Project Title:Short Form Business CaseVersion NoDate


Photo or Flood Map

BUSINESS CASE APPROVAL SHEET

1 Review & Technical ApprovalProject title

Authority project reference EA reference

Lead authority Date of submission

Consultant

‘I confirm that this project meets our quality assurance requirements, environmental obligations and Defra investment appraisal conditions, that all internal approvals, including member approval, have been completed and recommend we apply to the Environment Agency for capital grant and local levy in the sum of £

Job title Name Signature DateAuthority Project Executive

‘I have reviewed this document and confirm that it meets the current business case guidelines for local authority and Internal Drainage Board applications.’

OBC reviewer

‘I confirm that the project is ready for assurance and that I have consulted with the Director of Business Finance’

Area Flood & Coastal Risk Manager

Assurance sign off - (Tick the appropriate box)

AFCRM Assurance Projects < £500k Or Projects < £1m (if GiA & Levy <£500k)

NPAS Assurance Projects £500k - £2m

Recommendation for approval DateAFCRM or NPAS Chair

Project total as approved (£k)

Version Number

Project total made up of : Capital Grant (£k)

Levy (£k)

Other Contributions (£k)

2 Project Financial approvalFinancial scheme of approval

Project total

Name Signature Date

Area Flood & Coastal Risk Manager

<£100k or <£1m (if GiA & Levy <£100k)

Director of Business All projects


Finance >£100k

Plus:Area Director £100k-

£1m

Director of Operations £1m -£10m

3 Further approvals (if applicable)Date sent (or N/A) Version number

(if different)

Date approved (or N/A)

Final Comments


For FSoD Coordinator use only:


Business Case

Approval RequestedInclude a brief synopsis of the project you propose, the problem it will address and the sums of GiA, Local Levy and other funding that you need.

1. Strategic case

In this section, explain the problem in the context of the current situation. Define (preferably tabulate) the households and infrastructure at risk and split into risk bands, very significant, significant, moderate and low, or short or medium term erosion loss. Support this with specific evidence of flooding and/or erosion in the recent past, eg dates, photographs, news cuttings and plans of flooded areas or loss of coastline, and note the importance of assessing the flood depth, not just extent.

Describe the implications of doing nothing. Append an annotated map showing the baseline flood risk (extent and depth, where available) or erosion lines. Describe (preferably tabulate) details of existing defences or other relevant assets including standard of protection (bands of probability), residual life, environmental designation, access issues, maintenance arrangements etc.

Refer to relevant Local Flood Risk Management Strategy and any S19 investigations, Surface Water Management Plan, EA Flood Risk Management Plans or strategies and summarise what they say concerning this specific problem. Refer also to the relevant River Basin Management Plan and summarise any ways the proposal may help to support the achievement of WFD objectives. Depending on the project it may also be useful to highlight links to other local plans/strategies such as Local Development Plans, economic regeneration strategies or green infrastructure plans.

Set out the objectives of the project, which should be SMART (Specific, measurable, achievable, realistic and time bound). Explain the potential constraints on your scheme, such as environmental risks (e.g. biodiversity, historic environment, landscape, amenity), planning restrictions, land owner stipulations, working windows, access, ground conditions and contamination, available funding etc. Please also consider any opportunities for integrating wider social and or environmental benefits as part of your scheme (including the Environment Agency expanded suite of FCRM environmental outcome measures).

Think about any assumptions you make and the effects of them proving to be unfounded. Resist the temptation to state the solution at the start. Please be aware that any project, however small, must comply with environmental and other legislation, so if you are unclear about what this means for your project, please seek advice from your Area Flood and Coastal Risk Manager.

2. Economic case

This section is where to explain the appraisal of the options that address the problem described in the strategic case. For all options, consider the technical issues, the environmental risk and opportunities, wider sustainability aspects (e.g. carbon use) and the economic cost and benefit. In the early identification of possible options consider opportunities to work with natural processes.


Always include the do-nothing (no action, maintenance and repair ceases, “walk away”) and do-minimum (minimum action necessary to maintain asset) options and note that you have already explained the implications of the do-nothing in the strategic case. It is helpful to start with a list of all possible options (the ‘long list’) and then, giving justification, dismiss those that do not warrant further investigation. If options such as SUDs, property flood resilience, temporary defences and natural flood management measures are discounted as individual options, they should be considered in combination with other measures. Confirm the short list of options with reference to any approved strategic stage options.

