2014 ILG Stage 2 Prove Project Budget Technical Guideline

Preparing Project Budgets for Business Cases
Technical guide
Technical guide
The Secretary
Department of Treasury and Finance
1 Treasury Place
Melbourne Victoria !!"
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ii
Technical guide
Contents
1+ Bac0ground 1
1+1 Conte2t+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
1
1+" Purpose 8 de,eloping and managing project budgets++++++++++++++++++++++++++
1+ Scope of application+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
1+6 Structure of this guide++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
1+( 9elated guides and frame*or0s+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
1+& The need for an accurate project budget++++++++++++++++++++++++++++++++++++++++++++++
"+ :lements of a project budget (
"+1 The headline elements of a project budget++++++++++++++++++++++++++++++++++++++++++
"+" Successful ;nancial planning++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
"+ The need for a *hole5of5life approach++++++++++++++++++++++++++++++++++++++++++++++++
"+6 <Poor project planning= ris0s are not project ris0s>++++++++++++++++++++++++++++++
"+( Deli,ering to budget+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ Foundations for good project budgets 1"
+1 Better business cases and better project budgets++++++++++++++++++++++++++++++
+" Preparing to de,elop a project budget++++++++++++++++++++++++++++++++++++++++++++++++
+ De,eloping a project budget++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+6 Culture. incenti,es and go,ernance+++++++++++++++++++++++++++++++++++++++++++++++++++
6+ De,eloping base cost estimates 1'
6+1 :ssential ingredients for an accurate base cost estimate+++++++++++++++++++
6+" Clearly de;ned project scope+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
6+ Competent. e2perienced estimators prepared to certify their
*or0 "1
6+6 # robust estimating methodology+++++++++++++++++++++++++++++++++++++++++++++++++++++++
6+( 3nsightful and meaningful re,ie*s++++++++++++++++++++++++++++++++++++++++++++++++++++++
(+ De,eloping project ris0 estimates "6
(+1 Thin0ing about project ris0s++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
(+" Principles of project ris0 estimation++++++++++++++++++++++++++++++++++++++++++++++++++++
(+ ?nderta0ing a ris0 analysis+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
(+6 Si@ing project ris0s++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
(+( Setting the base ris0 allocation and contingency+++++++++++++++++++++++++++++++
(+& Verifying the estimates Athe sense chec0B++++++++++++++++++++++++++++++++++++++++++
&+ :stablishing a project budget (
&+1 :stablishing a project budget+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
&+" The mechanics of de,eloping the project budget+++++++++++++++++++++++++++++++
&+ -o,ernance and management of project budgets++++++++++++++++++++++++++++++
&+6 Project deli,ery by a public8pri,ate partnership+++++++++++++++++++++++++++++++++
4+ 3nstruction templates for professional ser,ices 6!
Technical guide iii
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++++++++++++++++++++
)+" Sign5oC by S9D for the statements of ser,ice and scope+++++++++++++++++++
)+ Sign5oC for base cost estimate+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
)+6 Sign5oC for project ris0+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
'+ -lossary 6'
#ppendi2 #$ Presentation of the project budget (1
#ppendi2 B$ Templates for estimate certi;cation (
iv
Technical guide
Bac0ground
1+ Bac0ground
Conte2t
This guide is a technical supplement to the 3n,estment Eifecycle -uidelines
series A"!1"B+ ?sers should refer to the 3n,estment Eifecycle -uidelines as
a basis for de,eloping concepts and preparing business cases for *hich
project budgets are reFuired+ The other technical supplements include the
follo*ing$
business case de,elopment for information and communications
technology A3CTB 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 robust
cost and budget estimates that support sound in,estment decisions+ 3t does
this 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 sign5oC reFuirements surrounding project
budgets+
Particular emphasis is on stage " <Pro,e= and the information reFuired for
the business case submission+ 3t pro,ides information to help users identify
Technical guide 1
D,er,ie* of the guide scope and its application in the Victorian -o,ernment
planning process for preparing business cases
Using an analogy, this guide
is about the standards of
cooking; not a recipe book
Bac0ground
and achie,e the optimum ;nancial outcome o,er the *hole life of the
asset+ 3n particular it helps projects de,elop the information they need for
the project budget for a business case submission+
Purpose 8 de,eloping and managing project budgets
This technical supplement. -uide for Preparing Project Budgets in Business
Cases A<the guide=B assists *ith establishing project budgets in a business
case and managing the project budget during the deli,ery phase+ 3t
complements the supplementary guide on project ris0 management and its
objecti,es are to$
pro,ide direction on de,eloping capital project budgets in business casesG
promote greater consistency. transparency and accountability in
managing capital budgetsG
reinforce the obligation and principle that public oHcials manage projects
to the lo*est cost for the reFuired performance. rather than to the
ma2imum appro,ed budgetG
put in place go,ernance arrangements for managing project
contingenciesG and
pro,ide some direction on the public communication of capital costs+
The purpose of the guide is to support these objecti,es by pro,iding
standards on$
de,eloping a base cost estimate for a business case=s proposed capital
projectG
de,eloping and costing project ris0s and contingenciesG
integrating base cost. project ris0 and contingency estimates to de,elop
a project budgetG and
establishing go,ernance and sign5oC reFuirements that attest to the
eHcacy and ,eracity of a business case=s project budget+
This guide is not prescripti,e about how to de,elop cost estimates+ 3t
pro,ides standards on the information reFuired and Fuality reFuirements to
be presented in a business case for decision5ma0ers to consider+ 3t outlines
the lin0ages bet*een the capital costs and *hole5of5life costs that are
needed as inputs to the business case and its economic appraisal to allo*
the selection of the best ,alue for money option to deli,er the bene;ts+ 3t is
recognised that the most appropriate methods and techniFues to de,elop
speci;c cost estimates may ,ary gi,en the uniFue features of some
projectsG ho*e,er. the standards in this guide must be met at a minimum+
For e2ample. the separate guidance on 3CT projects identi;es speci;c
costing elements to be considered in de,eloping the base cost estimate+
Ihere a project budget in a business case is prepared
using a diCerent method andJor techniFues from those
in this guide. the rationale and implications of the
departure needs to be fully e2plained and justi;ed in the
business case+
2
Technical guide
Bac0ground
Scope of application
This guide applies in all cases *here the Victorian -o,ernment reFuires a
business case to be prepared+ Currently. business cases are reFuired for all
projects costing K( million or more in total estimated in,estment AT:3B.
including Ligh ValueJLigh 9is0 ALVL9B
1
projects+ This applies to all projects
and asset5related proposals see0ing funding through the budget process.
and for go,ernment business entities. for those prooposals that reFuire the
Treasurer=s appro,al+ This guide applies to all projects regardless of any
preferred procurement option such as !artnerships "ictoria. alliance
contracting or any other procurement arrangement+
The concepts and principles of this guide can apply broadly to non5asset
proposalsG ho*e,er. the primary focus is on capital asset proposals being
considered by go,ernment+
Structure of this guide
This guide co,ers the follo*ing topics$
elements of a project budget 8 an o,er,ie* of thecomponents of a
project budget as they should be presented in a business case prepared
in accordance *ith Victorian -o,ernment policies and guidelinesG
foundations for good project budgets 8 an outline of the foundation
points and the core elements to ensure a project budget can be
de,eloped for the business case Ait is e2pected that all business cases
presented to go,ernment for consideration satisfy these foundation
pointsBG
developing accurate base cost estimates 8 a description of a base
cost estimate and the e2pected standards to be applied to its
preparationG
developing project risk estimates 8 an o,er,ie* of project ris0sG the
diCerent steps and techniFues of project ris0 estimatesG ho* to set the
base ris0 allocation and contingencyG and underta0ing a sense Aor
realityB chec0 on *hether the estimates are appropriateG
establishing a project budget 8 guidance on integrating the base cost
estimate. project ris0 estimate and le,el of contingency to form the
recommended project budgetG
instruction templates for professional services 8 suggested
templates for engaging the professional ser,ices associated *ith
de,eloping the project budget for the business caseG and
certifcation for project budget estimates 8 sign5oC templates for
attesting to professional standard of estimation. integrity of process and
;tness of project budgets+
1
LVL9 projects ha,e a T:3 of K1!! million or more. or ha,e an identi;ed high ris0+
Technical guide 3
Bac0ground
Source$ Comptroller -eneral of the ?nited States. Theory and Practice of Cost :stimating for
Major #cFuisitions. B51&!() AIashington. DC$ "6 Muly 1'4"B. and restated in the "!!' -#D
Cost :stimating and #ssessment -uide 8 Best Practice for De,eloping and Managing Capital
Program Costs
9elated guides and frame*or0s
This guide should be read in the conte2t of other rele,ant documents$
Athe broaderB 3n,estment Eifecycle and Ligh ValueJLigh 9is0 -uidelines 8
Victoria A"!1" and updatesBG
1ational PPP -uides Volume 6$ PSC -uidanceG
1ational #lliance Contracting Policy and -uidelines 8 Common*ealth
Department of 3nfrastructure and Transport A"!11BG
#ustralian Standard #SJ1NS 3SD51!!!$ "!!' 9is0 management 8
principles and guidelinesG
rele,ant departmental and agency project management methodologiesG
Project Management 3nstitute=s PMBDO. D-C Prince" or other
authoritati,e project management guidanceG and
Department of 3nfrastructure and Transport$ Best Practice Cost
:stimation Standard for Publicly Funded 9oad and 9ail Construction
AMune "!!) and updatesB+
The need for an accurate project budget
The planned bene;ts of capital in,estment proposals need to be analysed.
Fuanti;ed and articulated in a business case. along *ith a thorough
;nancial analysis of forecast capital costs. operational costs and ris0s+
#ppro,ing a business case project budget Aas a forecast of actual outturn
capital costsB reFuires a project o*ner to demonstrate that robust cost
information has been used to de,elop the business case+ This
demonstration no* includes speci;c sign5oC and assurances pro,ided as
part of the business case submission to go,ernment+
#n appro,ed business case *ith a project budget that is subseFuently
found to ha,e signi;cantly underestimated the actual outturn capital cost
raises doubt about the basis of the original in,estment decision+ Further. a
signi;cant underestimation of the forecast outturn capital costs could
displace future funding of alternati,e projects or ser,ices+ This guide
reinforces the need for the business case to be the core decision5ma0ing
document and the need to fully understand the estimates pro,ided+
4
Technical guide
From 1'4"P
<Ie found that uniform guidance on cost estimating practices and procedures
that *ould be the basis for formulating ,alid. consistent. and comparable
estimates *as lac0ing+ 3n fact. e,idence sho*ed that each QagencyR issued its
o*n guidance for creating cost estimates and that the guidance ranged from a
detailed estimating manual to a fe* general statements+ 3n addition. *e
reported that cost estimators often ignored this guidance+=
Bac0ground
Business cases need to reSect sound consideration of ris0s and the
proposed treatment+ Business cases should$
identify major areas of uncertainty in the projectG
reSect 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 !"#$!
31%%%&2%%% 'isk (anagement ) *rinciples and +uidelines,
This guide describes the process for de,eloping ris05based cost estimates 8
one step in the management of ris0 o,er the in,estment lifecycle+ The
estimate represents an informed ,ie* of the ;nancial ris0 at a point in time
in the projectJin,estment=s lifecycle+ 9is0 management is an ongoing
acti,ity. *hich must be managed throughout the life of the project to
reduce or maintain the o,erall ris0 pro;le of the project+
Technical guide -
:lements of a project budget
"+ :lements of a project budget
D,er,ie* of the elements of a project budget to be presented in a business
case prepared in accordance *ith Victorian -o,ernment policies and
guidelines
The headline elements of a project budget
The project budget should be prepared *ith the follo*ing headline
elements Aillustrated in Figure 1B+ These headline elements ha,e ,arious
subcomponents. some of *hich are summarised belo* *ith more detail
pro,ided in sections . 6 and (+
# ris05based project budget is a signi;cant. but not ;nal. step in managing
ris0 across the in,estmentJproject lifecycle+ The project budget aims to
accurately identify the base cost estimate. *hile ma0ing pro,ision for
<credible= ris0s o,er the deli,ery of the project+ 9is0s may or may not
materialise+ The aim of ongoing ris0 management throughout the project is
to minimise <do*nside= e,ents *hile ma2imising opportunities+
Figure 1 Leadline elements of a project budget
.ase cost estimate
The base cost estimate does not include any allowance for
escalation,
2
risk or contingency.
