2014 ilg stage 2 prove project budget technical guideline

8/12/2019 2014 ILG Stage 2 Prove Project Budget Technical Guideline

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Preparing Project Budgets for Business CasesTechnical guide


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Preparing Project Budgets for Business Cases

Technical guide

The SecretaryDepartment of Treasury and Finance1 Treasury PlaceMelbourne Victoria !!"#ustralia

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#uthorised by the Victorian -o,ernment1 Treasury Place. Melbourne. !!"

/ Copyright State of Victoria "!1"This boo0 is copyright+ o part may be reproduced by any process e2ceptin accordance *ith the pro,isions of the Copyright Act 1968+3SB '4)515'""!6(5'"5)Published #ugust "!1"+

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iiPreparing Project Budgets for Business Cases

Technical guide
mailto:[email protected]:[email protected]


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4+1 3nstruction templates for base cost estimation+++++++++++++++++++++++++++++++++++4+" 3nstruction templates for project ris0s++++++++++++++++++++++++++++++++++++++++++++++++

)+ Certi;cation of project budget estimates6&

)+1 #ddressing 0ey interdependencies in the business case++++++++++++++++++++)+" Sign5o by S9 for the statements of ser,ice and scope+++++++++++++++++++)+ Sign5o for base cost estimate+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++)+6 Sign5o for project ris0+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

'+ -lossary 6'

#ppendi2 #$ Presentation of the project budget (1

#ppendi2 B$ Templates for estimate certi;cation (

ivPreparing Project Budgets for Business Cases

Technical guide


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Bac0ground

1+ Bac0ground

Conte2t

This guide is a technical supplement to the 3n,estment Eifecycle -uidelinesseries A"!1"+ ?sers should refer to the 3n,estment Eifecycle -uidelines as

a basis for de,eloping concepts and preparing business cases for *hichproject budgets are reuired+ The other technical supplements include thefollo*ing$

business case de,elopment for information and communications

technology A3CT projectsG

procurement strategyG

go,ernanceG

economic e,aluationG

project ris0G and

sustainability +

This document pro,ides the user *ith information on ho* to de,elop robustcost and budget estimates that support sound in,estment decisions+ 3t doesthis by addressing the follo*ing issues$

;nancial planning of in,estments. lin0ing capital costs in the project

budget to *hole5of5life costs for ser,ice deli,eryG

ho* to accommodate ris0 and uncertainty in project budgeting and

deli,eryG and

project go,ernance and sign5o reuirements surrounding project

budgets+

Particular emphasis is on stage "


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Using an analogy, this guideis about the standards ofcooking; not a recipe book

Bac0ground

and achie,e the optimum ;nancial outcome o,er the *hole life of theasset+ 3n particular it helps projects de,elop the information they need forthe project budget for a business case submission+

Purpose 8 de,eloping and managing project budgetsThis technical supplement. -uide for Preparing Project Budgets in BusinessCases A


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Bac0ground

Scope of application

This guide applies in all cases *here the Victorian -o,ernment reuires abusiness case to be prepared+ Currently. business cases are reuired for all

projects costing K( million or more in total estimated in,estment AT:3.including Ligh ValueJLigh 9is0 ALVL91projects+ This applies to all projectsand asset5related proposals see0ing funding through the budget process.and for go,ernment business entities. for those prooposals that reuire the

Treasurer=s appro,al+ This guide applies to all projects regardless of anypreferred procurement option such as !artnerships "ictoria. alliancecontracting or any other procurement arrangement+

The concepts and principles of this guide can apply broadly to non5assetproposalsG ho*e,er. the primary focus is on capital asset proposals beingconsidered by go,ernment+

Structure of this guide

This guide co,ers the follo*ing topics$

elements of a project budget8 an o,er,ie* of thecomponents of aproject budget as they should be presented in a business case preparedin accordance *ith Victorian -o,ernment policies and guidelinesG

foundations for good project budgets8 an outline of the foundation

points and the core elements to ensure a project budget can bede,eloped for the business case Ait is e2pected that all business casespresented to go,ernment for consideration satisfy these foundation

pointsG developing accurate base cost estimates8 a description of a base

cost estimate and the e2pected standards to be applied to itspreparationG

developing project risk estimates8 an o,er,ie* of project ris0sG thedierent steps and techniues of project ris0 estimatesG ho* to set thebase ris0 allocation and contingencyG and underta0ing a sense Aorreality chec0 on *hether the estimates are appropriateG

establishing a project budget8 guidance on integrating the base costestimate. project ris0 estimate and le,el of contingency to form therecommended project budgetG

instruction templates for professional services8 suggestedtemplates for engaging the professional ser,ices associated *ithde,eloping the project budget for the business caseG and

certication for project budget estimates8 sign5o templates forattesting to professional standard of estimation. integrity of process and;tness of project budgets+

1LVL9 projects ha,e a T:3 of K1!! million or more. or ha,e an identi;ed high ris0+

Preparing Project Budgets for Business CasesTechnical guide 3


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Bac0ground

Business cases need to reect sound consideration of ris0s and theproposed treatment+ Business cases should$

identify major areas of uncertainty in the projectG

reect this uncertainty in budget and schedule estimatesG and

demonstrate the structures. process and methods by *hich this

uncertainty *ill be reduced or other*ise managed+

Departments should align risk management activity with !"#$!31%%%&2%%% 'isk (anagement ) *rinciples and +uidelines,

This guide describes the process for de,eloping ris05based cost estimates 8one step in the management of ris0 o,er the in,estment lifecycle+ Theestimate represents an informed ,ie* of the ;nancial ris0 at a point in timein the projectJin,estment=s lifecycle+ 9is0 management is an ongoingacti,ity. *hich must be managed throughout the life of the project to

reduce or maintain the o,erall ris0 pro;le of the project+

Preparing Project Budgets for Business CasesTechnical guide -


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:lements of a project budget

"+ :lements of a project budget

,er,ie* of the elements of a project budget to be presented in a businesscase prepared in accordance *ith Victorian -o,ernment policies andguidelines

The headline elements of a project budget

The project budget should be prepared *ith the follo*ing headlineelements Aillustrated in Figure 1+ These headline elements ha,e ,arioussubcomponents. some of *hich are summarised belo* *ith more detail

pro,ided in sections . 6 and (+

# ris05based project budget is a signi;cant. but not ;nal. step in managingris0 across the in,estmentJproject lifecycle+ The project budget aims toaccurately identify the base cost estimate. *hile ma0ing pro,ision for


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direct costs 8 the estimated cost of labour. plant. materials andspecialist subcontract *or0 reuired to deli,er the asset Abased oncalculated uantities deri,ed from proposed design solutions andconstruction methodologies de,eloped on industry best practiceG

indirect costs8 the speci;c project costs necessary to support the directcosts of project deli,ery incurred by both the sponsor and thecontractorAsG e2amples include site facilities. project insurances.professional fees. site management and super,isionG

The cost of agency sta applied to the project is not included in theestimate of the indirect costs because these costs are dealt *ith in theagency=s ongoing base funding+ Lo*e,er. there are cases *here a largeproject sees the establishment of a special purpose statutary authority orthe engagement of specialist capability for the project+ 3n these cases it isappropriate to include the associated costs as indirect costs+ #t all times.double counting of sta and other costs needs to be eliminated+

contracting parties0 fee8 this is an estimate of the contracting parties=pro;t margin and corporate o,erheads+

3t is essential that the base cost estimate clearly articulates its boundariesand assumptions to inform the ris0 assessment discussed in chapter (+ther*ise there is a high probability of o,erlap or omission+

#ctions eeded to 3mpro,e Transparency and #ccountability. -eneral #ccounting Hce. 1

#pril "!11

*roject risks

There *ill al*ays remain an element of uncertainty in the cost of a projectup to the date of the ;nal payment to the contractor+ Lo*e,er. costaccuracy increases as uncertainty reduces o,er timeG this has beendescribed as a cone of uncertainty Asee Figure "+