Undertake a technical assessment of the short list of options to demonstrate the hydraulic adequacy of the comparable options. The analysis of small projects should be proportional to the investment. RMAs may have access to this in-house otherwise seek advice from an engineering consultant or maybe collaborate with another RMA that has the in-house expertise. We do not expect you to spend more than 5% of the project cost justifying the application for grant. Advice on data sources, technical assessment and outputs for projects (based on the total capital value of the project) is provided below.

Advice Project Value<£150K £150-£500K £500K+

Data Sources(see footnote)

Some or all of the following data sources should be used: LLFA Historic

Flood Records EA Updated

Flood Map for Surface Water (uFMfSW)

Water Company Flood Maps

EA Flood Map for Planning

EA Property Points Dataset

Existing Ordinary Watercourse and/or Main River hydraulic model outputs

Housing Deprivation Dataset

Data sources for lower value projects plus: Sewer records from

relevant Water Company

Verification of historic flood risk through engagement with local residents and businesses.

Data sources for lower value projects, plus:Types of data that should be used Integrated 1D-2D

hydraulic model Estimates of

erosion from Shoreline Management Plans

Technical Assessment

Manual calculations are

Assessment of surface water

Creation/update of integrated 1D-


Advice Project Value<£150K £150-£500K £500K+

acceptable, with appropriate sensitivity tests.

GIS assessment of residential and non-residential properties within 30, 100 and 1000 year surface water flood extents

Assessment of residential and non-residential damages using industry standard methods like the Multi-coloured Handbook

Consideration of climate change impacts

storage volumes and/or changes in flow rates for the preferred option(s) using industry standard surface water drainage design software

Assessment of how changes in surface water storage and/or flow rates associated with the preferred option(s) will reduce flood risk damages

2D hydraulic model

Residential and/or commercial property threshold assessment

Hydraulic modelling assessment of damages for the ‘Do Nothing’ and ‘Do Minimum,’ and ‘Do Something’ scenarios.

Outputs to Provide as Supporting Evidence for your Business Case

Description of appraisal methodology, stating assumptions made

Estimated number of residential properties better protected from flooding in the Before and After Partnership Funding scenarios for the moderate, significant and very significant flood risk bands*

More accurate / refined property counts, using the outputs from the technical appraisal to justify the figures

Completed FCERM economic appraisal spreadsheet (or equivalent)

Modelling approach technical appendix

*When using the uFMfSW to identify properties at risk and where modelling is not available or disproportionately expensive, use professional engineering judgment validated where possible with historic evidence of flooding to determine the allocation of OM2 numbers to the partnership funding calculator flood bands. Where there are existing flood risk management assets and a detailed assessment of risk associated with deteriorating asset condition is not available, the ‘Before’ risk band is one band below that inferred from the design standard of the asset once capital maintenance is completed.


Climate Change

Measures designed to reduce flood risk today will become less effective over time due to climate effects that are predicted to increase rainfall intensity and sea level. The Partnership Funding calculator assesses the amount of grant available to each project by comparing the numbers of OM2 and OM3 before intervention with the number after the intervention at the end of the duration of benefit period when climate effects will have reduced the number of outcomes. Where for example, a scheme is proposed to avoid flooding in a 1:30 annual event probability (AEP) rainfall event by the end of a benefit period of 50 years, the scheme may have to be designed to a 1:75 AEP today to allow for climate effects. This has significant cost implications.

Cost Estimation

The cost of the options could be derived from a plan of the works and a bill of quantities priced using industry standard estimating data and where possible, benchmarked against similar previous work. It is important to consider the constraints when pricing work, eg access to land. An allowance for risk is essential and can either take the form of Optimism Bias calculated using the method given in the Supplementary appraisal guidance, or you can identify the various risks, estimate the most likely and maximum impact on time and cost and then apply a root mean square approach to deriving a contingency (see the supplementary information at the end of the template).