The base cost estimate comprises the follo*ing cost elements$
"
The base cost estimate is determined at a particular point in time. and allo*s the project cash So*s to
be forecasted by ta0ing into consideration the project implementation timeline and schedule of *or0s+
Ihile escalation is presented as part of the base ris0 allocation. it is not treated in the same *ay as the
other ris0s included in the base ris0 allocation+
/
Technical guide
direct costs 8 the estimated cost of labour. plant. materials and
specialist subcontract *or0 reFuired to deli,er the asset Abased on
calculated Fuantities deri,ed from proposed design solutions and
construction methodologies de,eloped on industry best practiceBG
indirect costs 8 the speci;c project costs necessary to support the direct
costs of project deli,ery incurred by both the sponsor and the
contractorAsBG e2amples include site facilities. project insurances.
professional fees. site management and super,isionG
The cost of agency staC applied to the project is not included in the
estimate of the indirect costs because these costs are dealt *ith in the
agency=s ongoing base funding+ Lo*e,er. there are cases *here a large
project sees the establishment of a special purpose statutary authority or
the engagement of specialist capability for the project+ 3n these cases it is
appropriate to include the associated costs as indirect costs+ #t all times.
double counting of staC and other costs needs to be eliminated+
contracting parties0 fee 8 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 boundaries
and assumptions to inform the ris0 assessment discussed in chapter (+
Dther*ise there is a high probability of o,erlap or omission+
#ctions 1eeded to 3mpro,e Transparency and #ccountability. -eneral #ccounting DHce. 1
#pril "!11
*roject risks
There *ill al*ays remain an element of uncertainty in the cost of a project
up to the date of the ;nal payment to the contractor+ Lo*e,er. cost
accuracy increases as uncertainty reduces o,er timeG this has been
described as a cone of uncertainty Asee Figure "B+
#t each stage the 0ey ris0s that should reduce or be mitigated include$
detailed design 8 increased certainty o,er design reFuirements.
speci;cations. ground conditions and site sur,ey dataG
procurement 8 contractor pricing agreed Aschedule of rates. lump sum.
guaranteed ma2imum price etc+BG
construction phase 8 detailed design completed Aconstruction dra*ingsB.
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 it
starts *ith an appropriate allo*ance being included *ithin the project
budget+ 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 <most li0ely ,alue= of the
increase in cost abo,e the base estimate to accommodate uncertainties
Technical guide 1
<Ihile it is clear that progress has been made in terms of implementing ne*
acFuisition re,ie*s and reporting detailed baselines. there remain critical gaps in
the material reported. particularly the Fuality of the underlying cost estimates
needed to establish baselines+=
in the project Aun0no*n ground conditions. design detailing. contractor
pricingBG and
"+ the contingency 8 an allo*ance abo,e the <most li0ely ,alue= for all
costed project ris0s+
The contingency should not be relied upon; the objective should be
to deliver the project without recourse to this additional provision.
Figure " Cone of uncertainty
3n de,eloping the base cost estimate. it is necessary for the agency=s cost
estimator to ma0e numerous assumptions about *hat *ill be deli,ered. and
ho* and *hat circumstances *ill arise as the project is deli,ered+ Ihen
assumptions are made. they often represent signi;cant areas of uncertainty
for the project time and cost estimates. *hich need to be recorded+ The
estimator. *ith the help of a business case de,elopment team. may further
in,estigate the assumptions to eliminate or reduce the uncertainty. or
moderate the ris0 impact+
#ssumptions are normally captured as <project ris0s=+ The logic for
determining an estimate of project ris0 is to better inform the sponsor on
e2pected costs abo,e that of the base cost estimate Ai+e+ a forecast of the
<actual outturn cost=B+
3t is important to remember the process of identifying and estimating the
cost of ris0s needs to connect to the ongoing management of ris0s and. in
terms of accountability. to understand *hat ris0s ha,e been pro,ided for in
the base ris0 allocation and contingency+
2
Technical guide
3scalation
Ihen de,eloping a project budget estimate assumptions must be made on the
future price of goods and ser,ices+ These prices change o,er time because of
inSation. mar0et conditions. pea0s and troughs in demand and legislati,e impacts
Ae+g+ carbon priceB+ The impact of these future price changes need to be
incorporated in the project cost estimate and cash So*+
:scalation is highly sensiti,e to predictions of mar0et conditions. to both systemic
changes and to the supply and demand of speci;c project inputs+ Oey historical
indices or measures of cost mo,ements used for future estimation of rates are
a,ailable in industry publications and are produced by the #ustralian Bureau of
Statistics+ For e2ample$
#ustralian and 1e* Nealand Standard 3ndustrial Classi;cation A#1NS3CB classes 611"
9esidential Building Construction n+e+c+ and 611 1on59esidential Building
Construction= 8
http$JJ***+abs+go,+auJ#?SST#TSJabs7+nsfJDSSbyCollectionidJ&B1F((C"(&"114'C#
"(&:D"!!4'&D: or tender price indices ATP3sB produced by cost management
consultancies
These indices are based on obser,ed historical data that is a,ailable for a range of
speci;c components of the project. for e2ample$ concrete. cement and sandG
petroleum and coal productsG and steel+ # cost estimator must use judgement to
determine appropriate escalation factors Afor the project5speci;c componentsB and
the o,erall escalation Aa single ;gure often used for presentation purposesB+ The
speci;c ris0s and ,olatilities associated *ith your project need to be considered.
such as sensiti,ity to steel price Suctuations. *hich might not follo* TP3+ #lso the
timeframe of cash So*s needs to be considered in order to apply a TP3 adjustment
because these costs *ill be incurred o,er time and the cost base *ill therefore shift
throughout the project duration+ Care is needed *hen considering lead times and
ho* these impact on cash So* because escalation compounds year5on5year and
can become signi;cant in future periods+
Cost estimators need s0ill. e2perience and *isdom to successfully use historical
data to forecast future escalation. particularly in conditions of high ,olatility+ 3n
circumstances of ,olatility this needs to be brought to the fore in the presentation
of the project budget so that management can better understand the assumptions
underlying the budget+
4or the purposes of this guide5 escalation is to be included as a project
risk in the base risk allocation, The calculation of the escalation allowance
provides ade6uate assessment of forecast cost increases due to the rise
and fall of project specifc costs during project delivery,
The base cost estimate has the greatest impact on the accuracy of the
project budget because it is the largest and most comple2 component and
the foundation on *hich the base ris0 allocation and contingency are
de,eloped+ Figure illustrates the typical relati,e proportions seen in
robust project budgets de,eloped for the majority of go,ernment projects+
Technical guide 7
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 0ey
components$
1+ project deli,ery costs eFual to. or less than. the budgetG and
"+ the lo*est possible *hole5of5life cost *hile meeting all speci;ed
in,estment outcomes+T
T <3n,estment outcomes= are those outcomes that sit at the core of the
in,estment Ae+g+ patient care outcomes for a ne* health facility. teaching
outcomes for a ne* school or transport outcomes for a ne* piece of
transport infrastructureB+ 3t should be noted that the project for construction
of any ne* asset or installation of a ne* 3CT solution is simply part of the
measures reFuired to achie,e this outcome and in,estment success does not
depend solely on this phase+
These measures of success can be diHcult to achie,e. e,idenced by the
fact that projects regularly e2ceed budgets or operate less eCecti,ely than
reFuired+ Meeting these conditions reFuires a robust ;nancial planning
process feeding into eCecti,e project management that acti,ely ma2imises
opportunities and minimises ris0s+
Successful ;nancial planning reFuires the follo*ing$
an understanding of the relationship bet*een e2penditure on
de,elopment Aconstruction. installation of ne* 3CT system. etcB and
e2penditure on the operation of the assetG
use of robust estimating techniFuesG and
a robust ris0 management strategy that can identify. cost and
accommodate uncertainty *ithout e2ceeding the budget+
1ote that this document aims to change the *ay in *hich project budgets
ha,e historically been de,eloped+ 3n some cases it *ill reFuire project
teams to challenge many commonly held opinions about or approaches to
;nancial performance Asee Table 1B+
1%
Technical guide
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 capital
cost 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 programB are only a
small 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
Technical guide 11
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 performance
outcomes+ The optimum solution ;nds an eCecti,e balance
bet*een initial capital and *hole5of5life costs+
Projects *ith high
le,els of uncertainty
*ill al*ays tend to
go o,er budget
?ncertainty can al*ays be accommodated *hen estimating a
project+ Ihen it is 0no*n that a project has high le,els of
uncertainty then greater emphasis should be placed on the ris0
management and more detailed allo*ances for ris0 and
contingency should be made+
9is0 management
in,ol,es allo*ing 1!
per cent for things
that go *rong
Pro,ision for ris0 and uncertainty should be proportionate to the
ris0+ Poor planning is not an e2cuse for large ris0s remaining in a
project+ #s a project de,elops. the uncertainty should reduce and
therefore ris0 allo*ances and contingencies should also reduce+
Sustainability is a
;nancial burden on a
project
Sustainability is the process of using natural. human and ;nancial
capital in the most eHcient *ay possible+ #,oidance of *aste is
central to this+ Many Anot allB sustainability objecti,es can result in
cost5reducti,e outcomes 8 but these must be assessed o,er the
*hole life of the asset and not just consider the capital cost+
A capital pro#ect, irrespecti$e of the
%uality or detail of its technical
scoping, cannot be satisfactorily
deli$ered as an in$est&ent if it is not
directly linked to the business case
ser$ice ob#ecti$es in an e'cient,
e(ecti$e and econo&ical &anner
this reason it is critical that proposals forecast and plan for an eHcient and
lo*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+
3nadeFuate eCort in identifying and calculating operational costs during the
in,estment decision ma0ing and early design phases can ha,e a signi;cant
impact later on+ Ihile it is not al*ays necessary to cost all of these
elements in detail for the business case. it is important that the relationship
bet*een capital costs and potential increases or decreases in the costs at
the operational phase is clearly de;ned+
The guidance recognises the importance of managing projects to
budget5 reinforcing the need to scope the project correctly at the
outset 8and in some cases reduce the scope9 such that operational
costs are a:ordable and cost e:ective,
<Poor project planning= ris0s are not project ris0s>
9is0 in the conte2t of <project ris0s= refers to possible e,ents in project
deli,eryJconstruction. associated regulatory planning appro,als and so on
*ith outcomes that can be substantially dimensioned at the time the
business case is de,eloped+ Lo*e,er. there are other Aoften ,ery
substantialB ris0s arising from poor or insuHcient project planning 8 for
e2ample. business cases not completed in accordance *ith guidelines and
featuring poor andJor incomplete analysis of the in,estment rationale and
the proposed capital *or0s+ 3t is e2pected that business cases *ill in,ol,e a
suHcient le,el of planning to produce
defensible and robust estimates Athat
a,oid poor project planning ris0sB+
Financial impacts arising from the ris0 of
<poor project planning and analysis=
represent an a,oidable ris0+
Poor project planning. and hence substandard cost estimating. cannot be
remedied by a ris0 assessment + This is discussed further in section (+1
Ade,eloping project ris0 estimatesB+
12
Technical guide
<Q3n relation toR cost estimating 8 there *as a lac0 of Pcapability to pro,ide
adeFuate cost estimates and inabilityP to e,aluate the ,alidity of the cost data+=
The #ustralian 1ational #udit DHce 8 -eneral 9eport 1o+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 for
deli,ering Aconstructing or installingB the asset+ 3t is comprised of the base
estimate. a ris0 allo*ance and a contingency+
The objecti,e is for all projects to be deli,ered *ithin budget Aand to time
and Fuality standardsB+ This means that all projects must$
1+ be built on clear project objecti,es *ith de;ned performance outcomes
that should a,oid unnecessary changes in scope. scale and de;nitionG
and
"+ accommodate ris0 and uncertainty using robust ris0 management
techniFues 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+
Technical guide 13
Foundations for good project budgets
+ Foundations for good project budgets
Better business cases and better project budgets
The Victorian Department of Treasury and Finance ADTFB pro,ides ad,ice to
the go,ernment on implementing its asset in,estment program+ This
includes ensuring that eCecti,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,ice
bene;ts and that ,alue5for5money outcomes are achie,ed+ To ma0e such
e,aluations and pro,ide Fuality recommendations to go,ernment. reliable
cost information and standards are reFuired to ensure this baseline
information is pro,ided in the full business case+
The business case is the primary document that DTF and go,ernment use
as 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
eCecti,e ran0ing against competing priorities articulated in other
business cases
the Fuality of the implementation plans
understanding the time. Fuality and cost constraints for a project to
deli,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 *hether
bene;ts areJ*ere deli,ered+
DTF has de,eloped this guide to establish a consistent frame*or0 so
go,ernment decision ma0ing about allocating public funds is based on
good5Fuality costing information+ Poor cost estimates can lead to erroneous
judgements of ,alue for money and the relati,e merits of competing
proposals Ai+e+ the <opportunity cost of capital= criterionB. and thereby
undermine the decision5ma0ing process for achie,ing good public
outcomes+
#t all times. the project progress and the actual costs during project
deli,ery should be traceable bac0 to the project scope statement and
ultimately to the ser,ice bene;ts of the business case+These relationship
elements are illustrated in Figure (+
14
Technical guide
#n outline of the foundation points and the need5to5ha,es that ensure a good
project budget can be de,eloped for the business caseG it is e2pected that all
business cases presented to go,ernment for consideration satisfy these
foundation points
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 the
business case and associated project budget+ 9eliable project budget
estimates 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 appropriate
time and resources are pro,ided to support a Fuality outcome+
Setting a culture of cost a*areness. strong leadership and accountability
are all necessary to establish a good project budget and manage it during
project deli,ery+ Strong leadership *or0ing *ith an appropriate go,ernance
frame*or0 *ill support a sound in,estment process+ # go,ernance
frame*or0 should reinforce the principle that the public sector should
manage projects to the lo*est cost for the reFuired performance and not to
the 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,elop
a project budget that is suitable for presentation in the business case+
Ihere a business case does not satisfy the substance or intent of a
Technical guide 1-
foundation point. it is e2pected that this *ould be highlighted in the
business case. *ith the potential implications and rationale discussed+
4oundation points )
pre;budget
development
Description
1+ Clear identi;cation
of the ser,ice bene;ts to
be deli,ered
The ser,ice bene;ts for the proposed in,estment should be
clearly articulated Aincluding measures of Fuantity. Fuality
and timingB in the business case+ A9efer to the business case
guidance in the 3n,estment Eifecycle -uidelines+B
"+ Demonstrable
lin0s bet*een the
ser,ice bene;ts and the
proposed capital assets
enabling that ser,ice
deli,ery
The business case needs to pro,ide a con,incing case that
the proposed capital project *ill deli,er the identi;ed ser,ice
bene;ts in an eHcient. eCecti,e and economical mannerG
and that this capital asset option is more bene;cial than a
non5capital asset alternati,e+
+ # clear project
scope statement of the
capital *or0s in terms of$
core objecti,es of
functionality. utility
and performance
le,elsG and
speci;cations of
design and input
elements
# project scope statement is a prereFuisite for de,eloping a
robust project budget estimate+ The scope statement
comprises the core objecti,es of$
functional and performance reFuirementsG
the physical scope Ae+g+ construction inputsBG and
ser,ices to be pro,ided by the project deli,ery team+
3n articulating the physical scope. the business case needs to
assume certain design and input factors+ Moreo,er. the
impacts of sta0eholder engagement and change
management need to be included+
6+ # *ell5thought5out
conceptJdesign that
addresses the project
scope statement in an
eHcient. eCecti,e and
economical manner
#ccuracy in cost estimates is dependent upon the le,el of
in,estigation and design Afor e2ample. suHcient research
and in,estigations of site conditions and design to achie,e
eHciency in operational costsB+ 1ote that. particularly for
building and construction projects. e2perienced estimators
should be able to <price= project elements using benchmar0
cost data+ # high le,el construction timetable *ill be needed
to inform escalation+
(+ # good
understanding of current
and future mar0et
conditions
#n understanding of current and future mar0et conditions
and li0ely impact during the tendering and project deli,ery
phases is necessary+ The sponsor should understand the
mar0et=s capacity and interest for the project and the supply
chain outloo0 Aincluding mar0et depth and capacityB+ This *ill
impact on procurement method and associated ris0
allocation+
&+ # clear
understanding of the
project ris0 pro;le and
the upside and do*nside
ris0s
# clear and mature understanding of the project ris0 pro;le
including the correlation bet*een ris0s and the compounding
eCects on budget and time+ 3t should be based on input from
capable. e2perienced practitioners and is reFuired to
determine appropriate ris0 estimations+ -ood project budgets
a,oid both o,er5 and under5estimations of ris0s. and do not
factor in Aoptic ris0B premiums to ensure the appearance of
<on5budget= success+
4+ #,ailability of ,alid
benchmar0ing data from
similar projects
#ccess to rele,ant. accurate and up5to5date benchmar0ing
data. as *ell as historical information. *ill support the
de,elopment of project budgets that can pass informed
scrutiny and challenge+ This may be sourced from the client=s
o*n project program and from other state and national
agencies+
1/
Technical guide
Table 2 !ummary of foundation points pre;project budget development
De,eloping a project budget
There is considerable literature on cost5estimating practices. *ith a number
of accepted estimating principles+ Lo*e,er. much of this material is
focussed on the construction of capital assets. rather than the *hole5of5life
conte2t of the in,estment+
This guide focuses on understanding the o,erall cost estimate as a basis for
decision ma0ing and assisting in subseFuent budget management+ This
pro,ides go,ernment *ith greater assurance that project budgets are *ell
de,eloped. understood. managed and targeted to their objecti,es+
3n de,eloping project budgets. the agency needs to be a*are of the main
elements ma0ing up the project budget and their relati,ities+ Project
analysis should not focus on high5attention elements li0e ris0s at the
e2clusion of the more substantial elements li0e direct and indirect costs+
Departments should ensure they do not <load up= the estimate of project
ris0s to co,er the potential impacts of poor andJor truncated planning+
Ihere necessary there should be an indication of the le,el of con;dence in
the estimate and an appropriate adjustment to the contingency+
Table summarises the foundation points that underpin the de,elopment
acti,ities of a project budget that is suitable for presenting a business case.
