Infrastructure clients are planning to ditch Treasury-backed rules for calculating the contingency budgets of major infrastructure projects.
They have produced a report which concludes that using the Treasury’s optimism bias mechanism to anticipate cost overruns is costing billions of pounds.
The proposal has been made by the Infrastructure Risk Group, an industry-led group with representation from major infrastructure clients.
“The optimism bias concept is often misunderstood and is too readily accepted as the best available figure, contrary to explicit Green Book [Treasury project appraisal guidance] instructions,” says the report.
It says that clients should underpin early stage risk allowances with reference class forecasting and risk analysis, rather than optimism bias-based uplifts.
The group says that this will encourage interrogation and mitigation of the risks driving risk allowances and eventually project contingencies.
It would also lead to the earlier identification of specific risks, avoiding fear of the unknown being priced into optimism bias.