#t each stage the 0ey ris0s that should reduce or be mitigated include$

detailed design 8 increased certainty o,er design reuirements.speci;cations. ground conditions and site sur,ey dataG

procurement 8 contractor pricing agreed Aschedule of rates. lump sum.

guaranteed ma2imum price etc+G

construction phase 8 detailed design completed Aconstruction dra*ings.

detailed site inspectionsG and

contract end 8 all ,ariations agreed. all costs incurred. and presumably

no claims outstanding+

This uncertainty needs to be managed o,er the life of the project. but itstarts *ith an appropriate allo*ance being included *ithin the projectbudget+ This is achie,ed by including t*o elements *ithin the project

budget in addition to the base cost estimate$1+ the base ris0 allocation 8 an allo*ance for the


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in the project Aun0no*n ground conditions. design detailing. contractorpricingG and

"+ the contingency 8 an allo*ance abo,e the


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scalation

Ihen de,eloping a project budget estimate assumptions must be made on thefuture price of goods and ser,ices+ These prices change o,er time because ofination. mar0et conditions. pea0s and troughs in demand and legislati,e impactsAe+g+ carbon price+ The impact of these future price changes need to beincorporated in the project cost estimate and cash o*+

:scalation is highly sensiti,e to predictions of mar0et conditions. to both systemicchanges and to the supply and demand of speci;c project inputs+ Oey historicalindices or measures of cost mo,ements used for future estimation of rates area,ailable in industry publications and are produced by the #ustralian Bureau ofStatistics+ For e2ample$

#ustralian and e* Nealand Standard 3ndustrial Classi;cation A#NS3C classes 611"9esidential Building Construction n+e+c+ and 611 on59esidential BuildingConstruction= 8http$JJ***+abs+go,+auJ#?SST#TSJabs7+nsfJDSSbyCollectionidJ&B1F((C"(&"114'C#"(&:D"!!4'&D: or tender price indices ATP3s produced by cost management

consultancies

These indices are based on obser,ed historical data that is a,ailable for a range ofspeci;c components of the project. for e2ample$ concrete. cement and sandGpetroleum and coal productsG and steel+ # cost estimator must use judgement todetermine appropriate escalation factors Afor the project5speci;c components andthe o,erall escalation Aa single ;gure often used for presentation purposes+ Thespeci;c ris0s and ,olatilities associated *ith your project need to be considered.such as sensiti,ity to steel price uctuations. *hich might not follo* TP3+ #lso thetimeframe of cash o*s needs to be considered in order to apply a TP3 adjustmentbecause these costs *ill be incurred o,er time and the cost base *ill therefore shiftthroughout the project duration+ Care is needed *hen considering lead times andho* these impact on cash o* because escalation compounds year5on5year and

can become signi;cant in future periods+

Cost estimators need s0ill. e2perience and *isdom to successfully use historicaldata to forecast future escalation. particularly in conditions of high ,olatility+ 3ncircumstances of ,olatility this needs to be brought to the fore in the presentationof the project budget so that management can better understand the assumptionsunderlying the budget+

or the purposes of this guide5 escalation is to be included as a projectrisk in the base risk allocation, The calculation of the escalation allowanceprovides ade6uate assessment of forecast cost increases due to the riseand fall of project specic costs during project delivery,

The base cost estimate has the greatest impact on the accuracy of theproject budget because it is the largest and most comple2 component andthe foundation on *hich the base ris0 allocation and contingency arede,eloped+ Figure illustrates the typical relati,e proportions seen inrobust project budgets de,eloped for the majority of go,ernment projects+



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Figure Typical cost proportions of a large capital project

Planning for ;nancial success

The ;nancial success of an in,estment can be de;ned as ha,ing t*o 0eycomponents$

1+ project deli,ery costs eual to. or less than. the budgetG and"+ the lo*est possible *hole5of5life cost *hile meeting all speci;ed

in,estment outcomes+


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Table 1 Listoric approaches to project budgets

The need for a *hole5of5life approach

Ihen de,eloping business cases is important to focus on both the capitalcost for the project and the *hole5of5life costs for the asset in ser,ice+ The

costs to de,elop the ne* asset Aor embed a ne* 3CT program are only asmall part of the story+ 3n fact. the cost of operating a ne* asset o,er. say.a !5year life *ould normally far e2ceed the initial capital in,estment+ For


Listoric thin0ing Principle

Eo*est capital cost is

best

Sometimes the lo*est capital cost can result in an asset that is

,ery e2pensi,e to operate. or ineHciently deli,ers its performanceoutcomes+ The optimum solution ;nds an eecti,e balancebet*een initial capital and *hole5of5life costs+

Projects *ith highle,els of uncertainty*ill al*ays tend togo o,er budget

?ncertainty can al*ays be accommodated *hen estimating aproject+ Ihen it is 0no*n that a project has high le,els ofuncertainty then greater emphasis should be placed on the ris0management and more detailed allo*ances for ris0 andcontingency should be made+

9is0 managementin,ol,es allo*ing 1!per cent for thingsthat go *rong

Pro,ision for ris0 and uncertainty should be proportionate to theris0+ Poor planning is not an e2cuse for large ris0s remaining in aproject+ #s a project de,elops. the uncertainty should reduce andtherefore ris0 allo*ances and contingencies should also reduce+

Sustainability is a;nancial burden on aproject

Sustainability is the process of using natural. human and ;nancialcapital in the most eHcient *ay possible+ #,oidance of *aste iscentral to this+ Many Anot all sustainability objecti,es can result incost5reducti,e outcomes 8 but these must be assessed o,er the*hole life of the asset and not just consider the capital cost+


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A capital pro#ect, irrespecti$e of the%uality or detail of its technicalscoping, cannot be satisfactorilydeli$ered as an in$est&ent if it is notdirectly linked to the business caseser$ice ob#ecti$es in an e'cient,


this reason it is critical that proposals forecast and plan for an eHcient andlo*5cost operational life of the asset+

Figure 6 Total in,estment cost components

Figure 6 illustrates the nature of the costs that need to be considered+3nadeuate eort in identifying and calculating operational costs during the

in,estment decision ma0ing and early design phases can ha,e a signi;cantimpact later on+ Ihile it is not al*ays necessary to cost all of theseelements in detail for the business case. it is important that the relationshipbet*een capital costs and potential increases or decreases in the costs atthe operational phase is clearly de;ned+

The guidance recognises the importance of managing projects tobudget5 reinforcing the need to scope the project correctly at theoutset 8and in some cases reduce the scope9 such that operationalcosts are a:ordable and cost e:ective,

9is0 in the conte2t of


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The #ustralian ational #udit Hce 8 -eneral 9eport o+14 "!1!511. #ssurance 9eport"!!'81! Major Projects 9eport

Deli,ering to budget

The project budget is the amount appro,ed based on the business case fordeli,ering Aconstructing or installing the asset+ 3t is comprised of the baseestimate. a ris0 allo*ance and a contingency+

The objecti,e is for all projects to be deli,ered *ithin budget Aand to timeand uality standards+ This means that all projects must$

1+ be built on clear project objecti,es *ith de;ned performance outcomesthat should a,oid unnecessary changes in scope. scale and de;nitionGand

"+ accommodate ris0 and uncertainty using robust ris0 managementtechniues that are appropriate to the comple2ity. nature and scale of the

project and the procurement method+

This guidance pro,ides information on ho* to achie,e these outcomes+



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Foundations for good project budgets

+ Foundations for good project budgets

Better business cases and better project budgets

The Victorian Department of Treasury and Finance ADTF pro,ides ad,ice tothe go,ernment on implementing its asset in,estment program+ Thisincludes ensuring that eecti,e management practices and processes are

in place and operate optimally. including in,estment project performance+The aim is to ensure indi,idual projects achie,e their goals. deli,er ser,icebene;ts and that ,alue5for5money outcomes are achie,ed+ To ma0e suche,aluations and pro,ide uality recommendations to go,ernment. reliablecost information and standards are reuired to ensure this baselineinformation is pro,ided in the full business case+