and ful;l the reFuirements the 3n,estment Eifecycle -uidelines+ Ihere a
business case does not satisfy the substance or intent of a foundation
point. it is e2pected that this *ould be highlighted in the business case *ith
the potential impacts and rationale discussed+
4oundation points
)
during
development
Description
1+ The project
budget
recommended in
the business case
is representati,e
of a challenging
but achie,able
outcome for an
e2perienced and
capable project
team
The project budget must be de,eloped *ith the mindset that it
*ill enable project deli,ery through good planning and the
application of hard and smart *or0 by an e2perienced and
capable team+ #ll cost elements should be traceable to the
speci;c elements in the project scope statement. *hich in turn
has a traceable lin0 directly to the eHcient deli,ery of ser,ice
bene;ts identi;ed in the business case+
-o,ernment decision5ma0ers need con;dence that the project
budget is not inclusi,e of costs that inappropriately reduces the
<optic ris0= of a budget o,er5run+ Con,ersely the project budget
should be realistic and not o,erly impacted by <optimism bias=+
Technical guide 11
:2perience suggests there is need for a number of analytical. planning and
thin0ing acti,ities to be underta0en to de,elop a good5Fuality business case+
Truncating the timeline or the number of acti,ities *ill lead to a suboptimal
outcome+ :2pediency is damaging to good project planning+
3n short. short cuts are disastrous+
4oundation points
)
during
development
Description
"+ # robust
estimating
procedure
Documenting. implementing and conforming to a comprehensi,e
estimating procedure that is industry best practice+ This *ill
pro,ide a good basis for establishing a best5in5mar0et project
budget along *ith its assumptions+
+ # structure
and presentation
format of the base
cost estimate that
promotes
understanding by
decision5ma0ers
#n appropriate *or0 brea0do*n structure and terminology should
be used consistent *ith this guide. and applied consistently to
promote understanding by decision5ma0ers+ # *or0 brea0do*n
structure ensures that no parts of the estimate are omitted or
double counted. and allo*s for comparisons to similar programs
and systems+
The documentation should be easy to use and comprehensi,e to
inform the reader=s understanding of the assumptions and its
strengths and *ea0nesses+
6+ Project ris0s
are modelled on
the basis that
responsibility is
assigned to the
best and most
capable party
3dentifying and Fuantifying project ris0s must proceed on the
basis that all necessary and prudent in,estigations Ae+g+
geotechnical. regulatory planningB ha,e been done+ Moreo,er. the
ris0 modelling must be on the basis that the party best positioned
to manage the ris0 *ill ta0e responsibility for that ris0+
The go,ernment decision5ma0ers need con;dence that the
project ris0s are not modelled *ith premiums loaded in <just to be
sure=+
(+ Senior
management
attention to the
preparation and
detail of the
estimate
SuHcient senior management attention to the Fuality of inputs
and the approach to preparing estimates to ensure adherence to
procedures and processes+
3mportant aspects to consider are$
using e2perienced and suHcient resources to perform the
*or0 reFuired to ensure the reliability of estimatesG
underta0ing necessary analysis and assessment to determine
an appropriate base ris0 allocation and contingency
allo*anceG
using benchmar0ing and cost databases eCecti,ely to ,alidate
cost estimatesG
timely pro,ision of informationG and
reporting ho* the estimate is prepared including assumptions.
Fuali;cations and e2clusions+
12
Technical guide
4oundation points
)
during
development
Description
&+ #ppropriate
independent
re,ie* and sign5oC
There should be a process of independent re,ie* by appropriately
e2perienced personnel in order to determine that the cost
estimate$
captures all the rele,ant scope of the project scope statementG
reSects. as best as possible at the business case stage. good
practice design solutions. construction methodology.
constraints. program scheduling etc+G
the cost estimation process is prepared follo*ing best
practiceG and
is reasonably based on professional judgement and
e2perience and there is con;dence that it can be achie,ed
through good planning and application of hard and smart
*or0+
AThe cost estimation process should be subject to an appro,al
process based on consistent. clear lines of responsibility and
accountability to ensure costing standards apply to any budget
information+
The importance of independent review and sign o:
increases commensurate with the scale and comple<ity of
the project+B
4+ #ppropriate
change
management for
cost estimates
#ppropriate reporting. management and appro,al of changes to
cost estimates. as they are being de,eloped. should be in place to
enable eCecti,e communication and accountability+
)+ -ood5Fuality
documentation
that e,idences the
project budget
estimate
The project budget estimate documented in the business case
needs to clearly articulate and ,alidate the project scope
statement. state the 0ey parameters. assumptions and
constraints of the estimate. and pro,ide a statement of the
reliabilityJreproducibility of the budget estimate+
# business case must pro,ide a le,el of con;dence to decision5
ma0ers that their decision. based on in,estment bene;t$cost
ratio. ,alue for money and <opportunity cost of capital=
considerations. is not in,alidated by a poor budget estimate+ The
planning. in,estigation. design de,elopment and ris0
identi;cationJFuanti;cation necessary at this stage must be of a
le,el to gi,e this con;dence+
'+ Process and
system re,ie*s for
continuous
impro,ement
9egular process and system re,ie*s conducted during the budget
de,elopment. as *ell as project learnings from other similar
projects should be shared to increase corporate 0no*ledge. and
encourage and facilitate continuous impro,ement+
Table 3 !ummary of foundation points to be satisfed during the project
budget development
Culture. incenti,es and go,ernance
Ihile the go,ernance of project budgets during deli,ery is addressed
brieSy. the de,elopment and implementation of a go,ernance frame*or0 is
out of scope for this guide Ausers should refer to the separate technical
guide on project go,ernanceB+ Lo*e,er. the follo*ing discussion is pro,ided
to inform the distinction made in the guide bet*een base ris0 allocation
and contingency and their management Arefer to section &+B+
Technical guide 17
#ny go,ernance frame*or0 that is eCecti,e must gi,e the go,ernment
con;dence that the project can be successfully deli,ered as planned and
for the lo*est cost+
LM Treasury in the ?nited Oingdom A?OB in its 3nfrastructure Cost 9e,ie*
report states that outturn costs rise because the processes of budget
preparation. appro,al and management do not pro,ide eCecti,e incenti,es
to minimise the outturn cost+ 3n particular. insuHcient consideration is
gi,en to the assessment. placement and management of the project=s
contingency+ There *as a ;nding that many large infrastructure projects
tend to be managed *ithin a Fuoted budget. rather than aiming at lo*est
cost+ 3f the budget includes contingencies this tends to be ,ie*ed as
<a,ailable= budget and should be spent+
The report identi;es that successful projects tend to share common
characteristics such as$
strong go,ernance and culture to reduce costs. clear roles and
responsibilities including role separation bet*een the sponsor. funder
and the deli,ery agencyG
*or0ing to the principle that public oHcials should manage projects to
the lo*est cost for the reFuired performance. and not to full project
budget e2penditure or ma2imum allo*able aCordabilityG and
eCecti,ely allocating and controlling the project contingency by the
funder rather than the project deli,ery oHce+
Source$ 3nfrastructure Cost 9e,ie*. Technical 9eport LM Treasury. ?O. December "!1!
9ecent audit reports from the ?nited States
and ?O
6
suggest there are
signi;cant opportunities for go,ernment impro,ement in setting realistic
project baselines. managing ris0 and reducing the e2cessi,ely high costs of
constructing infrastructure+ 3n the ?O alone. this estimated sa,ing is U"! to
U! billion o,er the ne2t decade+
Lo* much *ill this program really costV Cost :stimating and #ssessment -uide$ Best
Practices for De,eloping and Managing Capital Program Costs A-#D5!'5SPB. " March "!!'
6
3nfrastructure Cost 9e,ie*. LM DTFJ 3nfrastructure ?O. December "!1!