Tabulate the benefits and the costs of each option to compare the benefit cost ratio and the option choice made in accordance with section 8 of the appraisal guidance. Note that the costs and benefits in table 1 are discounted, not cash values. The discount period is your assessment of the lifetime of the assets comprising the scheme. Note that a benefit is a damage avoided. It is important to rank the options in ascending order of benefit. Benefit cost ratio is an expression of value for money. The highest BCR is the best value. The incremental BCR column compares two options to assess the additional value provided by additional cost, and which should always be greater than unity. The two options must be identified in the “option for incremental calculation” column. The incremental value is the benefit difference divided by the cost difference of the two options. Example values are included in table 1 to demonstrate the calculation. A worked example is shown in the Supporting Information.


https://www.gov.uk/government/publications/flood-and-coastal-erosion-risk-management-appraisal-guidance


Table 1 – Option Choice from Economic Appraisal Summary (example values shown to aid understanding)Option Present

Value costs(£’000)

Present Value damages(£’000)

Present Value benefits(£’000)

Average benefit: cost ratio (BCR)

Incremental benefit: cost ratio (IBCR)

Option for incremental calculation

1 Do nothing 0 500 0 n/a n/a n/a

2 Do minimum

2 480 20 10 n/a n/a

3 Do something 1(5%)

100 200 300 3 2.85 2

4 Do something 2 (3.3%)

200 100 400 2 1 3

At this point, you will need to evaluate the environmental impacts (including legislative constraints) and non-monetised benefits of each option e.g. environmental outcome measures. An ecosystem services approach can help to identify and assess potential impacts and benefits and in some cases their valuation. Refer to and summarise any environmental surveys and or assessments which have been used to inform the options appraisal or are planned.

Preferred way forward

Describe how you have selected the preferred option with reference to key criteria e.g. economic (see section 8.3 of the appraisal guidance), environmental, risk, sustainability, carbon footprint etc. Comment on the sensitivity of the option choice to variations in the key assumptions.

3. Commercial case

Explain the approach to procurement and how it demonstrates value for money and the benefits over the alternatives considered. Describe the form of contract proposed and how risk will be shared. Confirm compliance with the Public Contract Regulations (if they apply to this procurement) and confirm compliance with your organisations procurement procedures.

All schemes spending grant are expected to demonstrate potential efficiency savings over the initial budget estimate and will be collected by the Environment Agency national programming team.



4. Financial case

Financial Summary

Summarise the project costs. Explain how the costs have been derived and how the risk contingency has been calculated.

Table 2 – Preferred Option Financial Summary1Whole-life cash cost

2Total Project cost(approval)

Cost up to OBC3 Exc previous applications

Costs after OBC

Salary costs

Cost of Professional Advice

Site investigation and survey

Construction

Supervision

Environmental mitigation4

Land purchase & compensation

Other5

Risk Contingency (See s.12 of the Grant Memorandum)

Risk or Optimism Bias6

Future cost(construction + maintenance)

(Cash)

N/aOptimism Bias on future cost7

Project total cost 8


Notes1. This column shows the cash, i.e., undiscounted, values and includes all

future costs over the design life including any study costs approved under an FCERM7.

2. The costs in this column are cash values.3. The whole life cash cost column includes any study costs approved under an

FCERM7 and the development cost of the OBC. The Total project cost (approval) column does not include study costs as these have already been approved under an FCERM7. It does include the OBC development cost.

4. The cost of environmental enhancement is contained within the other cost elements and not shown separately.

5. Add further rows as necessary for individual headings. A cumulative miscellaneous cost should not be more than 5% of the total.

6. Note that the allowance for risk and/or optimism bias is part of the project approval but must be claimed separately when needed using the FCERM4 application. See supporting information for further explanation.

7. The allowance for risk and optimism bias applicable to future construction and maintenance is shown separately from current risk and optimism bias to account for uncertainty.

8. This is the value of the project that will be approved and appear on the FCERM2.

Funding sources

State the partnership funding score and how the total project cost is to be funded. Specify the source of all contributions and any conditions and risks attached. Append the partnership funding calculator and letters of agreement. Should the out-turn cost exceed the approval, confirm the source of funding.

Table 3 – Sources of funding and Partnership Funding Score% Description Total £k

Raw Partnership Funding score

Funding:Contributions (list) Other: (list) Local Levy Non GiA contributions Adjusted Partnership Funding score

Grant in Aid Project total cost (approval) 1

1This is the value of the project that will be approved and appear on the FCERM2 (see table 2 note 8)

5. Management case


Project and contract management

Explain how you will manage the design and construction stages. Define the governance arrangements using an organisation structure chart and define the roles and responsibilities of key officers.

