Appendix 16: Optimism Bias
[chapter]
2012
Simple Tools and Techniques for Enterprise Risk Management
The method proposed for calculating optimism bias is based predominantly on the recommendations of the UK Department for Transport (DfT 2004(DfT , 2007a(DfT , 2007b(DfT , 2010)), the Green Book (HM Treasury 2003 , 2003b) and the Mott MacDonald Review of Large Public Procurement in the UK (Mott MacDonald 2002) . The method adopted (for the adjustment for investment costs for optimism bias) follows a ten-step approach as follows and as illustrated in Figure A16 .1: 1. Determine the reference
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... and the type of project. 2. Decide on the stage of the project. 3. Decide on the applicable upper bound value for optimism bias provided for the project type. 4. Decide on the contributory factors to the upper bound optimism bias for the project type. 5. Carry out a risk assessment of the contributory factors, discerning the "mitigation factor" (between 0 and 1) and the "cost of risk management". 6. Add together the effectively managed contributions to the optimism bias for each project risk area (as a percentage). 7. Calculate the revised optimism bias percentage. 8. Calculate the capital impact of optimism bias. 9. Calculate the cost of risk mitigation. 10. Calculate the adjusted capital estimate. METHOD FOR CALCULATING OPTIMISM BIAS FOR COST This section is based on an example Metro project called XYZ -which has reached life cycle stage 4, called single option development. Step 1: Determine the reference class and the type of project The first step involves determining the reference class and the type of project, according to the typology given in Table A16 .1. Transport schemes are divided into a number of reference classes which are treated as statistically different, but where the projects within each of the reference classes can be treated as statistically similar. Bent Flyvbjerg (DfT 2004) concluded that within each of the reference classes identified in Table A16 .1, the risk of investment cost overruns can be treated as statistically similar. Step 2: Decide on the stage of the project Optimism bias assumes that as a project progresses through its life cycle, the requirements, scope definition, schedule, cost estimate, change management and risk analysis become more developed and mature and hence the possible underestimation of project costs and duration diminishes. Hence, the suggested percentage levels of optimism bias reduce as a project progresses through the life cycle. To be able to select the appropriate/recommended level of Simple Tools and Techniques for Enterprise Risk Management, Second Edition by Robert J. Chapman
doi:10.1002/9781118467206.app16
fatcat:ixesygajlnbmfnc7y4o5dpssb4