2%
Technical guide
<Iithin the P Qcapital *or0s programme enabling the "!1" Summer Dlympics
hosted by EondonR there is a ,ery clear delineation of accountability for cost
control and the management of contingency budgets+ #ll contingency is
clearly identi;ed as either <project= or <program= and either <in scope=
Aa,ailable to the projectB or out of scope Afunder=s contingency is not ,ie*ed.
as is often the case. as a,ailable budgetB+ # strong go,ernance structure is
built around the process for allocating contingency *hich. combined *ith
eCecti,e incenti,isation at all le,els. has instilled a culture of cost a*areness
and accountability+ The achie,ement of cost and ris0 reductions at the deli,ery
le,el frees contingency for reassignment *ithin the programme. subject to
justi;cation and appro,al+ Success in part has been dri,en by the clarity of
decision ma0ing and commitment to ensuring that the sponsor *as set up as
A base cost esti&ate
founded on a poorly de)ned
scope is no &ore than an ill*
infor&ed guess
De,eloping base cost estimates
6+ De,eloping base cost estimates
The base cost estimate represents the largest proportion of costs and has
the greatest impact on project budget accuracy+ 3t is the largest and most
comple2 component and the foundation on *hich ris0 and contingency are
determined+ 9ecently it has been some*hat neglected. *ith the focus
shifting to ris0 estimation soft*are+ The conseFuence is that base cost
estimates ha,e often lac0ed the methodology and accuracy needed to
produce the precise and reliable project budgets essential for business case
decision ma0ing+
Lo*e,er. accurate base cost estimates are achie,able if a disciplined and
rigorous approach is ta0en to their preparation using specialist 0no*ledge+
:ssential ingredients for an accurate base cost
estimate
The accuracy of the base cost estimate *ill increase to acceptable
standards if these four elements are employed in a systematic and
integrated manner+
1$ Clearly de;ned project scope
2$ Competent and e2perienced estimators using rele,ant benchmar0 cost
data 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 an
accurate base cost estimate+ #n accurate estimate relies on the project
being clearly de;ned+ This doesn=t mean that e2tensi,e design information
is reFuired. 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 Aincluding
dra*ings. speci;cations and calculationsBG
construction methodsG
Technical guide 21
Description of a base cost estimate for a project Amainly focused on a building
or construction projectB and the e2pected standards to be applied to its
preparation Arefer also to separate business case guidance for 3CT projectsB
program datesG
project performance objecti,esG
project ris0s that may be encounteredG
all necessary and prudent in,estigations to complete the project
de;nitionG
the proposed method of deli,ery Adesign and construct. alliance. public8
pri,ate partnership. etc+BG and
a description of those *or0s Aother*ise associated *ith the projectB
speci;cally e2cluded or not in scope+
# number of recognised classi;cations are a,ailable that describe the le,el
of project de;nition maturity needed to achie,e diCering le,els of accuracy
of base cost estimates+ #gencies should ha,e regard to those classi;cations
to achie,e an acceptable standard of business case for consideration by
go,ernment. including the follo*ing reFuirements+
aB The project de;nition in the project scope statement should be
de,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 this
range to de,elop the reFuired base cost estimate for the business
case+ The greater the agency 0no*ledge. e2perience and trac0 record
in deli,ering the project type. the more acceptable it is to *or0 to a
project de;nition at the lo*er range of de,elopment+
8 For similar reasons it can be e2pected that lo*5ris0 projects could
tolerate a lo*er le,el of project de;nition than high5ris0 projects due
to their heterogeneous nature Asee section (+1B+
bB The project scope statement should enable the base cost estimate to
be prepared to *ithin a W( per cent le,el of reliability+
8 This is based on the principle that the cost estimator is costing the
project scope statement rather than predicting *hat the actual outturn
project cost may be+
8 This e2pected le,el of accuracy should be capable of repetition by
another independent and competent cost estimator. producing a base
cost estimate from the same project scope statement and the same
<assumption boo0= Ai+e+ a register of 0ey assumptions li0e timings.
methodology etc+B+
8 3n this situation it *ould be e2pected that the t*o estimates *ould be
*ithin W( per cent of each other+ 3f this cannot be achie,ed. then
additional re,ie* may be reFuired to con;rm the project scope
statement. the assumptions boo0 andJor the methodology used+
During business case de,elopment. there may be speci;c scope items for
*hich full details are not a,ailable+ For e2ample. the business case
recommends the inclusion of art*or0 for the e2terior of a ne* signi;cant
public building. *hich *ill be commissioned follo*ing an open competition+
(
Ihile. as noted earlier. there are ,arious classi;cations of estimates based on a
percentage of project de;nition. there is a dearth of guidance on ho* to interpret that
percentage and it remains a matter of judgement for the agency+ Lo*e,er. in all cases the
maturity of the project scope statement must enable preparation of a base cost estimate
*ithin a W( per cent le,el of reliability+
22
Technical guide
Ihile the reFuirement is 0no*n. the cost and nature of the reFuirement
cannot be fully detailed for the business case+ 3n this case. the agency
should propose Aand highlight as a pro,isional sumB an upper cost limit in
the base cost estimate for decision5ma0ers to consider+ Decision5ma0ers
may ma0e such funding single purpose and sa,ings not a,ailable for re5
allocation to other project *or0s or issues+
Competent. e2perienced estimators prepared to certify
their *or0
The base cost estimate should be founded on a project scope statement
that is 1!8"! per cent of complete de;nition+
&
This lac0 of full de;nition represents a challenge to producing an accurate
base cost estimate+ 3t *ill necessitate estimators *ho are e2perienced in
their ;eld and able to e2ercise sound judgement and 0no*ledge to bridge
both the ine,itable information gaps and ensure eCecti,e integration of the
base cost estimate *ith the project ris0 assessment+
1ot*ithstanding this lac0 of full de;nition. it is clear that e2perienced
estimators are capable of producing highly accurate estimates as
e,idenced by lump5sum design and contract tenders A*hich include both
base cost estimates and project ris0 estimatesB *here the design is often
only at the "!8! per cent le,el of de;nition+
Describing and de;ning an appropriate standard of e2perience for
estimators 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 to
a simple speci;cation+ Therefore the trac0 record and industry reputation of
the 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 eFuate to
1!8"! per cent of design eCort+ The focus in this guide is on design de;nition that enables a
W( per cent le,el of reliability for the base cost estimate+ For e2ample. additional eCort may
need to be e2pended on high5ris0 design elements in comparison *ith lo*5ris0 design
elements that may be as costly. or e,en more costly. in construction terms+
Technical guide 23
#n ill5de;ned project scope statement *ill result in signi;cant uncertainty and
misunderstanding. *hich *ill result in signi;cant diCerences in e2pectations at
contract a*ard+ This *ill lead to unpredictable increases in costs andJor poor
outcomes+
!kills and capability for base cost estimating
:stimating the base cost is comple2 and. *hen done properly. it reFuires a
high le,el of professional s0ill and judgement+ :ssentially t*o types of
engagements may be underta0en$
De,eloping the base cost estimate
The base cost estimate is prepared by senior e2perienced cost estimators *ho
ha,e a trac0 record of successful estimation practice+ They are reFuired to
understand and ha,e rele,ant e2perience for the project they are engaged on+
They need to be recognised by peers as sho*ing *isdom and 0no*ledge of the
current mar0et and future trends+
9e,ie*ing the base cost estimate de,eloped
PeerJindependent re,ie*s of the base cost estimate should be carried out by
personnel *ith appropriate estimating and estimating management
e2perience+ -enerally a minimum of ;,e years= estimating e2perience in the
speci;c sector *ould be e2pected. and preferably additional speci;c industry
e2perience in other sectors+
3n addition to the prereFuisite s0ills and e2perience. it is e2pected that the
estimator should be prepared to certify the Fuality of their estimate.
e2pressly ac0no*ledging the ad,erse conseFuences for go,ernment should
the resultant base cost estimate not address the le,els of accuracy
e2pected for business cases+ # suggested template for estimator sign5oC is
pro,ided in #ppendi2 B+
# robust estimating methodology
To pro,ide the accuracy e2pected of base cost estimates adopt a robust
estimating methodology that is consistent *ith an industry5recognised
structure+ The estimating methodology should entail a hybrid of <;rst
principles= and <unit rates= approaches
4
for estimating the direct costs.
indirect costs Aincluding design feesB and o*ner=s costs+
#s a guide this hybrid could be a (!$(! ratio of ;rst principles$unit rates.
recognising that this ratio *ill be project speci;c and *ill ,ary accordingly+
More eCort using a <;rst principles= approach *ould be e2pected for the
high5,alue andJor high5ris0 elements and <unit rates= for the lo*5,alue
andJor lo*5ris0 items+ =sing simple rules of thumb5 such as >- per
cent allowance for owner0s costs05 will not provide su?cient
accuracy,
The method by *hich the estimate is produced must be appropriate both
for the type and the design de,elopment phase of a project+ 3n early design
it is unusual to try to brea0 costs do*n to <;rst principles=G instead. it is
more normal to ha,e unit rates dra*n from similar benchmar0 project
types+
For e2ample. the estimate for a ne* building might initially be based on a
KJm
"
of gross internal Soor area+ #s the design de,elops this might then be
disaggregated into elemental costs Asingle5;gure estimates for each building
elementB. and then ;nally bro0en do*n further to describe the costs Aunit
ratesB for each part of that element or sub5element+ #t each stage the le,el
of detail in the cost plan should be proportional to the le,el of design
4
Costing items in ;rst principles in,ol,es brea0ing the unit cost such as KJm
"
into labour.
plant and materials+
24
Technical guide
information a,ailable+ For ci,il engineering projects it is common to
separately identify costs for labour. plant and materials because each is
often sourced in large Fuantities or for long durations+
# clear. consistent. transparent format for both the presentation and
underlying structure of the base cost estimate is necessary to facilitate a
constructi,e and independent interrogation. and benchmar0ing to
comparable projects. by both the peer re,ie*er and the senior responsible
o*ner AS9DB+ The summary presentation of the base cost estimate should
follo* the format outlined in #ppendi2 #+
3nsightful and meaningful re,ie*s
:nsure that insightful and meaningful re,ie*s are underta0en by both
peers and senior management. e,ery base cost estimate reFuires rigorous
re,ie*s+ These re,ie*s should occur at t*o le,els+
1+ *eer review by another estimator+ This in,ol,es a <line by line=
re,ie* by an alternati,e estimator other than the original estimator+ This
may be someone *ith necessary Fuali;cations and e2perience from
*ithin the same agency or a professional cost estimation ser,ice
pro,ider+ The peer re,ie* should result in a W( per cent le,el of ,ariation
from the original estimate+ Some areas that this re,ie* might focus on
include$
computational chec0ing 8 to ensure all calculations are correct and
subtotals are carried through to the grand totalG
thorough and correct measurement 8 to ensure items are not omittedG
assumptions 8 *here design information is scarce. the estimator may
be reFuired to ma0e assumptions about the design 8 these should be
clearly set outG
inclusions and e2clusions 8 ensuring the estimate clearly de;nes *hat
it includes and e2cludes Ae+g+ land costs. professional fees.
subcontract design. art*or0BG and
correct TP3s 8 ensuring the project estimate is set at the correct point
in time+
"+ 'eview by the !'@+ Ihile preparing the base cost estimate reFuires
specialist and e2perienced s0ills. it is also necessary that the agency
re,ie*s the base cost estimate from a business perspecti,e to ensure
that estimate reSects the proposed capital asset in terms of the project
scope statement. *hole5of5life considerations and ser,ice bene;ts+ This
re,ie* ensures the S9D is familiar *ith the base cost estimate and
comfortable that it represents the best5in5mar0et pricing. and is
defensible+
Technical guide 2-
LM Treasury 3nfrastructure ?O 8 3nfrastructure Cost 9e,ie*. Main 9eport. December "!1!
Departures from the outline of these steps. *hich may arise from
departmental project e2perience andJor speci;c project characteristics.
should be e2plained and justi;ed in terms of best5for5the5State outcomes
and the li0ely impact on the con;dence le,el of the project budget+
2/
Technical guide
<#,oid o,er speci;cation. the application of unnecessary high standards or
speci;cations and usage of bespo0e or Xgold platedY solutions *hen oC the
shelf design is suHcient+ :ncourage more outcome based speci;cations and a
greater consideration of ,alue for money. deli,ering cost certainty and
programme certainty+=
De,eloping project ris0 estimates
(+ De,eloping project ris0 estimates
Thin0ing about project ris0s
1ot all capital projects are the same+ Procuring infrastructure is ,ery
diCerent to building projects. diCerences that signi;cantly impact on the
si@e and nature of project ris0s+
.uildings&
Building projects ha,e many repeatable structural elements that
<ha,e been done before= and can be easily benchmar0ed on cost+
:2tensi,e use of arti;cial or manufactured materials lends to
predictability+ Moreo,er. buildings are typically constructed from the
ground up. in,ol,ing minimal interface *ith the natural en,ironment.
adding further predictability+
Anfrastructure&
3nfrastructure projects are largely heterogeneous. generally *ith
critical elements that are structurally diCerent and freFuently in,ol,e
the <not been done many times before= factor+ The e2tensi,e use of
naturally occurring materials. the e2tensi,e interface *ith other
net*or0 assets. the Aoften unpredictableB natural en,ironment. high
e2posure to ,olatile costs of labour. hydrocarbons. etc+ tends to lead
to a relati,ely higher ris0 pro;le+
:mpirical e,idence suggests that cost o,erruns and delays are often a
feature of these projects+ Cost o,erruns and bene;ts shortfalls of (!
per cent are relati,ely commonG cost o,erruns o,er 1!! per cent are
not uncommon+ 3n one study of major projects in "! countries. nine
out of 1! projects had cost o,erruns+
# common misconception is that the idiosyncratic nature of
infrastructure means that project ris0s often crystallise and that this
is just an unfortunate do*nside+ Dften infrastructure projects are
attributed to the cause of <nation building= and this in some *ay
justi;es this do*nside. the long5term bene;ts d*ar;ng the cost and
time o,erruns+
?nfortunately. these ,ie*s about infrastructure can be seen as a licence for
poor planning in all capital projects+ The reality is that all projects in,ol,e
ris0G large infrastructure projects ha,e a poor reputation for coping *ith
Technical guide 21
D,er,ie* of project ris0s. and discussion of the diCerent stepsJphases and
techniFues of project ris0 estimates. ho* to set the base ris0 allocation and
contingency. and underta0ing a sense Aor realityB chec0 on *hether the
estimates are appropriate
ris0. often resulting in time and cost o,erruns+ Lo*e,er. this is not an
ine,itable result of in,esting in ci,il and process infrastructure Aor buildings
for that matterB+
There needs to be a distinction dra*n bet*een project ris0s and poor
project planning ris0s$
*roject risks are the ris0s associated *ith implementing the project.