Schedule

Provide a simple schedule of events that demonstrates the main activities and the associated timescales. This can be a table or a simple chart.

Table 4 – Schedule of main events

Event [examples only included below] Date DD/MM/YY

Planning permission received

Other (detail as necessary)

Work to be started on site

Work substantially completed by

Outcomes

Summarise the benefits and explain how they will be monitored and reported and when they will be realised. Consider recording the numbers of households that benefit from the project, even if they do not qualify under OM2/3. Add additional sections to the table to record other benefits, e.g., ecosystems services, natural flood management.Confirm who will own and maintain any assets built.

Table 5 – Outcome Measures delivered by the projectContributions to outcome measures

Outcome 1 − Ratio of whole-life benefits to costs

Present value benefits (£k) [Value taken from table 1] Eg £400k

Present value costs (£k) [Value taken from table 1] Eg £200k

Benefit: cost ratio [Value taken from table 1] Eg 2

Outcome 2 − Households at reduced risk [Values taken from the PF calculator]

2a – Households moved to a lower risk category (number – nr)

2b – Households moved from very significant or significant risk to moderate or low risk (nr)

2c – Proportion of households in 2b that are in the 20% most deprived areas (nr)

Outcome 3 – Households with reduced risk of erosion [Values RMA short form business case template – May 2018 Page 13 of 20

Contributions to outcome measures

taken from the PF calculator]

3a – Households with reduced risk of erosion (nr)

3b – Proportion of those in 3 protected from loss within 20 years (nr)

3c – Proportion of households in 3b that are in the 20% most deprived areas (nr)

Outcome 4 – Water framework directive [Values for OM4a to 4c taken from the PF calculator]

4a – Hectares of water-dependent habitat created or improved (ha)

4b – Hectares of intertidal habitat created (ha)

4c – Kilometres of river protected (km)

4d – Kilometres of WFD water body enhanced through FCRM

4e – Kilometres of water body opened up to fish and /or eel passage through FCRM

4f – Kilometres of river habitat enhanced (including SSSI) through FCRM

4g – Hectares of habitat (including SSSI) enhanced through FCRM

4h – Hectares of habitat created through FCRM

Risk, constraint and dependency management

Tabulate the risks to the project and append a register of risks. Show how you calculated the contingency. Tabulate the matters that constrain project events such as choices of material, planning conditions, working windows etc. Tabulate events beyond the control of the project but on which the project output is dependent, eg funding bid.

Table 6 – Main risks from the risk register [add lines as needed]Risk Risk Owner [Client

or Supplier]Mitigation

1

Table 7 – Constraints and Dependencies [add lines as needed]Constraint or Dependency Impact

1

Sustainability


Explain how you have identified and will manage the sustainability aspects, e.g., environmental assessment processes or activities, supply chain management. The explanation will be proportionate to the scale of the project.

Assurance

Explain the checks you have applied, eg a peer review, and the outcome. State the approval given by your organisation. Refer to any external approvals needed, eg planning permission, licences, etc.

Engagement with Stakeholders and compliance with the Equality Act 2010

Summarise the process adopted to communicate the scheme to affected stakeholders and note risks and issues, e.g. opposition. List out the roles within the RMA and other organisations who have been asked to comment on the proposals and provide a summary of the responses. Describe the steps taken to meet the statutory requirements of the Equality Act 2010 that includes a duty for public sector organisations to show due regard to eliminate unlawful discrimination, advance equality of opportunity and to foster good relations between people who share a protected characteristic and those who do not.

Evaluation

Explain how you will monitor the effectiveness of the project and the success of the outcomes.

Appendix A: Partnership funding calculator

Appendix B: List of reports produced


Supporting Information

Introduction

Our experience shows that some aspects of the business case will benefit from further explanation. In the sections that follow we provide additional advice and links to sources of more detailed information that you may find helpful.

