Archived Documents:

Major Scheme Appraisal in Local Transport Plans Part 1:
Detailed Guidance on Public Transport and Highways Schemes

Version 3: 4 April 2003

Annex D: Optimism bias

D1. Optimism bias is the demonstrated tendency for appraisers to be over-optimistic about key project parameters. It must be accounted for explicitly in all appraisals, and can arise in relation (but not exclusively) to:

• capital costs;
• works duration;
• patronage / benefits.

Capital costs

D2. Optimism bias uplifts need to be applied to the expected capital cost of an option. This applies even where a full quantified risk analysis has been carried out. The aim of this approach is to provide better estimates of the final cost of a proposal at key stages in its development. This should benefit both promoters and assessors of a scheme alike. The type of project, its stage of development, and the extent of risk management determines the levels of optimism bias uplifts.

Types of project

D3. Typically schemes which involve unusual construction techniques or innovative technologies will have larger uplifts than standard civil engineering schemes. The categorisation of particular schemes is still under discussion within the Department. Expert advice is currently been sought on this and will be made publicly available. In the interim, the values from the Mott McDonald report provide an indication of possible uplifts to schemes.^[50] However it should be noted that these values are purely illustrative. As a guide examples of non-standard types of engineering may include light rail schemes or guided bus. Standard civil engineering would more likely cover standard road schemes, and bus priority schemes. A further category of standard buildings may be appropriate for bus stations and some elements of park and ride.

Stages of development

D4. The size of the optimism bias adjustment required will reduce as project definition improves and / or as risks are identified and taken into account. In practice, reductions will be linked to formal stages in the development of projects. For example, for highway schemes, reductions will be specified at public consultation / preferred route, order publication and works commitment stages. For public transport schemes the specific stages of reduction in optimism bias are still under discussion.

Risk management

D5. Where a QRA has been carried out and project costs include an allowance for risk, the size of the optimism bias adjustments required will be further reduced.

Note, however, that allowance for risk is not a complete substitute for optimism bias adjustment.

Works duration

D6. Optimism bias can also occur in the estimation of the construction period of a scheme. This may result in higher costs and a delay in the receipt of benefits. Potential delays should be assessed and incorporated into the risk assessment. Sensitivity tests on costs (construction and disruption) and benefits of a longer construction period should be carried out.

Patronage / Benefits

D7. The evidence for benefits optimism bias in the transport sector is unclear, however there is a perception that optimism bias may be an important issue. Thus, the Department recommends that optimism bias in this area should be considered by developing central, optimistic and pessimistic scenarios. In some cases, additional scenarios and / or sensitivity tests may also be required, to test the impact of key uncertainties. An example of this may be regeneration benefits of a scheme. These scenarios should cover key areas of risk, particularly with regard to patronage and demand assumptions.

D8. The Department is aware that these investigations need to be proportionate to the scheme scale, and is happy to discuss with promoters the exact requirements in this area.

[50] Available from: http://www.hm-treasury.gov.uk.

Published: 2 May 2003 | Updated: 12 May 2003