The business case is the primary document that DTF and go,ernment useas the basis for$

in,esting in the right things

ensuring projects respond to a real and priority community ser,ice needG

articulate the ser,ice need and e2pected bene;tsG and

eecti,e ran0ing against competing priorities articulated in otherbusiness cases

the uality of the implementation plans

understanding the time. uality and cost constraints for a project todeli,er ,alue5for5money outcomes from an in,estmentG and

determining the optimal management plan and procurement strategy

e,aluating outcomes

the business case is primary source document by *hich success is

de;ned and assessed in terms of meeting the ser,ice need and *hetherbene;ts areJ*ere deli,ered+

DTF has de,eloped this guide to establish a consistent frame*or0 sogo,ernment decision ma0ing about allocating public funds is based ongood5uality costing information+ Poor cost estimates can lead to erroneous

judgements of ,alue for money and the relati,e merits of competingproposals Ai+e+ the


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Figure ( 3nterdependencies of 0ey planning and management acti,ities

Preparing to de,elop a project budget

3t is essential to appropriately resource the project team in de,eloping thebusiness case and associated project budget+ 9eliable project budgetestimates are dependent on e2perienced. capable. professional leadership*ith appropriate resources and time to in,estigate and prepare the

estimates+ #gencies preparing business cases must ensure appropriatetime and resources are pro,ided to support a uality outcome+

Setting a culture of cost a*areness. strong leadership and accountabilityare all necessary to establish a good project budget and manage it duringproject deli,ery+ Strong leadership *or0ing *ith an appropriate go,ernanceframe*or0 *ill support a sound in,estment process+ # go,ernanceframe*or0 should reinforce the principle that the public sector shouldmanage projects to the lo*est cost for the reuired performance and not tothe full project budget+

Table " summarises the foundation points to be satis;ed prior to de,eloping

a project budget+ 3t underpins the preparatory *or0 and thin0ing to de,elopa project budget that is suitable for presentation in the business case+Ihere a business case does not satisfy the substance or intent of a

Preparing Project Budgets for Business CasesTechnical guide 1-


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foundation point. it is e2pected that this *ould be highlighted in thebusiness case. *ith the potential implications and rationale discussed+

oundation points )pre;budget

development

Description

1+ Clear identi;cationof the ser,ice bene;ts tobe deli,ered

The ser,ice bene;ts for the proposed in,estment should beclearly articulated Aincluding measures of uantity. ualityand timing in the business case+ A9efer to the business caseguidance in the 3n,estment Eifecycle -uidelines+

"+ Demonstrablelin0s bet*een theser,ice bene;ts and theproposed capital assetsenabling that ser,icedeli,ery

The business case needs to pro,ide a con,incing case thatthe proposed capital project *ill deli,er the identi;ed ser,icebene;ts in an eHcient. eecti,e and economical mannerGand that this capital asset option is more bene;cial than anon5capital asset alternati,e+

+ # clear projectscope statementof thecapital *or0s in terms of$

core objecti,es of

functionality. utilityand performancele,elsG and

speci;cations ofdesign and inputelements

# project scope statement is a prereuisite for de,eloping arobust project budget estimate+ The scope statementcomprises the core objecti,es of$

functional and performance reuirementsG

the physical scope Ae+g+ construction inputsG and

ser,ices to be pro,ided by the project deli,ery team+

3n articulating the physical scope. the business case needs toassume certain design and input factors+ Moreo,er. theimpacts of sta0eholder engagement and changemanagement need to be included+

6+ # *ell5thought5outconceptJdesign that

addresses the projectscope statement in aneHcient. eecti,e andeconomical manner

#ccuracy in cost estimates is dependent upon the le,el ofin,estigation and design Afor e2ample. suHcient research

and in,estigations of site conditions and design to achie,eeHciency in operational costs+ ote that. particularly forbuilding and construction projects. e2perienced estimatorsshould be able to


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Table 2 !ummary of foundation points pre;project budget development

De,eloping a project budget

There is considerable literature on cost5estimating practices. *ith a numberof accepted estimating principles+ Lo*e,er. much of this material isfocussed on the construction of capital assets. rather than the *hole5of5lifeconte2t of the in,estment+

This guide focuses on understanding the o,erall cost estimate as a basis fordecision ma0ing and assisting in subseuent budget management+ Thispro,ides go,ernment *ith greater assurance that project budgets are *ellde,eloped. understood. managed and targeted to their objecti,es+

3n de,eloping project budgets. the agency needs to be a*are of the mainelements ma0ing up the project budget and their relati,ities+ Projectanalysis should not focus on high5attention elements li0e ris0s at thee2clusion of the more substantial elements li0e direct and indirect costs+Departments should ensure they do not


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oundation points)

duringdevelopment

Description

"+ # robustestimatingprocedure

Documenting. implementing and conforming to a comprehensi,eestimating procedure that is industry best practice+ This *illpro,ide a good basis for establishing a best5in5mar0et projectbudget along *ith its assumptions+

+ # structureand presentationformat of the basecost estimate thatpromotesunderstanding bydecision5ma0ers

#n appropriate *or0 brea0do*n structure and terminology shouldbe used consistent *ith this guide. and applied consistently topromote understanding by decision5ma0ers+ # *or0 brea0do*nstructure ensures that no parts of the estimate are omitted ordouble counted. and allo*s for comparisons to similar programsand systems+

The documentation should be easy to use and comprehensi,e toinform the reader=s understanding of the assumptions and its

strengths and *ea0nesses+

6+ Project ris0sare modelled onthe basis thatresponsibility isassigned to thebest and mostcapable party

3dentifying and uantifying project ris0s must proceed on thebasis that all necessary and prudent in,estigations Ae+g+geotechnical. regulatory planning ha,e been done+ Moreo,er. theris0 modelling must be on the basis that the party best positionedto manage the ris0 *ill ta0e responsibility for that ris0+

The go,ernment decision5ma0ers need con;dence that theproject ris0s are not modelled *ith premiums loaded in


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oundation points)

duringdevelopment

Description

&+ #ppropriateindependentre,ie* and sign5o

There should be a process of independent re,ie* by appropriatelye2perienced personnel in order to determine that the costestimate$

captures all the rele,ant scope of the project scope statementG

reects. as best as possible at the business case stage. goodpractice design solutions. construction methodology.constraints. program scheduling etc+G

the cost estimation process is prepared follo*ing bestpracticeG and

is reasonably based on professional judgement ande2perience and there is con;dence that it can be achie,edthrough good planning and application of hard and smart

*or0+AThe cost estimation process should be subject to an appro,alprocess based on consistent. clear lines of responsibility andaccountability to ensure costing standards apply to any budgetinformation+The importance of independent review and sign o:increases commensurate with the scale and comple


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#ny go,ernance frame*or0 that is eecti,e must gi,e the go,ernmentcon;dence that the project can be successfully deli,ered as planned andfor the lo*est cost+

LM Treasury in the ?nited Oingdom A?O in its 3nfrastructure Cost 9e,ie*report states that outturn costs rise because the processes of budgetpreparation. appro,al and management do not pro,ide eecti,e incenti,esto minimise the outturn cost+ 3n particular. insuHcient consideration isgi,en to the assessment. placement and management of the project=scontingency+ There *as a ;nding that many large infrastructure projectstend to be managed *ithin a uoted budget. rather than aiming at lo*estcost+ 3f the budget includes contingencies this tends to be ,ie*ed as


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A base cost esti&atefounded on a poorly de)nedscope is no &ore than an ill*

De,eloping base cost estimates

6+ De,eloping base cost estimates

The base cost estimate represents the largest proportion of costs and hasthe greatest impact on project budget accuracy+ 3t is the largest and mostcomple2 component and the foundation on *hich ris0 and contingency aredetermined+ 9ecently it has been some*hat neglected. *ith the focusshifting to ris0 estimation soft*are+ The conseuence is that base costestimates ha,e often lac0ed the methodology and accuracy needed toproduce the precise and reliable project budgets essential for business casedecision ma0ing+