Selecting the Optimum Economic Option

A small village has suffered flooding on a number of occasions and the source of the flooding is both fluvial and surface water. Modelling indicates that flooding can occur from events with an annual event probability (AEP) as high as 10% from the surface water system but a little lower, at an AEP of 5% from a small watercourse. Assessing the BCRThere are limited options to address the risk due to various constraints as follows:

Option 1 – Do Nothing Option 2 – Do Minimum Option 3 – a combined surface water / fluvial scheme with an AEP of 2% (1 in 50); Option 4 – a surface only scheme that provides protection from the 5% (1 in 20) AEP

event; Option 5 – a fluvial only scheme that provides protection from the 3.3% (1 in 30) AEP

event; Option 6 – a combined solution that provides protection from the 1% (1 in 100) AEP

event.

Table 1 – assessing the BCR for each option Option Damage

£Damage avoided /

benefit £

Cost BCR

Option 1 DN 500,000 0 N/A N/AOption 2 DM 480,000 20,000 2,000 10.0Option 3 (2%) 50,000 450,000 170,000 2.6Option 4 (5%) 200,000 300,000 50,000 4.0Option 5 (3.3%) 100,000 400,000 150,000 2.7Option 6 (1%) 0 500,000 220,000 2.3


It appears that the ‘Do Minimum’ (DM) option, which is basically maintaining the current level of risk and preventing the situation deteriorating, is the leading economic option, at this stage, as it has by far the highest BCR. However, it delivers very little benefit and doesn’t achieve the objective of protecting the properties. This is often the case when undertaking an appraisal, but it doesn’t mean the DM is the optimum economic option. The other options are all cost beneficial and deliver far more benefit than DM, so this is where the iBCR comes in, assessing whether the additional benefits of the other options can be justified in cost terms.

Calculating the iBCRsBy comparing the iBCR between two options with an incremental increase in benefit, we can determine which option provides the optimum value for money. For this process to work, the options need to be placed in an appropriate order. Ideally, the options are arranged by reducing probability of flooding but, if this is not possible, reducing BCR can be used. In our example, as each option provides a different SoP, this can be used to arrange the options, giving the following.

Table 2 – ordering the options by reducing probabilityOption Damage

£Damage avoided / benefit

£Cost

£BCR

Option 1 DN 500,000 0 N/A N/AOption 2 DM 480,000 20,000 2,000 10.0Option 4 (5%) 300,000 200,000 50,000 4.0Option 5 (3.3%) 100,000 400,000 150,000 2.7Option 3 (2%) 50,000 450,000 170,000 2.6Option 6 (1%) 0 500,000 220,000 2.3

Looking at the iBCR of Option 4 i.e. the difference in costs and benefits between it and DM (the option preceding it in the list) gives:

iBCR = [PVb Option 4 – PVb DM] / [PVc Option 4 – PVc DM]

iBCR =[£200,000 - £20,000] / [£50,000 - £2,000] = £180,000/ £48,000 = 3.75

Following this through for each pair of options i.e. comparing Option 5 to Option 4, Option 3 to Option 5 and Option 6 to Option 3 gives the following.

Table 3 – calculating the iBCROption Damage

£Damage avoided /

benefit£

Cost£

BCR iBCR

Option 1 DN 500,000 0 N/A N/A N/AOption 2 DM 480,000 20,000 2,000 10.0 N/AOption 4 (5%) 300,000 200,000 50,000 4.0 3.75Option 5 (3.3%) 100,000 400,000 150,000 2.7 1.33Option 3 (2%) 50,000 450,000 170,000 2.6 2.50Option 6 (1%) 0 500,000 220,000 2.3 1.00

This shows that, in each case, the iBCR is >1.0 indicating that the additional economic benefits provided by the next option in the list, outweigh the costs of providing these benefits and appear therefore to be justified. It could be argued that Option 6 should therefore be progressed. However, in order to ensure that too much investment isn’t directed at a single scheme, potentially at the expense of other schemes, iBCR thresholds


are used particularly targeting solutions that deliver a high level of protection. In effect, this is aimed at controlling investment in solutions that may increase the level of protection from very rare events.