for e2ample. a contaminated site. regulatory planning failure to grant a
right of *ay or materials defect+ These are the residual ris0s that
projects 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 an
appropriately robust and rigorous business case and procurement
process. 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. as
further project 0no*ledge is gained+ Ihere,er possible identi;ed ris0s
should be mitigated by ta0ing steps in the design or through project
management initiati,es+ #ssessing ris0s should therefore focus on
<residual= ris0s 8 those that cannot be mitigated fully at any gi,en
stage+
*oor project planning risks most often crystallise on projects *hen
the DTF 3n,estment Eifecycle -uidelines ha,e not been applied
properly+ These ris0s are most often associated *ith Sa*ed and
truncated project planning. and typically see signi;cant scope changes
and other surprises during the tender process andJor post5contract
a*ard+ Poor project planning ris0s can be catastrophic. resulting in
e2tensi,e delays and signi;cant cost o,erruns+ AIell5documented
e2amples include the Sydney Dpera Louse$ deli,ered 1! years later
than originally planned at a cost o,errun of 1.6!! per cent+B
# ris0 professional should assist in mo,ing beyond <group thin0= outcomes
and pro,ide a project ris0 estimate that is neither optimistic nor
22
Technical guide
Optimism bias: This describes the tendency for base costs and ris0s to be
systematically underestimated during the business case de,elopment phase+
This results in project budgets based on optimism rather than on a rational
*eighting of gains. losses and the considered li0elihood that ad,erse ha@ard
e,ents may impact on the project+
#ote& 3t is unacceptable to use arti;cially inSated bene;ts andJor deSated
costs as a *ay of ma2imising the chance of a business case attracting funding
support+
essimism bias: There is also another alternati,e scenario. especially *hen a
project. arising from an urgent and compelling public interest need. has been
pre5announced and committed to before ;nalisation of a comprehensi,e
business case+ 3n this case it is easy for an agency to o,erestimate the costs.
ris0s and time reFuired+
#ote& 3t is unacceptable to arti;cially o,erestimate costs. ris0s and time as a
*ay of ma2imising the chance of the project being deli,ered on budget and on
time+
Bautionary note& Ihile these biases are a recognised <psychological
pessimistic+ -ood planning reFuires full transparencyG agencies must be
able to demonstrate the *or0 done in de,eloping the project budget in the
business case Asee section (+"B+
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! per
cent <contingency= onto the base cost estimate to create the project
budget+ 9ather. best practice is that all signi;cant project ris0s are
identi;ed. usually though *or0shops based on the input of capable and
e2perienced practitioners. and then each is dimensioned in terms of
li0elihood and potential conseFuence+
=ncertainty
# further le,el of analysis to ris0 identi;cation is the concept of uncertainty+
?ncertainty is the le,el of con;dence that can be put on the identi;cation
and cost estimation of the potential ris0 conseFuence+ The follo*ing
categories of e,ents are a useful guide to the concepts of ris0 and
uncertainty+
The kno+n kno+ns$ 3f potential ris0 e,ents can be Fuanti;ed Ai+e+ in
terms of their li0elihood and the potential conseFuenceB. they are
addressed in the base ris0 allocation and contingency+ The 0no*n
0no*ns are normally referred to as the project ris0s+ The greater AlesserB
the con;dence of estimating li0elihood and potential conseFuence. the
more AlessB li0ely that these estimates of the 0no*n ris0s *ill be correct+
The kno+n unkno+ns are 0no*n ha@ard e,ents *ith a *ide range of
signi;cantly diCerent possible outcomes+ These potential ha@ards can be
identi;ed. but there is no basis upon *hich to estimate the li0elihood of
the e,ent occurring andJor the conseFuence if it does occur+ 3n capital
projects. such kno+n unkno+ns commonly relate to e,ents that can be
identi;ed Ae+g+ ad,erse ground conditionsB. but there is little a,ailable
information Ae+g+ site in,estigationsB on *hich to Fuantify either the
chance that the e,ent might happen or the impact on the costs of the
project if it did+ These e,ents are so uncertain that they can not be
Fuanti;ed *ith the con;dence that *ould classify them as project ris0s+
)

Further in,estigation on these e,ents may pro,ide the information
reFuired to increase the con;dence on the estimates of probability and
impact to allo* these e,ents to be classi;ed as ris0s+ Dften this is not
only desirable but necessary to underta0e this *or0 to satisfy the
foundation points for budget de,elopment+
'

Dften the diCerence bet*een kno+n kno+ns and kno+n unkno+ns is the
amount of researchJin,estigation underta0en+ ?nless *or0 is underta0en
)
To ensure clarity. <project ris0s= are ha@ards that can be Fuanti;ed Ai+e+ the kno+n kno+nsB+
La@ards that can=t be Fuanti;ed or perhaps e,en identi;ed are true uncertainties Ai+e+ the
kno+n unkno+ns and the unkno+n unkno+nsB do not attract a funding pro,ision in project
budgets and should such e,ents crystallise then the agency must apply for supplementary
funding through the normal budget processes of go,ernment+
'
The inclusion of kno+n unkno+ns as project ris0s Athe kno+n kno+nsB is not appropriate+
The le,el of accuracy is lo*. and therefore the inclusion *ould unreasonably s0e* or inSate
the total project ris0 estimate+ 3n a tendering stage. *here bidders are prepared to
competiti,ely price and ta0e on the management of project ris0s. costing kno+n unkno+ns
is more a0in to ta0ing a gamble on the price. and *ould attract price premiums andJor ha,e
unattracti,e conseFuences during project deli,ery+
Technical guide 27
to dimension kno+n unkno+ns to the standard of ris0 analysis outlined in
section (+. they should not be included in the project budget+
The unkno+n unkno+ns are ris0s that cannot be reasonably identi;ed
and so are not included in the ris0 estimates+ There is no allo*ance or
pro,ision for these in the project budget and if these types of e,ents
crystallise then the agency must apply for supplementary funding
through the normal budget processes of go,ernment+ These e,ents are
also 0no*n as uncertainty+
-ood planning is about reducing the le,el of uncertainty 8 it can ne,er be
eliminated+ Ihere the e2tent of uncertainty signi;cantly reduces the
ability to accurately price a proposal. thought should be gi,en to building in
options that allo* for informed decisions to be ta0en *hen uncertainties
are resol,ed+ For e2ample. this could in,ol,e further research. pilot studies.
staged de,elopment or termination options+
3%
Technical guide
Principles of project ris0 estimation
Through this guide agencies are encouraged to adopt ris0 analysis
processes that are robust and defensible. including the use of a broad
reference of similar and e2emplary projects that ,erify the ris0 analysis as
reasonable Ai+e+ the sense chec0B+
The process for project ris0 estimation should be based on the follo*ing
principles$
identifying and Fuantifying project ris0s follo*s best practice.
including
Technical guide 31
3<ample of a known unknown ) e<tent of ground contamination
#n agency has conducted research of land and historical records and
identi;ed that the site of a future construction project *as used to
manufacture lead batteries in the early part of the 1'!!s+ The agency
follo*ed up on this documentary disco,ery by engaging the specialist
ser,ices of an en,ironmental engineering ;rm+ This <technical ris0 e2pert=
undertoo0 bore samples and generally in,estigated ho* underground
conditions may ha,e impacted on the mo,ement of any soil contamination to
the present day+
#fter recei,ing the in,estigation report. the agency=s project ris0 analysis
team concluded that identi;ed soil contamination *ould cost K"+( million to
remediate+ Lo*e,er. once site e2ca,ations are *ell ad,anced. there are t*o
li0ely scenarios$
there is no additional contaminationG and
there is additional contamination if suspected *ater table So*s e,entuated+
The e2pected cost of remediation arising from the second scenario is an
additional K1+" million+
3n this case. it *ould be appropriate for the agency to include K"+( million for
remediation in the base cost estimate. and identify a project ris0 of K1+"
million. *hich the funding authority may place in the base ris0 allocation or in
the contingency+ ADn the other hand. if the ris0 analysis is that there is a (!5
(! chance of the *ater table issue occurring. then this *ould suggest K!+&
million in the base ris0 allocation and perhaps an additional K!+& million in
the contingency+B
Further. there may be a possibility that cannot be Fuanti;ed *ith any
reasonable con;dence that a geological fault e2ists. do*n *hich the
contamination has been able to in;ltrate to a deeper le,el+ 9emediation
*ould cost more if this *ere the case+ 3f fault lines *ere 0no*n to e2ist in the
local area then this uncertainty may be a real issue for the project and it
*ould be appropriate to underta0e further site in,estigation. such as seismic
sur,eying. in order to gather the information that *ould eliminate this
uncertainty and either render the e,ent as a cost or a ris0 estimate+
3f no 0no*n fault lines e2ist in the locality and the geological structure made
it e2tremely unli0ely for such geological structures to e2ist then it may not be
*orth*hile going to the e2pense of the sur,ey+ The e,ent *ould remain as an
uncertainty. or a 0no*n un0no*n if identi;ed and an un0no*n un0no*n if
not identi;ed+ :ither *ay it is not e2pected that such e,ents should be
costed pro,ided that the appropriate le,el of in,estigation has been carried
out in accordance *ith these guidelines+
using appropriate in,estigation to understand and treat or control
ris0G
employing project management capability commensurate *ith
the challenges of the projectG and
allocating ris0s to the party best able to manage the ris0 Aand
therefore price itBG
the estimate discloses all material assumptions and does not <double
count=G
the estimate is a robust ;gure *ithin *hich the project can be
deli,ered through good planning and eCort in,ol,ing acti,e and
capable management Aa robust estimate is not one that deli,ers a
project inside of its estimate simply because the estimate is pitched
highBG
,alue for money for the State is a critical criterion. *ith the State
see0ing the lo*est *hole5of5life cost for the reFuired performance of
the infrastructure. noting that the inclusion of Se2ibility may represent
,alue for moneyG
good planning and discipline is maintained to minimise optimism and
pessimism bias in determining the project ris0 estimationG and
departures from this guide are e2plained and justi;ed in terms of best
for the State outcomes+
?nderta0ing a ris0 analysis
Consideration of ris0 is hea,ily reliant on good judgement and e2perience+
The <tools= are a means of facilitating the thin0ing process. concisely
capturing that judgement and ma0ing appropriate decisions+ The important
part is the Fuality of thin0ing and deliberation that goes into considering
ris0+ Best practice ris0 analysis has substance o,er form+ Follo*ing the
process on its o*n does not produce robust ris0 estimates+ #gencies should
ensure they engage *ell5Fuali;ed and e2perienced professionals capable of
pro,iding the depth of input reFuired to prepare ris0 estimates that do ha,e
substance+
32
Technical guide
The follo*ing bo2 identi;es the s0ills that *ould be e2pected from such
professionals+
De,elopment of project. and more speci;cally. project procurement
objecti,es and underta0ing a mar0et analysis are important considerations
in ris0 analysis+ This ensures the ris0 analysis deliberations are guided by a
set of principles rele,ant to the project+ These guiding principles should be
based on the follo*ing Fuestions$
Ihat are the main objecti,es that *e are afterV
Ihat is our tolerance for de,iation from these objecti,esV
Lo* does that help us set a limit on materialityV Ai+e+ ho* big should a
ris0 be before it=s *orth consideringVB
Ihat is the time hori@on for considering ris0V
Ihat are the ris0 issues generic to this areaV
Ihat ris0 e,ents are precedents for this type of projectV
Ihat controls can *e ta0e for granted in such a projectV Ai+e+ all
contracts ha,e a number of clauses intended to protect both parties from
certain ris0 e,entsB+
The process of ris0 analysis is a large subject that can be organised in
diCerent *ays+ Best practice ris0 analysis *ill proceed through the follo*ing
steps$
1+ identifying project ris0sG
"+ Fuanti;cation of project ris0sG
+ analysis of project ris0s to de,elop ris0 management
strategiesG
6+ ,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+
Technical guide 33
!kills and capability for leading risk analysis
9is0 analysis is comple2 and. done properly. it reFuires a high le,el of
professional s0ill and judgement+ :ssentially t*o types of s0ills are reFuired$
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 technical
disciplines reFuired to deli,er the project Ae+g+ design and construction
capabilityB such as architects. engineers and cost estimators+
Deli,ering a ris0 analysis reFuires both s0ills from formal learning and
considerable professional judgement. *hich can only be acFuired by
e2perience+
9is0 estimation is by its ,ery nature uncertain+ Budget appro,als reFuire a
le,el of con;dence that ris0 estimates are de,eloped to a professional
standard+ #nalogous to the legal test applied to claims of negligence. the
standard e2pected is that of a s0illed person e2ercising and professing to ha,e
that specialist s0ill+
,est practice risk
&anage&ent allocates
risks to the party best
able to &anage the risk
-and therefore price it at
the lo+est cost to the
pro#ect.
Figure & The phases in a typical ris0 analysis
Figure & is included as an e2ample of a best practice standard for
estimating ris0s generally suitable for medium5si@ed projects+ For simpler
projects 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 or
high5ris0 e,ents+ #t the stage that the ris0 analysis is being underta0en. the
base cost estimate should already be in e2istence and is used as the basis
for doing ris0 analysis+
Si@ing project ris0s
The outcome from adopting the processes in steps 18 Aoutlined in Figure
&B is a robust ris0 register that has ris0 e,ents identi;ed+
1!