Lo*e,er. accurate base cost estimates are achie,able if a disciplined andrigorous approach is ta0en to their preparation using specialist 0no*ledge+

:ssential ingredients for an accurate base costestimate

The accuracy of the base cost estimate *ill increase to acceptablestandards if these four elements are employed in a systematic andintegrated manner+

1$ Clearly de;ned project scope

2$ Competent and e2perienced estimators using rele,ant benchmar0 costdata and *ho are prepared to certify their *or0

3$ # recognised and rigorous approach to estimating

4$ # robust and insightful peer re,ie* process

These four elements are discussed in detail belo*+

Clearly de;ned project scope

# *ell5de;ned project scope statement is the critical contributor to anaccurate base cost estimate+ #n accurate estimate relies on the projectbeing clearly de;ned+ This doesn=t mean that e2tensi,e design informationis reuired. just that the project fundamentals around design. approach.ris0s. site conditions and so on should be captured+

The project scope statement should include$

a detailed description of the scope of the capital *or0s Aincludingdra*ings. speci;cations and calculationsG

construction methodsG


Description of a base cost estimate for a project Amainly focused on a buildingor construction project and the e2pected standards to be applied to itspreparation Arefer also to separate business case guidance for 3CT projects


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program datesG

project performance objecti,esG

project ris0s that may be encounteredG

all necessary and prudent in,estigations to complete the projectde;nitionG

the proposed method of deli,ery Adesign and construct. alliance. public8pri,ate partnership. etc+G and

a description of those *or0s Aother*ise associated *ith the project

speci;cally e2cluded or not in scope+

# number of recognised classi;cations are a,ailable that describe the le,elof project de;nition maturity needed to achie,e diering le,els of accuracyof base cost estimates+ #gencies should ha,e regard to those classi;cationsto achie,e an acceptable standard of business case for consideration by

go,ernment. including the follo*ing reuirements+

a The project de;nition in the project scope statement should bede,eloped to at least a le,el of 1!8"! per cent of complete de;nition+(

8 The agency *ill typically need the project de;nition to be *ithin thisrange to de,elop the reuired base cost estimate for the businesscase+ The greater the agency 0no*ledge. e2perience and trac0 recordin deli,ering the project type. the more acceptable it is to *or0 to aproject de;nition at the lo*er range of de,elopment+

8 For similar reasons it can be e2pected that lo*5ris0 projects couldtolerate a lo*er le,el of project de;nition than high5ris0 projects due

to their heterogeneous nature Asee section (+1+

b The project scope statement should enable the base cost estimate tobe prepared to *ithin a W( per cent le,el of reliability+

8 This is based on the principle that the cost estimator is costing theproject scope statement rather than predicting *hat the actual outturnproject cost may be+

8 This e2pected le,el of accuracy should be capable of repetition byanother independent and competent cost estimator. producing a basecost estimate from the same project scope statement and the same


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Ihile the reuirement is 0no*n. the cost and nature of the reuirementcannot be fully detailed for the business case+ 3n this case. the agencyshould propose Aand highlight as a pro,isional sum an upper cost limit inthe base cost estimate for decision5ma0ers to consider+ Decision5ma0ers

may ma0e such funding single purpose and sa,ings not a,ailable for re5allocation to other project *or0s or issues+

Competent. e2perienced estimators prepared to certifytheir *or0

The base cost estimate should be founded on a project scope statementthat is 1!8"! per cent of complete de;nition+&

This lac0 of full de;nition represents a challenge to producing an accuratebase cost estimate+ 3t *ill necessitate estimators *ho are e2perienced intheir ;eld and able to e2ercise sound judgement and 0no*ledge to bridgeboth the ine,itable information gaps and ensure eecti,e integration of thebase cost estimate *ith the project ris0 assessment+

ot*ithstanding this lac0 of full de;nition. it is clear that e2periencedestimators are capable of producing highly accurate estimates ase,idenced by lump5sum design and contract tenders A*hich include bothbase cost estimates and project ris0 estimates *here the design is oftenonly at the "!8! per cent le,el of de;nition+

Describing and de;ning an appropriate standard of e2perience forestimators is not simple since it in,ol,es the need for tacit 0no*ledge.

judgement and e2perience that *ill be project speci;c and not conduci,e toa simple speci;cation+ Therefore the trac0 record and industry reputation ofthe indi,idual estimator and their company can be of greater importance+

&

3t should be noted that 1!8"! per cent of design de;nition does not necessary euate to1!8"! per cent of design eort+ The focus in this guide is on design de;nition that enables aW( per cent le,el of reliability for the base cost estimate+ For e2ample. additional eort mayneed to be e2pended on high5ris0 design elements in comparison *ith lo*5ris0 designelements that may be as costly. or e,en more costly. in construction terms+


#n ill5de;ned project scope statement *ill result in signi;cant uncertainty andmisunderstanding. *hich *ill result in signi;cant dierences in e2pectations atcontract a*ard+ This *ill lead to unpredictable increases in costs andJor pooroutcomes+


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information a,ailable+ For ci,il engineering projects it is common toseparately identify costs for labour. plant and materials because each isoften sourced in large uantities or for long durations+

# clear. consistent. transparent format for both the presentation and

underlying structure of the base cost estimate is necessary to facilitate aconstructi,e and independent interrogation. and benchmar0ing tocomparable projects. by both the peer re,ie*er and the senior responsibleo*ner AS9+ The summary presentation of the base cost estimate shouldfollo* the format outlined in #ppendi2 #+

3nsightful and meaningful re,ie*s

:nsure that insightful and meaningful re,ie*s are underta0en by bothpeers and senior management. e,ery base cost estimate reuires rigorousre,ie*s+ These re,ie*s should occur at t*o le,els+

1+ *eer review by another estimator+ This in,ol,es a


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LM Treasury 3nfrastructure ?O 8 3nfrastructure Cost 9e,ie*. Main 9eport. December "!1!

Departures from the outline of these steps. *hich may arise fromdepartmental project e2perience andJor speci;c project characteristics.should be e2plained and justi;ed in terms of best5for5the5State outcomesand the li0ely impact on the con;dence le,el of the project budget+

2/Preparing Project Budgets for Business Cases

Technical guide


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De,eloping project ris0 estimates

(+ De,eloping project ris0 estimates

Thin0ing about project ris0s

ot all capital projects are the same+ Procuring infrastructure is ,erydierent to building projects. dierences that signi;cantly impact on thesi@e and nature of project ris0s+

.uildings&

Building projects ha,e many repeatable structural elements that


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ris0. often resulting in time and cost o,erruns+ Lo*e,er. this is not anine,itable result of in,esting in ci,il and process infrastructure Aor buildingsfor that matter+

There needs to be a distinction dra*n bet*een project ris0s and poorproject planning ris0s$

*roject risksare the ris0s associated *ith implementing the project.for e2ample. a contaminated site. regulatory planning failure to grant aright of *ay or materials defect+ These are the residual ris0s thatprojects are e2posed to and that need to be managed. either by$

transferring them to another party better able to manage and price the

ris0G or

retaining the ris0. *hich implies acti,e management by the agency to

reduce or preferably remo,e the ris0 by ta0ing treatmentJcontrol actions+

# *ell5managed project. and one that has been through anappropriately robust and rigorous business case and procurementprocess. could be e2pected to ha,e project ris0s costed in the range of(8"! per cent of the project budget+

9is0 identi;cation e,ol,es o,er the course of project de,elopment. asfurther project 0no*ledge is gained+ Ihere,er possible identi;ed ris0sshould be mitigated by ta0ing steps in the design or through projectmanagement initiati,es+ #ssessing ris0s should therefore focus on


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pessimistic+ -ood planning reuires full transparencyG agencies must beable to demonstrate the *or0 done in de,eloping the project budget in thebusiness case Asee section (+"+

3t is poor practice for ris0 to be either ignored or dealt *ith in an arbitrary*ay. for e2ample. ha,ing a corporate practice of simply adding a 1! percent


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Principles of project ris0 estimation