Rather than using the investment to achieve a very high SoP, it may be more appropriate to protect a number of communities to a lower standard, spreading the funding available more widely to benefit more people.The thresholds used are:

Options delivering protection from floods with an AEP greater than 1.3%, must have an iBCR >1

Options delivering protection from floods with an AEP between 1.3% and 0.5%, must have an iBCR >3

Options delivering protection from floods with an AEP less than 0.5% must have an iBCR >5

This shows how it becomes increasingly difficult to justify providing very high SoP. An option that would provide protection against a flood with an AEP less than 0.5% i.e. a SoP of greater than 1 in 200 years, would need to demonstrate that it was delivering 5x more benefit than the associated increase in costs. This is one of the reasons why schemes tend to be targeted at achieving protection from events with an AEP of 1% (1 in 100) or greater. Applying the thresholds to the options in our example gives the following.

Table 4 – applying the probability thresholdsOption BCR iBCR Threshold

iBCROver threshold

Option 1 DNOption 2 DM 10.0Option 4 (5%) 4.0 3.75 1 YesOption 5 (3.3%) 2.7 1.33 1 YesOption 3 (2%) 2.6 2.50 1 YesOption 6 (1%) 2.3 1.00 3 No

This changes the optimum economic option to Option 3. This is because the increased cost of delivering a scheme to protect from an event with an AEP of 1%, compared to one protecting from an event with an AEP of 2% can’t be justified i.e. the iBCR is <3, the threshold to justify the higher standard of protection. There is a useful flow-chart, on page 273 of the FCERM-AG, which shows this process.

At this point in the process, we check how sensitive the optimum economic option is to various criteria that could affect the cost and benefit values. So for example, were the costs of option 3 to increase by £40,000 or 23%, the iBCR in relation to option 5 will fall from 2.5 to 0.8, which is below unity. Therefore the optimum economic option is more likely to be option 5.

Choosing the preferred optionThe methodology explained above describes how to use iBCR to identify the optimum economic option. The choice of option will be influenced by the environmentally preferred option and local choices (external contributions). In simple terms, option 6 can become a local choice if a local financial contribution of £50,000 is made towards the cost of the scheme. This is in addition to any external contributions needed under the partnership funding policy.


Treatment of Project Risk - Contingency and Optimism Bias.

The OBC includes a contingency to allow for underestimation of cost, time and scope, and for unplanned events that also increases cost. Guidance is provided in the ‘Defra Supplementary Note to Operating Authorities March 2003 Revisions to Economic Appraisal Procedures Arising from the New HM Treasury “Green Book”.

The supplementary note addresses the risk that the assessment of cost, time and benefits are overly optimistic and proposes the application of an Optimism Bias uplift. It is important to note that the Optimum Bias uplift is applied to the “best estimate”.

The “best estimate” is “the appraiser’s assessment of the most likely outturn costs of the project including, for example, all labour, materials, supervision, land purchase, compensation, access costs and contractors’ overheads associated with both temporary and permanent works required and all long-term costs associated with its operation and maintenance. Where the judgement of the estimator is that additional sums are likely to be required for particular areas of work, for example dealing with poor ground conditions, these should be included but general contingencies should be estimated as part of the process of deriving the optimism bias adjustment…”

The supplementary note provides an alternative approach in the Environment Agency where the equivalent Optimism Bias uplift factor can be derived from an “EA recommended Monte Carlo type risk valuation approach….” with 95%ile confidence.

This advice offers an alternative approach to the Monte Carlo type risk valuation technique that does not need specialist software to calculate. The following is an example of using the ‘Root Mean Square’ to calculate the residual risks, for which a cost is not included in the best estimate. This is valuable as it gives a better idea of the ‘maximum likely project cost’.

Example of Root Mean Square calculation in Risk Management

Tabulate the residual risks for which a cost is not included in the best estimate and calculate their most likely and maximum cost. The statistical root mean square approach is applied to the difference between the most likely and maximum values in recognition that not all maximum values will occur at the same time.

Risk Most Likely Additional

Cost

Maximum Likely

Additional Cost

Difference Difference squared

Unexpected services

£500 £1100 £600 360 x 103

Weather delay £700 £2000 £1300 1690 x 103

Sum £1200 2050 x 103

Risk Allowance

Square root of 2050000=

£1430

Project best estimate £30,000 Most likely additional cost £ 1,200Maximum likely additional risk £ 1,430





Maximum likely project cost £32,630 Optimism Bias uplift £1430/£31,200=4.6%


Documents

LIT 10420 Short Form Business Case Template - … · Web view‘I confirm that this project meets our quality assurance requirements, environmental obligations and Defra investment