The ris0s should
be ran0ed relati,e to each other. using Fualitati,e ris0 analysis tools. and
ris0 management controls considered Aincluding their li0ely impact on the
Fualitati,e ran0ing of the ris0sB+ This pro,ides the essential foundation on
*hich the Fuantitati,e estimates in step 6 can then be established+
3t is critical that estimates are prepared on the basis of
best practice ris0 management+ Best practice ris0
management allocates ris0s to the party best able to
manage the ris0 Aand therefore price it at the lo*est cost
to the projectB+ Pro,ided this principle is rigorously
adopted agencies *ill ha,e a solid foundation to a,oid
1!
1ote that a ris0 register does not identify ris0 outcomes Ae+g+ the cost o,errun associated
*ith the disco,ery of poor ground conditionsB. rather it is a list of ris0 e,ents Ae+g+ <poor
ground conditions=B+
34
Technical guide
either optimism or pessimism bias+ This principle applies irrespecti,e of the
procurement strategy adopted for the project+
Depending on the comple2ity of the project. diCerent analytical tools may
be appropriate to Fuantify and analyse the ris0s Asteps " and B+ The
agency should ensure that the right analytical tools are used.
commensurate *ith the comple2ity and ris0iness of the project+
# selection of the diCerent ris0 estimation techniFues are described in Table
6+
TechniFue Ihen to use
Simple
scenario
analysis Aor
e2pected
,alue
techniFueB
Small projects. often repeatable. that are *ell understood and relati,ely
simple to implement+ The ris0s can be readily identi;edJanalysed using limited
time and resources+
ASimple scenario analysis Aor the e2pected ,alue techniFueB in,ol,es
considering diCerent possible scenarios. estimating the li0ely eCect they *ill
ha,e on the project and the probability they ha,e of occurring+ The le,el of
e2posure on a particular ris0 is gi,en by the eCect the scenario has on the
project. multiplied by the probability of its occurrence+B
M:9#
Amultiple
estimating
using ris0
analysisB
Small to medium5si@ed projects *here ris0 is a feature but relati,ely *ell
understood and not ,ery material to the project budget+
AM:9# analysis is the e2tension of the simple scenario analysis techniFue to
consider multiple diCerent possible scenarios. estimating the li0ely eCect
these *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 combined
eCect each scenario has on the project. multiplied by the probability of its
occurrence+B
Sensiti,ity
and scenario
analysis
Typically used to test underlying assumptions and in particular *here simple
and M:9# analysis is used+ The test in,ol,es changing the underlying
assumptions and analysing the sensiti,ity of total ris0 estimates to that
change+ Sensiti,ity and scenario analysis can also be combined *ith
stochastic simulation. although less often because simulation automatically
builds in sensiti,ity and multiple scenario considerations+
Stochastic
simulation
techniFues
li0e Monte
Carlo or Eatin
Lypercube
Medium to large5si@ed projects for *hich the ris0 analysis is important+
Suitably Fuali;ed e2pertise and re,ie*ers must be used to conduct and ,erify
the use of such techniFues+
Table 6 :2amples of ris0 estimation techniFues
Determining ris0 estimates is best based on a combination of professional
judgement and pre,ious project data A*here a,ailable and pro,en to
represent best practiceB+ The result should be presented as a range of
outcomes. clearly stating the sensiti,ity of the estimates to the underlying
assumptions and the le,el of con;dence the agency places on the
estimates+
9is0 identi;cation and cost estimation are more uncertain in the earliest
stages of a project. *hich is also *hen decisions of greatest impact are
often made+ #n agency and its e2pert ad,isers should operate as a single
team to a,oid any institutional shortcomings of incomplete commitment
Technical guide 3-
and inconsistent decisions *hen it comes to estimating ris0s and
contingency+ The need for judgement should not be used as an e2cuse for
failing to gi,e adeFuate consideration to a formal analysis of project ris0+
!isk estimation is essentially about compiling realistic forecasts
and answers to "uestions that start with #what if$%
Clearly one si@e doesn=t ;t all+ Lo*e,er. for the majority of public sector
projects that are *ell in,estigated and analysed in the business case. at the
point of commitment A*hen the go,ernment considers appro,alB agencies
should be able to estimate project budgets that include an estimate of
project ris0s in the indicati,e range of (8"! per cent+ 3t may be higher for
some projects+ -enerally$
Business5as5usual or routine projects Alo* ris0. lo* ,alueB. such as school
buildings and simple road and health projects that can dra* on corporate
history. should ha,e a project ris0 estimate Abase ris0 allocation and
contingencyB 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 more
li0ely to include project ris0 at the higher end of the range of. say. 1(8"!
per cent+
3diosyncratic or one5oC projects that are high ris0 due to uniFue
engineering or other high ris0 factors may need the agency to mo,e
outside of this indicati,e range and include a project ris0 estimate o,er
"! per cent Ae+g+ Victoria=s SynchrotronB+
The diCerence bet*een a project ris0 estimate of. say. "( per cent ,ersus
1( per cent might simply be further in,estigation and research Ai+e+ greater
planningB+ 1ot*ithstanding the e2tent of planning underta0en. a higher
project ris0 estimate may be appropriate to co,er a genuinely high5,alue
and high5ris0 project+ The abo,e ranges are indicati,e. but agencies should
use them as a guide to inform the le,el of eCort that is e2pected to go into
the planning+ This *or0 must be documented to demonstrate that the base
ris0 allocation genuinely co,ers project ris0 and that planning ris0 has been
largely eliminated+
Bautionary note
3t is bad practice and contrary to the public interest to <load up= the project ris0
estimate to compensate for absent or poor project planning+ This may ha,e
the undesirable eCect of producing padded budgets that ma2imise the <optics=
of successfully deli,ering a project to the business case=s project budget+
#gencies need to apply a realistic ,ie* on ris0s+ #ustralian construction and
design companies are among the most successful in the *orld and promote a
reputation of e2cellence+ They typically ha,e a long history of deli,ering
comple2 and high5ris0 projects *ith good ;nancial outcomes+ Therefore.
agencies should ensure they do not o,er5identify and o,er5inSate the
uniFueness andJor the challenges of deli,ering a project+ #n informed and
e2perienced ,ie* needs to be ta0en of the industry=s capability and e2pertise
to manage project ris0s+
3/
Technical guide
Setting the base ris0 allocation and contingency
The base risk allocation
The base ris0 allocation is a critical cost component that. combined *ith the
base cost estimate. is the most li0ely cost outcome to go,ernment in
deli,ering the project+ This project cost estimate includes$
ris0s transferred to another party
11
Ae+g+ contractorB at a price to
go,ernment that reSects the eCecti,eness and eHciency A,alue for
moneyB that is e2pected in transferring the ris0sG and
ris0s retained by go,ernment that li0e*ise reSect the most li0ely outturn
cost to go,ernment of managing these ris0s+
<Most li0ely= implies a statistical a,erage of *eighted probabilities and
impacts+ Dstensibly this single ;gure estimate represents the most
probable outcome for the project considering all the ris0s and their
respecti,e *eighted li0elihoods of occurring and impacts Aand potentially
range of impactsB+ Lo*e,er. it remains a judgement 8 one that should be
informed by appropriate analysis and e2perience+
The business case *ill need to pro,ide the basis for the proposed base ris0
allocation in the ma0e up of the project budget+
The contingency
<Success=. from a project costing point of ,ie*. is to deli,er the full scope
*ithin the project cost estimate Ai+e+ the base cost estimate % base ris0
allocationB+ Lo*e,er. there are circumstances *here this does not occur as
ris0s that *ere unli0ely to occur materialise+ 3n these situations. the project
cost estimate *ill be e2ceeded+ To proacti,ely recognise these situations.
project budgets include a contingency abo,e the base ris0 allocation+
Contingency caters for$
the ,olatility of the project=s ris0s as demonstrated by the spread of
li0ely cost outcomes determined through the ris0 analysis stepsG
any signi;cant ris0s that fall outside of the norm. and are signi;cant
reasons for the project being ,olatileG and
the sensiti,ity of the project to underlying ris0 assumptions. such as
correlations bet*een ris0s andJor secondary ris0 impacts+
# high5ris0 project *ith a ,olatile cost pro;le Ae+g+ a large spread of
potential outcomes as measured using statistical toolsB may justify a
contingency recommendation that lines up *ith a '! per cent con;dence
limit. if this techniFue is used+
3n these circumstances the contingency may be signi;cant and. together
*ith the base ris0 allocation. may be greater than the 1!8"( per cent
11
1ote that insurable project ris0s Ai+e+ project ris0s for *hich the cost impact can be
transferred to an insurer at a cost acceptable to the agency and go,ernmentB are to be
accounted for in the base cost estimate in the form of insurance costs+ Transferring ris0
under insurance contract eCecti,ely e2changes *hat other*ise *ould be a ris0 estimate
A*ith all the ,ariability of actual outcome ,ersus estimate entailedB. *ith a ;2ed cost Ai+e+ the
premiumB+
Technical guide 31
e2pected for the majority of go,ernment projects+ 3n contrast. for a
<business as usual=. lo*5ris0 project *ith lo* ,olatility and high certainty in
its base cost estimate. the base ris0 allocation and contingency may be in
the range of !81! per cent of the recommended project budget+
'ecommending the base risk allocation and contingency
amounts
3n presenting recommendations for the base ris0 allocation and contingency
amounts in the project budget. the agency *ill need to employ judgement
and a test that in,ol,es the notion of li0elihood+ #gencies are reFuired to
pro,ide suHcient justi;cation in the business case for both recommended
amounts+
The justi;cation must include a rationale for the contingency that pro,ides
an appropriate upper limit for the total project budget <beyond the most
li0ely ,alue for all ris0s= Ai+e+ the base ris0 allocationB+ This upper limit must
pro,ide a realistic estimate that the project cost is unli0ely to e2ceed Aand
not an easy targetB+
purely statistical representation of risk 8using stochastic tools9 is
insu?cient evidence to justify either the contingency or the base
risk allocation, Chile such tools may provide supporting analysis
for setting the estimates they must also be supported by a
rigorous and in;depth rationale5 including the capability of the
project delivery team5 the >sense check0 and sign o: by
management,
Verifying the estimates Athe sense chec0B
The sense chec0 is introduced to the process to assist agencies in
o,ercoming optimism and pessimism biases and to increase con;dence
that the base cost estimate. base ris0 allocation and contingency are
appropriate+ The steps to establish the estimates can be seen as an
insider=s ,ie* of the project. *hich is ,alid *hen based on sound
professional s0ills and judgements+ 1e,ertheless it can. both 0no*ingly and
un0no*ingly. be compromised by an understanding that ultimately the
project oHce *ill be judged by their performance in deli,ering the project
against the estimate+
Ihereas the insider ,ie* is the con,entional and intuiti,e approach to
planning projects and estimating costs and ris0s. the outsider ,ie* ta0es an
independent ,ie* of the project and compares it to similar projects already
completed in an e2emplary manner+ # rele,ant comparison to a number of
similar projects Ae+g+ on type of project. procurement strategy. the
comple2ity and geographic locationB is good practice+
The outsider ,ie* is less li0ely to re5employ the same analytical techniFues
on the projectG therefore. the outside ,ie* is more li0ely to a,oid the eCects
of bias on the project+ The aim is to pro,ide a 0no*ledgeable and realistic
benchmar0 or sense chec0 on *hether the estimates are reasonable and
truly represent the most li0ely outcome for the project+
32
Technical guide
#gencies can present the sense chec0 as e,idence that the costs. ris0s and
contingencies are fair and reasonable+ :,idence must be pro,ided in the
business case supporting the rationale for the base estimate. base ris0
allocation and contingency+
Technical guide 37
: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 appropriate
time and resources in de;ning the project scope. estimating the costs and
analysing the ris0s to produce high5Fuality ad,ice to inform go,ernment
decision ma0ing+
The management decision taken by the agency in determining the
project budget is critical.
# business case should not be submitted to go,ernment for a decision if
there has not been a high5Fuality and transparent process to determine a
project budget that is rigorously calculated and defensible+
To establish the project budget.