Through this guide agencies are encouraged to adopt ris0 analysisprocesses that are robust and defensible. including the use of a broadreference of similar and e2emplary projects that ,erify the ris0 analysis asreasonable Ai+e+ the sense chec0+

The process for project ris0 estimation should be based on the follo*ingprinciples$

identifying and uantifying project ris0s follo*s best practice.

including



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using appropriate in,estigation to understand and treat or controlris0G

employing project management capability commensurate *iththe challenges of the projectG and

allocating ris0s to the party best able to manage the ris0 Aandtherefore price itG

the estimate discloses all material assumptions and does not


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The follo*ing bo2 identi;es the s0ills that *ould be e2pected from suchprofessionals+

De,elopment of project. and more speci;cally. project procurementobjecti,es and underta0ing a mar0et analysis are important considerationsin ris0 analysis+ This ensures the ris0 analysis deliberations are guided by aset of principles rele,ant to the project+ These guiding principles should bebased on the follo*ing uestions$

Ihat are the main objecti,es that *e are after

Ihat is our tolerance for de,iation from these objecti,es

Lo* does that help us set a limit on materiality Ai+e+ ho* big should a

ris0 be before it=s *orth considering

Ihat is the time hori@on for considering ris0

Ihat are the ris0 issues generic to this area

Ihat ris0 e,ents are precedents for this type of project

Ihat controls can *e ta0e for granted in such a project Ai+e+ all

contracts ha,e a number of clauses intended to protect both parties fromcertain ris0 e,ents+

The process of ris0 analysis is a large subject that can be organised indierent *ays+ Best practice ris0 analysis *ill proceed through the follo*ingsteps$

1+ identifying project ris0sG"+ uanti;cation of project ris0sG+ analysis of project ris0s to de,elop ris0 managementstrategiesG6+ ,erifying the ris0 estimatesG and(+ presentation of the ris0 analysis *or0+

Figure & demonstrates ho* these steps ;t into a typical ris0 analysis

process for a project+


!kills and capability for leading risk analysis

9is0 analysis is comple2 and. done properly. it reuires a high le,el ofprofessional s0ill and judgement+ :ssentially t*o types of s0ills are reuired$

process s0ills that include *or0shop facilitation. interpretation and coordination

of assumptions. ;nancial modelling and interpretation of analytical resultsG and

technical s0ills 8 highly trained professionals e2perienced in the technicaldisciplines reuired to deli,er the project Ae+g+ design and constructioncapability such as architects. engineers and cost estimators+

Deli,ering a ris0 analysis reuires both s0ills from formal learning andconsiderable professional judgement. *hich can only be acuired bye2perience+

9is0 estimation is by its ,ery nature uncertain+ Budget appro,als reuire a

le,el of con;dence that ris0 estimates are de,eloped to a professionalstandard+ #nalogous to the legal test applied to claims of negligence. thestandard e2pected is that of a s0illed person e2ercising and professing to ha,ethat specialist s0ill+


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est practice risk &anage&ent allocatesrisks to the party bestable to &anage the risk-and therefore price it atthe lo+est cost to the


Figure & The phases in a typical ris0 analysis

Figure & is included as an e2ample of a best practice standard forestimating ris0s generally suitable for medium5si@ed projects+ For simplerprojects it may not be necessary to use formal *or0shops and inter,ie*s+For more comple2 projects it may be necessary to underta0e multiple*or0shops and establish independent analysis of project components orhigh5ris0 e,ents+ #t the stage that the ris0 analysis is being underta0en. thebase cost estimate should already be in e2istence and is used as the basisfor doing ris0 analysis+

Si@ing project ris0s

The outcome from adopting the processes in steps 18 Aoutlined in Figure& is a robust ris0 register that has ris0 e,ents identi;ed+ 1!The ris0s should

be ran0ed relati,e to each other. using ualitati,e ris0 analysis tools. andris0 management controls considered Aincluding their li0ely impact on theualitati,e ran0ing of the ris0s+ This pro,ides the essential foundation on*hich the uantitati,e estimates in step 6 can then be established+

3t is critical that estimates are prepared on the basis ofbest practice ris0 management+ Best practice ris0management allocates ris0s to the party best able tomanage the ris0 Aand therefore price it at the lo*est costto the project+ Pro,ided this principle is rigorouslyadopted agencies *ill ha,e a solid foundation to a,oid

1!ote that a ris0 register does not identify ris0 outcomes Ae+g+ the cost o,errun associated*ith the disco,ery of poor ground conditions. rather it is a list of ris0 e,ents Ae+g+


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either optimism or pessimism bias+ This principle applies irrespecti,e of theprocurement strategy adopted for the project+

Depending on the comple2ity of the project. dierent analytical tools maybe appropriate to uantify and analyse the ris0s Asteps " and + Theagency should ensure that the right analytical tools are used.commensurate *ith the comple2ity and ris0iness of the project+

# selection of the dierent ris0 estimation techniues are described in Table6+

Techniue Ihen to use

Simplescenarioanalysis Aor

e2pected,aluetechniue

Small projects. often repeatable. that are *ell understood and relati,elysimple to implement+ The ris0s can be readily identi;edJanalysed using limitedtime and resources+

ASimple scenario analysis Aor the e2pected ,alue techniue in,ol,esconsidering dierent possible scenarios. estimating the li0ely eect they *illha,e on the project and the probability they ha,e of occurring+ The le,el ofe2posure on a particular ris0 is gi,en by the eect the scenario has on theproject. multiplied by the probability of its occurrence+

M:9#Amultipleestimatingusing ris0analysis

Small to medium5si@ed projects *here ris0 is a feature but relati,ely *ellunderstood and not ,ery material to the project budget+

AM:9# analysis is the e2tension of the simple scenario analysis techniue toconsider multiple dierent possible scenarios. estimating the li0ely eectthese *ill ha,e on the project and the probability that they ha,e of occurring+

The le,el of e2posure on a particular ris0 is gi,en by the sum of the combinedeect each scenario has on the project. multiplied by the probability of its

occurrence+

Sensiti,ityand scenarioanalysis

Typically used to test underlying assumptions and in particular *here simpleand M:9# analysis is used+ The test in,ol,es changing the underlyingassumptions and analysing the sensiti,ity of total ris0 estimates to thatchange+ Sensiti,ity and scenario analysis can also be combined *ithstochastic simulation. although less often because simulation automaticallybuilds in sensiti,ity and multiple scenario considerations+

Stochasticsimulationtechniuesli0e MonteCarlo or EatinLypercube

Medium to large5si@ed projects for *hich the ris0 analysis is important+Suitably uali;ed e2pertise and re,ie*ers must be used to conduct and ,erifythe use of such techniues+

Table 6 :2amples of ris0 estimation techniues

Determining ris0 estimates is best based on a combination of professionaljudgement and pre,ious project data A*here a,ailable and pro,en torepresent best practice+ The result should be presented as a range ofoutcomes. clearly stating the sensiti,ity of the estimates to the underlyingassumptions and the le,el of con;dence the agency places on theestimates+

9is0 identi;cation and cost estimation are more uncertain in the earliest

stages of a project. *hich is also *hen decisions of greatest impact areoften made+ #n agency and its e2pert ad,isers should operate as a singleteam to a,oid any institutional shortcomings of incomplete commitment

Preparing Project Budgets for Business CasesTechnical guide 3-


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and inconsistent decisions *hen it comes to estimating ris0s andcontingency+ The need for judgement should not be used as an e2cuse forfailing to gi,e adeuate consideration to a formal analysis of project ris0+

!isk estimation is essentially about compiling realistic forecastsand answers to "uestions that start with #what if$%

Clearly one si@e doesn=t ;t all+ Lo*e,er. for the majority of public sectorprojects that are *ell in,estigated and analysed in the business case. at thepoint of commitment A*hen the go,ernment considers appro,al agenciesshould be able to estimate project budgets that include an estimate ofproject ris0s in the indicati,e range of (8"! per cent+ 3t may be higher forsome projects+ -enerally$

