Flood protection appraisals: guidance for SEPA and responsible authorities
Appraisal guidance for the Scottish Environment Protection Agency (SEPA) and responsible authorities.
10. Estimating whole life costs
10.1.1. Whole life costs are the total costs of an option over its whole life. They takes account of design costs, initial capital costs (including mitigation), operation, maintenance and repair, and (where significant) disposal. They do not include costs already incurred such as investment in preceding studies or defences - these are defined as 'sunk' costs, and cannot be recovered whatever decision is taken now.
10.2. Cost estimates
10.2.1. The approach to estimating whole life costs should be risk based and proportionate: in some cases, professional judgement may be sufficient, whereas in others, a more detailed estimate may be required.
10.2.2. The precision of cost estimates will depend on the stage in the flood risk management planning process. Where appropriate, and particularly for strategic and feasibility studies and early stages of design, costs may be quoted as estimate ranges rather than single point estimate figures.
10.2.3. Appraisers should select the best and most appropriate source of information, including the sources listed in Box 10.1 and costs from previous studies and works (e.g. estimates from local authority departments), recent tenders, published articles and estimating price books. The source of the cost estimates should be recorded.
10.2.4. For detailed design, aspects to be considered should include site conditions, location, size, complexity, risks and risk profiles, uncertainties, programming and timing constraints, availability of resources, and construction methodology. Maintenance estimates should allow for storm damage repairs and, where significant, decommissioning costs, in addition to regular planned maintenance/repair/replacement activities.
10.2.5. Where less common items constitute a significant part of the overall cost, it is often necessary to obtain quotations and estimates obtained from operators with commercial experience in that sector in order to make a careful assessment of costs.
10.2.6. Where additional sums are likely to be required for particular areas of work, for example for 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 (Section 10.8).
10.2.7. As no illegal operations should have been included in the options ( Section 4.3), infraction costs (from infraction proceedings, penalties, or fines) should not be included.
Box 10.1: Sources of information for estimating whole life costs
Type of estimate
Previous studies and works
10.3. Price indices
10.3.1. Whole life costs are expressed in present value terms. The base year used for pricing should always be stated. When data are not available for that particular year, it will be necessary to use appropriate indices to convert historical prices to the same base (Section 10.3.2; Appendix 1 Section A1.2).
10.3.2. For feasibility studies, costs and benefits can generally be indexed using the HM Treasury Gross Domestic Product ( GDP) deflator series  as this gives an overall picture of the economy and not just prices. Historic prices (Section 10.3.1) should also be brought up to current values using the GDP deflator series. For detailed design, the Office for National Statistics construction price and cost indices  are appropriate for most uses.
10.3.3. Particular components may constitute a large proportion of a project cost or the cost of those components may be expected to vary in real terms over time. In such cases, sensitivity analysis ( Section 11.7) should be used to explore the implications for option choice.
10.4. Discontinuities in costs
10.4.1. Costs, as with benefits, may increase in a discontinuous fashion ( Section 9.5). For example, this could occur where the form of construction needs to change to accommodate a higher water level for an increased standard of protection. The points at which these steps occur should be examined in detail to assess the standards of protection where benefits may increase without increased costs.
10.5. Residual values
10.5.1. Even where an appraisal covers the full expected period of use of flood risk management asset, some assets could have residual value, in an alternative use, in a second-hand market, or as scrap. The HM Treasury Green Book (2011) recommends that there values should be included, and tested for sensitivity, as it may be difficult to estimate the future residual value at the present time.
10.5.2. For the purposes of flood risk management, the residual values should be taken into account in appraisal only where this is required to ensure a fair comparison of different options. The residual value of most assets is likely to be very small, particularly once discounting is applied. Consider, therefore, whether any residual value is going to be significant in terms of the whole life cost and hence whether it is worthwhile spending time calculating it.
10.6. Mitigation costs
10.6.1. It may be possible to eliminate or reduce some negative impacts through design or by mitigation. In these circumstances, the cost of mitigation should be included as part of the option costs. The residual impact (the impact that remains following mitigation) will need to be described, quantified and, where appropriate, valued as damages. If mitigation is not possible and actions are required to compensate then these costs should also be included in the option costs.
10.7. Contributions from others
10.7.1. The full cost of the project, regardless of who pays for it, should be reflected in the project costs. Any private contributions to the cost should not be deducted. Generally, any windfall contributions (e.g. from developers) only affect the distribution of costs and not the total resources required for the project.
10.7.2. If the benefits associated with the contribution can be reliably separated and excluded from the appraisal, then it would be reasonable to also exclude the contribution. However, it is preferable to include all benefits and costs in the appraisal (particularly when other contributions may also stem from public money). In this way the benefit-cost analysis will demonstrate whether the option as a whole is justified.
10.8. Optimism bias
10.8.1. There is a widely recognised, general tendency for early estimates of costs, benefits and time-scales to be overly optimistic when compared with final outturn values. This is termed optimism bias. An explicit consideration of optimism bias is required through (i) the application of suitable uplift factors to early best estimates of options costs, and (ii) sensitivity analysis of predicted benefits (and project time-scales).
10.8.2. The HM Treasury (2013) has published supplementary green book guidance on optimism bias. It provides benchmark optimism bias factors for different project types, including standard and non-standard civil engineering. Higher optimism bias factors may be required at early stages in the appraisal process; the optimism bias factor can be reduced according to the extent to which the contributory factors have been managed.
10.8.3. Historic guidance for flood and coastal defence projects is available from Defra (2003): it contains additional descriptions of the risk components and recommends broadly similar starting values for optimism bias to those recommended by HM Treasury.
10.8.4. For large complex projects, HM Treasury (2015) provides further guidance concerning the allowance of contingency in early project cost estimates.
Email: Neil Ritchie, email@example.com
Phone: 0300 244 4000 – Central Enquiry Unit
The Scottish Government
St Andrew's House
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