1"
and produce a single ;gure. the base cost
estimate. base ris0 allocation and the contingency are added Asee #ppendi2
# for the presentation template of the project budget=s main summary line
itemsB+
Successful project deli,ery sees$
the full project scope deli,ered as intended *ithin the cost en,elope of
the base cost estimate and base ris0 allocationG
1"
Projects are funded by go,ernment using nominal dollars. and therefore the project
budget and cash So*s need to be presented in nominal dollars+
4%
Technical guide
-uidance on integrating the base cost estimate and project ris0 estimate
Aincluding the le,el of contingencyB to form the recommended project budget
Allustrative e<ample
Iithout pro,iding the justi;cation reFuired in the business case to support the
recommended amounts for the base ris0 allocation and contingency. the
follo*ing illustrates the headline ;gures for a medium ris0 infrastructure
project+ #dditional details are pro,ided in #ppendi2 #+
Base cost estimate K!!m
Base ris0 allocation Km
Project cost estimate Km
Contingency K"1m
*roject budget
D3-4m
the lo*est outturn cost for the reFuired performanceG and
no or little call made on the contingency+
The aim is to deli,er ,alue for money for the State+ D,er and
underestimated project budgets both place ;nancial strain on the o,erall
go,ernment budget+ This can constrain or compromise go,ernment=s ability
to deli,er its full program of ser,ice priorities and is therefore not in the
public interest+
Figure 4 illustrates the relationship bet*een the cost estimates arising from
sections 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 strategy
Aand contracting modelB for the capital project+ The recommendation should
be based on the procurement strategy that deli,ers the best o,erall
outcome for the State considering a number of factors A*hich are normally
interrelatedB such as$
deli,ering the lo*est *hole5of5life cost for the reFuired performance
standards. including eCecti,e management of the project=s base costs
and ris0sG
managing ongoing sta0eholder reFuirements 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 project
budgets+ The initial project budget is based on a <design and then
construct= or <construct only= strategy+ Dnce the project budget is
de,eloped A<Project budget 1=B. the best procurement strategy is
determined+ Then it is necessary to re;ne the project budget A<Final project
budget=B in light of the procurement strategy+ The e2pectation is that an
Technical guide 41
alternati,e procurement strategy. to that of <construct only=. is selected
because this *ill best manage the base costs and project ris0s for the
reFuired objecti,es. and thereby pro,ides a more attracti,e and predictable
outcome for the State+ Lence. the ;nal project budget should be eFual to or
less than that initially estimated+
Figure ) The mechanics of de,eloping the ;nal project budget
3t is *orth noting here that the project budget for the business case is the
sum of all estimated costs for the successful deli,ery of the capital project+
This means that the project budget *ill ha,e components that *ill be
allocated to diCerent parties$
The agency0s project delivery o?ce$ The project budget *ill normally
include cost estimates for site acFuisition. contractors andJor
professional ser,ices that *ill be managed and paid for directly by the
agency+ 3n addition. the agency may retain certain ris0s it is best placed
to manage and this *ill be reSected in the base ris0 allocation as funding
a,ailable directly to the agency as. and *hen. appropriate+
The main project contractor$ The construction contract *ill be
a*arded to the successful tender. and the project budget components of
the base cost estimate and that of the transferred ris0s in the base ris0
allocation. *ill eCecti,ely eFuate to the contract price+
The B3@"(inister"Treasurer$ The contingency is managed by a party
not ha,ing direct responsibility for project deli,ery Asuch as the agency=s
project deli,ery oHceB+ #ppro,al for e2penditure against the contingency
may be from the MinisterJTreasurer for a go,ernment5appro,ed business
case and in other cases by the agency=s C:D or board+
42
Technical guide
Figure ' illustrates the management and application of the project budget
to diCerent 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 Fuite
signi;cantly. particularly in the de,elopment phase+ #ny public disclosure
of estimate should therefore be carefully considered and minimised 8 if
anything. only identi;ed as a <ball par0 estimate=+ #s displayed in Figure "
the ;nal estimate *ill not be 0no*n until the project is complete+
#lso. follo*ing funding appro,al. project budgets can be commercially
sensiti,e+ -o,ernment policy reFuires that all major capital projects are the
subject of an open tender process *here the contractor=s price is
competiti,ely determined+ :Cecti,ely. a major part of the project budget in
a business case represents the go,ernment=s reser,e price+ Ihen publicly
disclosed. potential bidders are informed of an anchor price and of the
go,ernment=s ,ie* on project aCordability+
#ccordingly. where project budgets are judged to be particularly
commercially sensitive and their disclosure before or during a tender
process may compromise the State in obtaining best5in5mar0et prices. a
diCerent process is recommended$
The process of de,eloping project budgets for business cases. and other
project costings. are to be dealt *ith as commercial5in5con;dence+
3f a business case is appro,ed. and the project proceeds to tender. the
project budget remains commercial5in5con;dence+
Budget papers. annual reports and other public documentation may
include the project budget in the aggregate of a portfolio=s capital *or0s
program+
The project budget *ill not be disclosed in any media releases or public
information bulletins prior to a*arding of tender contracts+
Technical guide 43
To ensure transparency and address public interest. indi,idual project
budgets *ill continue to be communicated to the #uditor5-eneral Aas
part of the re,ie* of the :stimated Financial Statements for the Victorian
general go,ernment sectorB+
Dnce the tender has closed and the successful proponent is a*arded the
contract. information on the accepted tender and the business case
project budget is publicly communicated by the agency+
.udget control
Follo*ing appro,al of a business case the project cost estimate is sectioned
into a cash So* schedule. *hich is managed by the agency and its project
oHce+ Lo*e,er. the contingency amount must be held outside of the
control of the project oHce$
+ For all projects. but particularly higher ,alue. more comple2 projects.
internal control mechanisms should be in place to ensure the project
team does not ha,e automatic access to. or control of. project
contingency+
For e2ample. access to contingency may reFuire appro,al of the C:D
andJor the Minister Adepending on the comple2ity of the projectB+
6+ 3n some cases go,ernment may determine that access to contingency *ill
be 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 ;scal
monitoring+
Contingency and ris0 allocation appro,al processes and tolerances should
be detailed in project go,ernance documents+
3f additional funding is reFuired beyond the appro,ed project budget. the
responsible Minister *ill ma0e an appropriate submission to the
go,ernment for funding+
ccountability
#s the project proceeds to completion some ,ariation might be e2pected
against the project cost estimate and the contingency may be used+
Departments should be a*are that they *ill be accountable for the rigour of
the project cost estimate and the project budget against outcome. and the
appropriate use of contingency+ The decision5ma0ing process for using
contingency 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 procurement
options analysis. the agency *ill need to commence de,elopment of the
Public Sector Comparator APSCB once the PPP option is con;rmed by
go,ernment+ Detailed guidance on the de,elopment of the PSC can be
found in the national PPP guidelines+
44
Technical guide
3nstruction templates for professional ser,ices
4+ 3nstruction templates for professional
ser,ices
3nstruction templates for base cost estimation
There are t*o main types of engagements$
1+ de,eloping the base cost estimateG and
"+ re,ie*ing the base cost estimate that has been de,eloped+
The follo*ing suggested instructions are pro,ided for agencies see0ing to
engage these ser,ices. either e2ternally or internally+
Developing the base cost estimate
The importance of an accurate project budget has been highlighted in
section 6. *hich also e2plained ho* the accuracy *ill be increased by using
competent and e2perienced cost estimators+ # template of instructions that
agencies could consider for engaging such professional ser,ices is gi,en
belo*+ The ;rst pro,ides a template for engaging the professional ser,ices
associated *ith de,eloping the project budget for the business case+
Technical guide 4-
Pro,ides ,arious templates for engaging the professional ser,ices associated
*ith de,eloping the project budget for the business case
.rief ) senior cost estimate advisory services
'ole conte<t
Ihile roles titled <estimator= e2ist at ,arious le,els in project de,elopment.
management and ad,isory organisations. the particular role de;ned belo* is
at the e2ecuti,e le,el as a 0ey member of a project team for K(!m to
multibillion multidisciplinary projects+ Typically the role reFuires high5le,el
functional capability and the capacity to understand the uncertain nature of
costs and 0ey ris0s of large5scale projects throughout the project=s lifecycle+
The position should report to the project director+
'ole accountabilities
Producing accurate and reliable base cost estimates based on *ell5de,eloped
scopes of *or0G
:nsuring that project budgets factor in project ris0 associated *ith uncertainty.
incomplete information and the comple2 interrelationships bet*een project
,ariablesG
#pplying a robust estimating methodology recognised *ithin the industry that
adopts sound ,alue management techniFues and change management
processesG
Creating and maintaining a competent and eHcient estimation team
appropriate for project reFuirementsG
:nsuring the accuracy and Fuality of decisions made *ithin the estimation
team such as those related to construction seFuencing and producti,ityG
:nsuring necessary accuracy and reliability of data and information on *hich
estimates are based including the Fuality of benchmar0ing and analyses
underta0enG
4/
Technical guide
.rief ) senior cost estimate advisory services 8cont,9
'ole accountabilities 8cont,9
:Cecti,ely integrating the output of the estimation team Aprocurement.
Fuantity sur,eyingB and across the bid team Adesign. constructability. ris0B to
achie,e the most accurate and reliable o,erall resultG
Collaborating and communicating eCecti,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 Fuantity sur,eying. estimation. project engineering. contracts
and procurement *ith a pro,en trac0 record at a senior technical or project
management le,elG
3n e2cess of 1( years= project e2perience. preferably as a senior estimator *ith
a broad bac0ground in pro,iding accurate and achie,able cost plans. ;rst
principle estimates and ,alue management ad,ice for large infrastructure
projects. for e2ample. in,ol,ing PPPs and alliancesG
#bility to lead teams to produce accurate project cost estimates and budgets
from concept to de;niti,e informationG
Thorough 0no*ledge of current estimating strategies and techniFuesG
Conceptual and integrati,e thin0ing capacity related to comple2 systems and
operating en,ironments and ability to accurately infer or ,isualise a *hole
project in all aspects Ae+g+ scope. program. constraints and sta0eholdersB *ith
incomplete informationG
9ele,ant tertiary engineering or construction5related Fuali;cations are
desirable but not essentialG
Pro,en ability to lead. communicate *ith and inSuence 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 of
attention to detail+
'eviewing the base cost estimate
The importance of insightful and meaningful re,ie*s has been e2plained in
section + The nature and e2tent of the re,ie* must be appropriate to the
project 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* by
e2perienced professional estimators for more comple2. higher ,alue. higher
ris0 projects+ # template that agencies could consider for engaging such
professional ser,ices is gi,en belo*+
Technical guide 41
'eviewing the base cost estimate
Some of the re,ie* assessments that agencies should consider addressing
include *hether$
the project scope statement has been described and Fuanti;ed in an industry
recognised. methodical *ay. conforming to an agreed *or0 brea0do*n
structure speci;c to the sectorG
the standard of *or0s conforms to technical. design and construction
reFuirements in legislation. industry and other standards. codes and recognised
manuals Acompatibility *ith e2isting and adjacent infrastructure is rele,ant as
is consideration of modern engineering eFui,alents and technologiesG
compliance *ith strategic asset management plans and total management
plans are li0ely to be highly rele,antBG
the base cost estimate aligns *ith the project scope statement and enables the
reFuirements of the statement of ser,ice bene;tsG
the base cost estimate is consistent *ith standard of *or0s and the conditions
pre,ailing in the mar0et for engineering. engineering supplies and constructionG
the base cost estimate reSects the construction methodology. staging.
producti,ities. site or *or0ing constraints. etc+G
the unit rates used in the base cost estimate are mar0et competiti,e and are
supported by a logical build up *ith rele,ant producti,ity and *astage factorsG
the base cost estimate e2cludes allo*ances for ris0. contingencies and
escalation. and is free of calculation errors and double countingG
the base cost estimate presentation conforms to the reFuired formatG
sanity chec0s con;rm that the estimate conforms to 0no*n benchmar0s
achie,ed from prior best practice projectsG
the assumptions. e2clusions. Fuali;cations and any limitations of the estimate
are appropriately documented and accompany the estimateG
any material changes from pre,ious appro,als or re,ie*s of base cost estimate
are clearly e2plained addressing the <*hy= as *ell as the <*hat=G and
departures from the guide are identi;ed and justi;ed+
3nstruction templates for project ris0s
1

3dentifying and Fuantifying ris0s is a specialist tas0 that reFuires a
multidisciplinary approach+ The s0ills necessary to de,elop a robust base
ris0 allocation and contingency in accordance *ith this guide reFuire a
combination of professional Fuali;cations and e2perience+ Typically this
means agencies need to supplement project team resources *ith e2ternal
professional ser,ices+ That said. agencies should not thin0 that this tas0
1
The !artnership "ictoria Public Sector Comparator Supplementary Technical 1ote pro,ides
an appropriate reference for underta0ing ris0 analysis and Fuanti;cation+ Ihile it *as
de,eloped for !artnerships "ictoria projects the approach to ris0 and the techniFues
described for Fuantifying ris0 are eFually applicable to all capital in,estment projects+ The
methodologies described Asimple and ad,anced ,aluation techniFuesB are a useful point of
reference for establishing the instruction template and scope of *or0 for project ris0s+
42
Technical guide
can be delegated entirely to consultants+ ?ltimately. the agency itself must
play a central role in establishing the base ris0 allocation and contingency+
:Cecti,e engagement *ith professional ser,ices reFuires a clear scope of
*or0 and acti,e management of ad,isers by agencies+ #gencies should
prepare a brief on the objecti,es. scope and timing of the capital
in,estment. including an assessment of its ,alue and importance to the
agency. its 0ey sta0eholders and its comple2ity+
To get the best out of professional ad,isers. agencies should acti,ely
engage and de,elop collaborati,e *or0ing relationships+ This is particularly
the case *hen it comes to ris0 analysis+ #gencies must e2pect to spend
considerable time brie;ng ad,isers on their reFuirements and *or0ing *ith
them to identify and Fuantify ris0s+ :2pecting a professional ad,iser to
deli,er on a scope of *or0 *ith minimal or no communications on the
issues *ill in,ariably not deli,er an appropriate or acceptable project
budget estimate+
#t a high le,el the scope of professional ris0 ser,ices is to$
identify ris0sG
e,aluate ris0sG
cost the treatmentJcontrol of ris0 responseG
de,elop mitigation strategies including optimal ris0 allocation Abet*een
the State and contracted partiesBG
assess residual ris0sG
plan the response to residual ris0sG
prepare and recommend a base ris0 allocation estimateG
prepare and recommend contingencyG and
document and communicate to the *ider project team the strategy and
plans for managing the project ris0s+
Broadly spea0ing there are li0ely to be three roles that agencies can see0 to
engage professional ser,ices on Ait should be noted that one ;rm or
indi,idual may be Fuali;ed to pro,ide all these ser,icesB$
1+ *roject risk and control services$ coordinate and facilitate the ris0
process. including *or0shops. and apply best practice ris0 management
standards+ These ser,ices are relati,ely *ell established in the mar0et.
including$
Fualitati,e ris0 analysis in line *ith ris0 standardsG
Fuantitati,e ris0 analysis that depending on the comple2ity of the project
and the nature of the ris0s Aincludes ris0 modelling using ,arious
stochastic soft*are pac0agesBG and
,erifying the ris0 estimates Aunderta0ing a sense chec0B
-/isk facilitation is a skilled role that is usually carried out by a professional
that has a deep background in capital in$est&ent and a track record in
facilitating +orkshops and applying best practice risk &anage&ent
standards.