Business5as5usual or routine projects Alo* ris0. lo* ,alue. such as school

buildings and simple road and health projects that can dra* on corporatehistory. should ha,e a project ris0 estimate Abase ris0 allocation andcontingency of (81! per cent of the total project budget+

More comple2 building projects that are not regularly underta0en by

agencies. or larger infrastructure projects regularly underta0en. are moreli0ely to include project ris0 at the higher end of the range of. say. 1(8"!per cent+

3diosyncratic or one5o projects that are high ris0 due to uniueengineering or other high ris0 factors may need the agency to mo,eoutside of this indicati,e range and include a project ris0 estimate o,er"! per cent Ae+g+ Victoria=s Synchrotron+

The dierence bet*een a project ris0 estimate of. say. "( per cent ,ersus1( per cent might simply be further in,estigation and research Ai+e+ greaterplanning+ ot*ithstanding the e2tent of planning underta0en. a higherproject ris0 estimate may be appropriate to co,er a genuinely high5,alueand high5ris0 project+ The abo,e ranges are indicati,e. but agencies shoulduse them as a guide to inform the le,el of eort that is e2pected to go intothe planning+ This *or0 must be documented to demonstrate that the baseris0 allocation genuinely co,ers project ris0 and that planning ris0 has beenlargely eliminated+

Bautionary note

3t is bad practice and contrary to the public interest to


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e2pected for the majority of go,ernment projects+ 3n contrast. for a


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#gencies can present the sense chec0 as e,idence that the costs. ris0s andcontingencies are fair and reasonable+ :,idence must be pro,ided in thebusiness case supporting the rationale for the base estimate. base ris0allocation and contingency+



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:stablishing a project budget

&+ :stablishing a project budget


# project budget. consistent *ith the *or0 outlined in sections 6 and (.needs to be determined and recommended by the agency as part of its

business case+ #t this stage. an agency should ha,e in,ested appropriatetime and resources in de;ning the project scope. estimating the costs andanalysing the ris0s to produce high5uality ad,ice to inform go,ernmentdecision ma0ing+

The management decision taken by the agency in determining theproject budget is critical.

# business case should not be submitted to go,ernment for a decision ifthere has not been a high5uality and transparent process to determine aproject budget that is rigorously calculated and defensible+

To establish the project budget.1"and produce a single ;gure. the base costestimate. base ris0 allocation and the contingency are added Asee #ppendi2# for the presentation template of the project budget=s main summary lineitems+

Successful project deli,ery sees$

the full project scope deli,ered as intended *ithin the cost en,elope ofthe base cost estimate and base ris0 allocationG

1" Projects are funded by go,ernment using nominal dollars. and therefore the projectbudget and cash o*s need to be presented in nominal dollars+

4%Preparing Project Budgets for Business Cases

Technical guide

-uidance on integrating the base cost estimate and project ris0 estimateAincluding the le,el of contingency to form the recommended project budget

Allustrative e


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the lo*est outturn cost for the reuired performanceG and

no or little call made on the contingency+

The aim is to deli,er ,alue for money for the State+ ,er and

underestimated project budgets both place ;nancial strain on the o,erallgo,ernment budget+ This can constrain or compromise go,ernment=s abilityto deli,er its full program of ser,ice priorities and is therefore not in thepublic interest+

Figure 4illustrates the relationship bet*een the cost estimates arising fromsections 6 and ( to arri,e at the project budget in the business case+

Figure 4 The relationship bet*een base cost estimate. project ris0s and project budgets

The mechanics of de,eloping the project budget

# business case needs to recommend the preferred procurement strategyAand contracting model for the capital project+ The recommendation shouldbe based on the procurement strategy that deli,ers the best o,eralloutcome for the State considering a number of factors A*hich are normallyinterrelated such as$

deli,ering the lo*est *hole5of5life cost for the reuired performance

standards. including eecti,e management of the project=s base costsand ris0sG

managing ongoing sta0eholder reuirements and issues during the

project deli,ery phaseG and

the pre,ailing mar0et conditions+

Figure )illustrates a common process used by agencies to de,elop projectbudgets+ The initial project budget is based on a


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alternati,e procurement strategy. to that of


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Figure ' illustrates the management and application of the project budgetto dierent parties+

Figure ' Managing ,arious components of the project budget

-o,ernance and management of project budgets

.udget disclosure

#s outlined in this guide project budget estimates are li0ely to ,ary uitesigni;cantly. particularly in the de,elopment phase+ #ny public disclosureof estimate should therefore be carefully considered and minimised 8 ifanything. only identi;ed as a


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To ensure transparency and address public interest. indi,idual project

budgets *ill continue to be communicated to the #uditor5-eneral Aaspart of the re,ie* of the :stimated Financial Statements for the Victoriangeneral go,ernment sector+

nce the tender has closed and the successful proponent is a*arded thecontract. information on the accepted tender and the business caseproject budget is publicly communicated by the agency+

.udget control

Follo*ing appro,al of a business case the project cost estimate is sectionedinto a cash o* schedule. *hich is managed by the agency and its projectoHce+ Lo*e,er. the contingency amount must be held outside of thecontrol of the project oHce$

+ For all projects. but particularly higher ,alue. more comple2 projects.

internal control mechanisms should be in place to ensure the projectteam does not ha,e automatic access to. or control of. projectcontingency+

For e2ample. access to contingency may reuire appro,al of the C:

andJor the Minister Adepending on the comple2ity of the project+

6+ 3n some cases go,ernment may determine that access to contingency *illbe subject to the Treasurer=s appro,al+

For e2ample. some LVL9 projects may be considered e2tremely

sensiti,e and a*areness of emerging ris0s important for ;scalmonitoring+

Contingency and ris0 allocation appro,al processes and tolerances shouldbe detailed in project go,ernance documents+

3f additional funding is reuired beyond the appro,ed project budget. theresponsible Minister *ill ma0e an appropriate submission to thego,ernment for funding+

ccountability

#s the project proceeds to completion some ,ariation might be e2pectedagainst the project cost estimate and the contingency may be used+

Departments should be a*are that they *ill be accountable for the rigour ofthe project cost estimate and the project budget against outcome. and theappropriate use of contingency+ The decision5ma0ing process for usingcontingency should include an audit trail+

Project deli,ery by a public8pri,ate partnership

Ihere a project is assessed as suitable for PPP deli,ery in the procurementoptions analysis. the agency *ill need to commence de,elopment of thePublic Sector Comparator APSC once the PPP option is con;rmed bygo,ernment+ Detailed guidance on the de,elopment of the PSC can befound in the national PPP guidelines+

44Preparing Project Budgets for Business Cases

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3nstruction templates for professional ser,ices

.rief ) senior cost estimate advisory services 8cont,9

'ole accountabilities 8cont,9

:ecti,ely integrating the output of the estimation team Aprocurement.

uantity sur,eying and across the bid team Adesign. constructability. ris0 toachie,e the most accurate and reliable o,erall resultG

Collaborating and communicating eecti,ely across all functions of the bid

teamG

3dentifying ris0s and opportunities and responding for best o,erall outcomeG

Systematically implementing rigorous estimate re,ie*sG and

Documenting the underlying assumptions as articulated abo,e+

.ackground5 skills and competencies

Bac0ground in uantity sur,eying. estimation. project engineering. contractsand procurement *ith a pro,en trac0 record at a senior technical or projectmanagement le,elG

3n e2cess of 1( years= project e2perience. preferably as a senior estimator *itha broad bac0ground in pro,iding accurate and achie,able cost plans. ;rstprinciple estimates and ,alue management ad,ice for large infrastructureprojects. for e2ample. in,ol,ing PPPs and alliancesG

#bility to lead teams to produce accurate project cost estimates and budgetsfrom concept to de;niti,e informationG

Thorough 0no*ledge of current estimating strategies and techniuesG

Conceptual and integrati,e thin0ing capacity related to comple2 systems andoperating en,ironments and ability to accurately infer or ,isualise a *holeproject in all aspects Ae+g+ scope. program. constraints and sta0eholders *ithincomplete informationG

9ele,ant tertiary engineering or construction5related uali;cations aredesirable but not essentialG

Pro,en ability to lead. communicate *ith and inuence people to achie,e

comple2 and challenging objecti,esG

Commercial acumen necessary for accurate cost estimates on

multimillionJbillion dollar projectsG and

9igorous and thorough in approach including ability to apply a high le,el ofattention to detail+

'eviewing the base cost estimate

The importance of insightful and meaningful re,ie*s has been e2plained insection + The nature and e2tent of the re,ie* must be appropriate to theproject pro;le+ This can range from a basic peer re,ie* for simple. lo*er,alue. lo*er ris0 projects. ranging up to independent e2ternal re,ie* bye2perienced professional estimators for more comple2. higher ,alue. higherris0 projects+ # template that agencies could consider for engaging suchprofessional ser,ices is gi,en belo*+



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"+ 'isk 6uantication and modelling services& specialist modellingcapability is engaged for comple2 projects *ith many signi;cant andinterdependent ris0s+ This reuires professional s0ills in coordinating ris0assumptions and combining these in a ris0 uanti;cation model+ ften

this *or0 is combined *ith the project ris0 and control ser,ices as bothin,ol,e coordination and interpretation of ris0 assumptions pro,ided bytechnical e2perts+

A0hese ser$ices are integral to planning the pro#ect, such as architects,engineers, %uantity sur$eyors and de&and forecasters 0echnical%uali)cation to undertake these roles is a gi$en.

The follo*ing instruction templates can be used for engaging theseprofessional ser,ices A*hich may be sourced from both internal ande2ternal professionals+

-%Preparing Project Budgets for Business Cases

Technical guide


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*roject risk and control services

#s a guide. agencies should consider engaging professional ser,ices to$

coordinate and facilitate the ris0 analysis process including *or0shops. and

apply best practice ris0 management standardsG de;ne and agree *ith the agencyZs project team the o,erall strategy for the

ris0 re,ie* including the le,el of ris0 analysis and the uanti;cation tools to beused Aestablish a base line by de;ning the conte2t and basis for the ris0analysis and ris0 management plansG

de;ne and agree *ith the agencyZs project team the methodology for

establishing a robust base ris0 allocation including the justi;cation andreference projects that *ill be used as a sense chec0G

form a ris0 management team by identifying and assigning those *ho *ill act

as technical ris0 e2perts to identify ris0s and pro,ide estimation of probabilityand impactG

introduce the ris0 analysis plan and manage progress throughout the processG

identify as e2hausti,ely as possible all signi;cant project ris0s and uncertaintyassociated *ith the projectG ascertain the cause of the ris0 Aha@ard e,ent andassess ho* the ris0s are related to other ris0s AcorrelatedG classify the ris0saccording to a ris0 categorisation frame*or0G consider each ris0 identi;ed andrecord in a ris0 register

o the cause of the ris0 by identifying the ha@ard e,ent Anot the outcome.

such as poor ground conditions Anot cost o,errunG

o trigger e,ents that gi,e rise to the ris0 occurringG

o the timing and freuency of the ris0 occurringG

o the range of possible outcomes in terms of cost. time and impact on

the in,estment Aproject andJor future performance of the assetG

o management response or control actions to mitigate the impact of

particular ris0sG

o residual ris0s after the control responseG and

o the range of possible outcomes post control action in terms of cost.time and impact on the in,estment Aproject andJor future performanceof the asset+

identify the ris0 analyst responsible for further analysis and uanti;cation ofthe ris0G

prepare a ris0 management strategy including the robust case for the ris0

allocationG and

uantify the combined impact of all ris0s uanti;ed to establish the

recommended base ris0 allocation and contingency+

The le,el of uanti;cation and conseuently ris0 modelling that is reuired*ill depend on the comple2ity of the project and the nature of the ris0s+ #highly comple2 project that is high ris0 *ill typically reuire more comple2ris0 uanti;cation and modelling than a relati,ely lo* ris0 project+ The le,elof sophistication in ris0 uanti;cation is discussed in section 6+ includingan outline of some of the techniues a,ailable+ The scope of *or0 shouldreect the comple2ity of the project and the le,el of ris0+

The follo*ing can be used as an instruction template for engaging these

professional ser,ices+

Preparing Project Budgets for Business CasesTechnical guide -1


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'isk 6uantication and modelling services

The professional ser,ices *ill ,ary from a simple to a comple2 project ris0pro;le. as a guide+

!imple risk 6uantication

De,elop an analysis that appropriately uanti;es the base ris0 allocation based

on the assumptions pro,ided by the ris0 e2perts+

Critically analyse the ris0 assumptions pro,ided by the ris0 e2perts and identifyany interdependencies and correlations+ #s part of this analysis identify andeliminate any double counting. optimism and pessimism bias+

Carry out a sensiti,ity analysis to determine *hich assumptions and ,ariablesare most and least sensiti,e to changes impacting on the base ris0 allocation+

#nalyse the results of the analyses and recommend an appropriate base ris0

allocation and contingency for the project+

dvanced risk 6uantication

De,elop an ad,anced probability analysis using stochastic tools and soft*are

that appropriately uanti;es the base ris0 allocation based on the assumptionspro,ided by the ris0 e2perts+ The output from this analysis is a statisticaldistribution+

Critically analyse the ris0 assumptions pro,ided by the ris0 e2perts and identifyany interdependencies and correlations and factor these into the ris0uanti;cation+ #s part of this analysis identify and eliminate any doublecounting. optimism and pessimism bias+

Carry out a sensiti,ity analysis to determine *hich assumptions and ,ariablesare most and least sensiti,e to changes impacting on the base ris0 allocation+

#nalyse the results on the modelling and recommend an appropriate base ris0allocation and contingency for the project+

+ 'isk estimation services& usually a component of the scope of *or0for technical ad,isers+ The reuirement for these e2perts is to ta0e onthe role of ris0 e2pert in their discipline+ The follo*ing can be used as aninstruction template for engaging these professional ris0 ser,ices fromtechnical ad,isers+

-2Preparing Project Budgets for Business Cases

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'isk estimation services

#gencies can consider the follo*ing guide for these professional ser,icestechnical e2perts+

!imple risk 6uantication

#pply the standards of your professional technical discipline to uantify the

ris0s in accordance *ith the project=s ris0 strategy+

Ior0 cooperati,ely *ith the project ris0 and control ser,ices pro,ider and theother technical e2perts to identify. uantify and establish ris0 characteristicsAincluding interdependencies bet*een ris0s 0no*n as correlation+

#ssess the li0elihood Aprobability and impact Aconseuence of each ris0 Atheris0 assumptions+

Pro,ide the ris0 assumptions to the project ris0 and control ser,ices pro,ider in

a format that is in accordance *ith the project ris0 strategy+

3dentify *hich ris0s justify more detailed analysis. e,aluation and

uanti;cation. and for these ris0s carry out a more detailed analysis asinstructed by the agency+

For each ris0 decide on *hat are the main options for a,oiding. reducing.transferring or containing ris0s Amitigation strategy+

Preparing Project Budgets for Business CasesTechnical guide -3


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Certi;cation of project budget estimates

)+ Certi;cation of project budget estimates

#ddressing 0ey interdependencies in the business case

The guide puts in place the follo*ing reuirements+

1+ The project scope statement is pro,ided as part of a business case andthe agency=s S9 pro,ides a speci;c sign5o attesting that$

it describes a ;t5for5purpose asset that enables deli,ery of theidenti;ed ser,ice bene;t Afrom the statement of the ser,ice bene;tsG

it de;nes the physical scope. utility and functional reuirements of thecapital project in an eHcient. eecti,e and economical mannerG and

departures from the -uide for Determining Project Budgets in BusinessCases are identi;ed e2plained and justi;ed in terms of best5for5the5State outcomes+

"+ The base cost estimate. including assumptions used in its preparation. is

e2plained and pro,ided as part of the business case+ # speci;c sign5o isreuired from an appropriately uali;ed and credentialed professionalthat$

its calculation presents a best5in5mar0et cost estimate of the projectscope statementG

the estimate does not include allo*ances for escalation and ris0G and

departures from the -uide for Determining Project Budgets in BusinessCases are identi;ed e2plained and justi;ed in terms of best5for5the5State outcomes+

+ The project ris0 estimate Ai+e+ the base ris0 allocation and contingency is

e2plained. including the methodology used for the calculation. andpro,ided as part of the business case+ # speci;c sign5o is reuired froman appropriately uali;ed and credentialed professional that$

identifying and uantifying project ris0s follo* best practice and arepredicated on capable management commensurate *ith thechallenges of the projectG

the estimates disclose all material assumptions and does not include


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Sign5o by S9 for the statements of ser,ice andscope

The agency=s S9 Aor project sponsor is reuired to pro,ide in the business

case a sign5o stating that the project scope statement pro,ides for a cost5eecti,e enabling asset for deli,ering the identi;ed ser,ice bene;ts thatunderpin the business case=s in,estment rationale Ai+e+ the statement of theser,ice bene;ts+ The sign5o can be pro,ided at the front of the businesscase=s appendi2 documenting the project budget+

The *ording of the sign5o may need to be tailored to suit the speci;cprojectG ho*e,er. it should meet the intent of the follo*ing template+

Sign5o for base cost estimate

To assist the S9 sign their attestation. the base cost estimator needs tocertify the uality of their estimate and e2pressly ac0no*ledge the ad,erseconseuences for go,ernment should they produce a base cost estimatethat does not meet the le,els of accuracy e2pected for business cases+

The *ording of the certi;cate may need to be tailored to suit the speci;cprojectG ho*e,er. it should meet the intent of the template included in#ppendi2 B. *hich can be in the form of a letter to the agency=s S9+

Preparing Project Budgets for Business CasesTechnical guide --

The statements of service and scope

gency sign;o: on the statements of the service benets and

project scope statement

3 attest that$

the project scope statement de;nes a ;t5for5purpose capital asset that is

directly lin0ed to. and enables deli,ery of the identi;ed business caseser,ice objecti,es Ai+e+ the statement of the ser,ice bene;ts in aneHcient. eecti,e and economical mannerG

the project scope statement is suHciently mature to allo* de,elopment of

a project budget to the standard reuired by the guideG

all material inputs. including the


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Sign5o for project ris0

The agency and its ad,isers collecti,ely in,ol,ed in preparing the base ris0allocation and contingency are e2pected to sign o that they ha,e prepared

robust estimates based on a rigorous and thorough process in accordance*ith this guide+

*roject risk services

,erarching sign5o is reuired in the business case from the agency andits ad,isers that$

#ll signi;cant ris0s ha,e been identi;ed and analysed+

The base ris0 allocation represents a robust and reasonable


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the detailed and uanti;ed e,aluation of li0elihood. conseuence. timing.

e2pected ,alue and dependencies are reasonable and based onprofessional judgement and e2perience+

The third template in #ppendi2 B. *hich should be in the form of a letter tothe agency=s S9. can be adapted by the agency as appropriate to addressthe speci;c ser,ices pro,ided+

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-lossary

'+ -lossary

Term De;nition Comment Statement of Ser,iceBene;t

Statement ofser,icebene;t

The rationale in the business casethat de;nes the ser,ice need andoutlines the ser,ice deli,eryimpro,ements and the e2pectedoutcomes to be achie,ed from theproposed in,estment+

This statement describes the ser,icebene;ts that the capital project *illenable+ 3t can be articulated in a strategicassessment. an in,estment logic map. anin,estment concept brief. or other suchsimilar document+

Projectscopestatement

# foundation document for theproject budget+ 3t is directly alignedto achie,ing the bene;ts set out inthe statement of ser,ice bene;t+ 3tde;nes the content. scope. utilityand business reuirements of thecapital project+

The scope statement needs to be ofsuHcient uality and detail Asee thecompanion guideline to enabledetermination of the project budget. andshould be pro,ided as an appendi2 of thebusiness case+ # *or0 brea0do*nstructure or functional brief are e2amplesof a project scope statement+

Base costestimate

Based on the project scopestatement. the current best5in5mar0et estimate of the e2pected;nancial costs of deli,ering theproject+

This does not include any estimatesfor escalation. ris0 or contingency+

# base cost estimate comprises costs fordesign. margins. project management.consultants. site preparation. buildingmaterials. labour. and use of plant andeuipment+ 3t is prepared by a suitablyuali;ed professional. and should bepro,ided in an appendi2 of the businesscase+ :scalation is a separate acti,ityunderta0en


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-lossary


Base ris0allocation # ;nancial calculation andjudgement of the most li0ely orprobable total ;nancial impact of allcosted project ris0s after theapplication of ris0 managementpractices+

The base ris0 allocation should include theallo*ance for escalation+ ASee escalationde;nition belo*+

ote$ ?niue items. such as land purchasecosts. can be separately identi;ed andcosted+ They should be presented as anitem in the base cost estimate. and ifnecessary. in the base ris0 allocation+

:scalation The anticipated ,ariation in projectcosts o,er time as a result offactors such as ination. mar0etconditions. supply constraints.timeframes etc+

The escalation factors Aor rates aresensiti,e to mar0et conditions and areincluded in the base ris0 allocation+

The base cost estimate is determined at aparticular point in time. and this allo*s the

project cash o*s to be forecast by ta0inginto consideration the projectimplementation timeline and schedule of*or0s+ #n allo*ance for escalation iscalculated by applying the escalationfactorAs to the casho*+

XMostli0elyY

This implies a statistical a,erage of*eighted probabilities and impacts+stensibly the representation of asingle ;gure estimate representsthe most probable outcome for theproject considering all the ris0s andtheir respecti,e *eighted

li0elihoods of occurring and impactsAand potentially range of impacts+Lo*e,er. it remains a judgement.one that should be based oninformed analysis and e2perience+

There are a number of techniues to costris0+ This guide deliberately a,oids theterminology of probabilistic estimatingAe+g+ P1!. P(!. P'! and speci;cally doesnot de;ne the use of term


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-lossary


ProjectDe;nition The project de;nition includes$a detailed description of the scope

of the capital *or0s Aincludingdra*ings. speci;cations.calculations etc

construction methods

program dates

project performance objecti,es

project ris0s that may beencountered

all necessary and prudentin,estigations to complete theproject de;nition

the method of deli,eryG anda description of those *or0s

Aother*ise associated *ith theproject speci;cally e2cluded ornot in scope+

The project de;nition in the project scopestatement should be de,eloped to at leasta le,el of 1!5"!] of complete de;nition+

/%Preparing Project Budgets for Business Cases

Technical guide


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#ppendi2 #$ Presentation of the project budget

#ppendi2 #$ Presentation of the projectbudget

Table 1& Eeadline project cost element summary

Base cost estimate K^^^m ATable "

Base ris0 allocation K^^m ATable

Project cost estimateK^^^m

Contingency K^^m ATable

Project budgetK^^^m

Table 2& .ase cost estimate

Preparing Project Budgets for Business CasesTechnical guide /1


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#ppendi2 #$ Presentation of the project budget

Table 3& *roject risks

/2Preparing Project Budgets for Business Cases

Technical guide


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#ppendi2 B$ Templates for estimatecerti;cation

.ase cost estimate services

#ddressee$ QSenior 9esponsible *nerR

'e& !ign;o: for project base cost estimating services

Ie refer to the contract dated Q R bet*een Q R and Q R. through *hich Q R hasbeen engaged to pro,ide base cost estimating ser,ices Athe


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#ppendi2

*roject risk services

#ddressee$ QSenior 9esponsible *nerR Q#gencyR

*roject risk and control services 8including risk 6uantication9Ie refer to the contract dated Q R bet*een Q R and Q R. through *hich Q R hasbeen engaged to pro,ide project ris0 and control ser,ices including base ris0allocation and si@ing the contingency Athe


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or project risks services for technical e


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2014 ilg stage 2 prove project budget technical guideline

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