Technical guide 47
"+ 'isk 6uantifcation and modelling services& specialist modelling
capability is engaged for comple2 projects *ith many signi;cant and
interdependent ris0s+ This reFuires professional s0ills in coordinating ris0
assumptions and combining these in a ris0 Fuanti;cation model+ Dften
this *or0 is combined *ith the project ris0 and control ser,ices as both
in,ol,e coordination and interpretation of ris0 assumptions pro,ided by
technical e2perts+
A0hese ser$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 these
professional ser,ices A*hich may be sourced from both internal and
e2ternal professionalsB+
-%
Technical guide
*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 Fuanti;cation tools to be
used Aestablish a base line by de;ning the conte2t and basis for the ris0
analysis and ris0 management plansBG
de;ne and agree *ith the agencyZs project team the methodology for
establishing a robust base ris0 allocation including the justi;cation and
reference 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 probability
and impactG
introduce the ris0 analysis plan and manage progress throughout the processG
identify as e2hausti,ely as possible all signi;cant project ris0s and uncertainty
associated *ith the projectG ascertain the cause of the ris0 Aha@ard e,entB and
assess ho* the ris0s are related to other ris0s AcorrelatedBG classify the ris0s
according to a ris0 categorisation frame*or0G consider each ris0 identi;ed and
record in a ris0 register
o the cause of the ris0 by identifying the ha@ard e,ent Anot the outcomeB.
such as poor ground conditions Anot cost o,errunBG
o trigger e,ents that gi,e rise to the ris0 occurringG
o the timing and freFuency 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 assetBG
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 performance
of the assetB+
identify the ris0 analyst responsible for further analysis and Fuanti;cation of
the ris0G
prepare a ris0 management strategy including the robust case for the ris0
allocationG and
Fuantify the combined impact of all ris0s Fuanti;ed to establish the
recommended base ris0 allocation and contingency+
The le,el of Fuanti;cation and conseFuently ris0 modelling that is reFuired
*ill depend on the comple2ity of the project and the nature of the ris0s+ #
highly comple2 project that is high ris0 *ill typically reFuire more comple2
ris0 Fuanti;cation and modelling than a relati,ely lo* ris0 project+ The le,el
of sophistication in ris0 Fuanti;cation is discussed in section 6+ including
an outline of some of the techniFues a,ailable+ The scope of *or0 should
reSect 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+
Technical guide -1
'isk 6uantifcation and modelling services
The professional ser,ices *ill ,ary from a simple to a comple2 project ris0
pro;le. as a guide+
!imple risk 6uantifcation
De,elop an analysis that appropriately Fuanti;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 identify
any interdependencies and correlations+ #s part of this analysis identify and
eliminate any double counting. optimism and pessimism bias+
Carry out a sensiti,ity analysis to determine *hich assumptions and ,ariables
are 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 6uantifcation
De,elop an ad,anced probability analysis using stochastic tools and soft*are
that appropriately Fuanti;es the base ris0 allocation based on the assumptions
pro,ided by the ris0 e2perts+ The output from this analysis is a statistical
distribution+
Critically analyse the ris0 assumptions pro,ided by the ris0 e2perts and identify
any interdependencies and correlations and factor these into the ris0
Fuanti;cation+ #s part of this analysis identify and eliminate any double
counting. optimism and pessimism bias+
Carry out a sensiti,ity analysis to determine *hich assumptions and ,ariables
are most and least sensiti,e to changes impacting on the base ris0 allocation+
#nalyse the results on the modelling and recommend an appropriate base ris0
allocation and contingency for the project+
+ 'isk estimation services& usually a component of the scope of *or0
for technical ad,isers+ The reFuirement for these e2perts is to ta0e on
the role of ris0 e2pert in their discipline+ The follo*ing can be used as an
instruction template for engaging these professional ris0 ser,ices from
technical ad,isers+
-2
Technical guide
'isk estimation services
#gencies can consider the follo*ing guide for these professional ser,ices
technical e2perts+
!imple risk 6uantifcation
#pply the standards of your professional technical discipline to Fuantify the
ris0s in accordance *ith the project=s ris0 strategy+
Ior0 cooperati,ely *ith the project ris0 and control ser,ices pro,ider and the
other technical e2perts to identify. Fuantify and establish ris0 characteristics
Aincluding interdependencies bet*een ris0s 0no*n as correlationB+
#ssess the li0elihood AprobabilityB and impact AconseFuenceB of each ris0 Athe
ris0 assumptionsB+
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
Fuanti;cation. and for these ris0s carry out a more detailed analysis as
instructed by the agency+
For each ris0 decide on *hat are the main options for a,oiding. reducing.
transferring or containing ris0s Amitigation strategyB+
Technical guide -3
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 reFuirements+
1+ The project scope statement is pro,ided as part of a business case and
the agency=s S9D pro,ides a speci;c sign5oC attesting that$
it describes a ;t5for5purpose asset that enables deli,ery of the
identi;ed ser,ice bene;t Afrom the statement of the ser,ice bene;tsBG
it de;nes the physical scope. utility and functional reFuirements of the
capital project in an eHcient. eCecti,e and economical mannerG and
departures from the -uide for Determining Project Budgets in Business
Cases are identi;ed e2plained and justi;ed in terms of best5for5the5
State outcomes+
"+ The base cost estimate. including assumptions used in its preparation. is
e2plained and pro,ided as part of the business case+ # speci;c sign5oC is
reFuired from an appropriately Fuali;ed and credentialed professional
that$
its calculation presents a best5in5mar0et cost estimate of the project
scope statementG
the estimate does not include allo*ances for escalation and ris0G and
State outcomes+
+ The project ris0 estimate Ai+e+ the base ris0 allocation and contingencyB is
e2plained. including the methodology used for the calculation. and
pro,ided as part of the business case+ # speci;c sign5oC is reFuired from
an appropriately Fuali;ed and credentialed professional that$
identifying and Fuantifying project ris0s follo* best practice and are
predicated on capable management commensurate *ith the
challenges of the projectG
the estimates disclose all material assumptions and does not include
<double counting=G and
State outcomes+
-4
Technical guide
Dutlines the reFuirements for certi;cation both by the S9D and the
professional ser,ices engaged *ith de,eloping the project budget for the
business case
Sign5oC by S9D for the statements of ser,ice and
scope
The agency=s S9D Aor project sponsorB is reFuired to pro,ide in the business
case a sign5oC stating that the project scope statement pro,ides for a cost5
eCecti,e enabling asset for deli,ering the identi;ed ser,ice bene;ts that
underpin the business case=s in,estment rationale Ai+e+ the statement of the
ser,ice bene;tsB+ The sign5oC can be pro,ided at the front of the business
case=s appendi2 documenting the project budget+
The *ording of the sign5oC may need to be tailored to suit the speci;c
projectG ho*e,er. it should meet the intent of the follo*ing template+
Sign5oC for base cost estimate
To assist the S9D sign their attestation. the base cost estimator needs to
certify the Fuality of their estimate and e2pressly ac0no*ledge the ad,erse
conseFuences for go,ernment should they produce a base cost estimate
that 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;c
projectG 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 S9D+
Technical guide --
The statements of service and scope
gency sign;o: on the statements of the service benefts 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 case
ser,ice objecti,es Ai+e+ the statement of the ser,ice bene;tsB in an
eHcient. eCecti,e and economical mannerG
the project scope statement is suHciently mature to allo* de,elopment of
a project budget to the standard reFuired by the guideG
all material inputs. including the <assumption boo0=. that e,idences the
de,elopment of a high5Fuality project budget are reported in this appendi2
of the business caseG
the project budget has been re,ie*ed from a holistic perspecti,e to ensure
it does reSect the proposed capital asset in terms of the project scope
statement and ser,ice objecti,es. and. as S9D. 3 am familiar and
comfortable *ith the base cost estimate as representing the best5in5mar0et
pricing for the application of best practice project deli,eryG
the project budget recommended in the business case is of high Fuality
suitable for go,ernment decision ma0ing. and has been de,eloped to the
lo*est cost for the reFuired performanceG and
departures from the guide are identi;ed. e2plained and justi;ed in terms of
best for the State outcomes+
[1ame\
Senior 9esponsible D*ner
Signature$
Date$
Sign5oC for project ris0
The agency and its ad,isers collecti,ely in,ol,ed in preparing the base ris0
allocation and contingency are e2pected to sign oC that they ha,e prepared
robust estimates based on a rigorous and thorough process in accordance
*ith this guide+
*roject risk services
D,erarching sign5oC is reFuired in the business case from the agency and
its ad,isers that$
#ll signi;cant ris0s ha,e been identi;ed and analysed+
The base ris0 allocation represents a robust and reasonable <most li0ely=
estimate of all project ris0s+
The contingency represents a robust and reasonable estimate Aand not
an easy targetB of the upper limit for the total project budget <beyond the
most li0ely ,alue for all project ris0s=+
The o,erall impact of ris0s has been assessed using recognised tools that
ha,e included sensiti,ity and scenario testing Aas appropriateB+
The base ris0 allocation and contingency ha,e been sense chec0ed
against an appropriate range of benchmar0 ris0s and projects and this
demonstrates that they are robust estimates+
The process adopted is in accordance *ith this guide+
The sign5oC should be against an outline of the ris0 pro;le of the project
and a justi;cation for the decision to select the base ris0 allocation and
contingency Fuanta in the conte2t of the ris0 pro;le+ This should also
include a description of the sensiti,ity of the base ris0 allocation to the
input data. the range of ris0 estimates analysed. and the le,el of
con;dence in the accuracy of the ;gures stated+
Deliberately. the guide is not prescripti,e on the tools and therefore the
statistical language that agencies and ad,isers adopt+ Therefore. the sign5
oC should be a meaningful statement and e2pression of the *or0 that has
gone into preparing the base ris0 allocation+ #gencies should ensure that
the sign5oCs are appropriately drafted to reSect the le,el of professional
s0ill that has been applied to the process aggregating as appropriate to the
ser,ices pro,ided+
The second template in #ppendi2 B. *hich should be in the form of a letter
to the agency=s S9D. can be adapted by the agency as appropriate+
Technical risk services
Speci;c sign5oC is reFuired from each technical e2pert on the underlying
assumptions that go into the ris0 analysis. including for each identi;ed ris0
that$
the Fualitati,e analysis of probability and impact is reasonable and
based on professional judgement and e2perienceG and
-/
Technical guide
the detailed and Fuanti;ed e,aluation of li0elihood. conseFuence. timing.
e2pected ,alue and dependencies are reasonable and based on
professional judgement and e2perience+
The third template in #ppendi2 B. *hich should be in the form of a letter to
the agency=s S9D. can be adapted by the agency as appropriate to address
the speci;c ser,ices pro,ided+
Technical guide -1
-lossary
'+ -lossary
Term De;nition Comment Statement of Ser,ice
Bene;t
Statemen
t of
ser,ice
bene;t
The rationale in the business case
that de;nes the ser,ice need and
outlines the ser,ice deli,ery
impro,ements and the e2pected
outcomes to be achie,ed from the
proposed in,estment+
This statement describes the ser,ice
bene;ts that the capital project *ill
enable+ 3t can be articulated in a strategic
assessment. an in,estment logic map. an
in,estment concept brief. or other such
similar document+
Project
scope
statement
# foundation document for the
project budget+ 3t is directly aligned
to achie,ing the bene;ts set out in
the statement of ser,ice bene;t+ 3t
de;nes the content. scope. utility
and business reFuirements of the
capital project+
The scope statement needs to be of
suHcient Fuality and detail Asee the
companion guidelineB to enable
determination of the project budget. and
should be pro,ided as an appendi2 of the
business case+ # *or0 brea0do*n
structure or functional brief are e2amples
of a project scope statement+
Base cost
estimate
Based on the project scope
statement. the current best5in5
mar0et estimate of the e2pected
;nancial costs of deli,ering the
project+
This does not include any estimates
for escalation. ris0 or contingency+
# base cost estimate comprises costs for
design. margins. project management.
consultants. site preparation. building
materials. labour. and use of plant and
eFuipment+ 3t is prepared by a suitably
Fuali;ed professional. and should be
pro,ided in an appendi2 of the business
case+ :scalation is a separate acti,ity
underta0en <outside= of the base
estimation process+ See escalation
de;nition belo*+
Project
ris0
16
Variability in future project deli,ery
outcomes for *hich a li0elihood and
impact of occurrence can be
estimated+ Variability arises from
e,ents *hich are 0no*n ha@ards or
are readily obser,able in practice or
from e2perience+ # reasonable
estimate of the range of ,ariation in
actual outcomes can be Fuanti;ed
or deri,ed from calculation+
The total allocation for Project 9is0
pro,ided in a Business Case project
budget is the Base 9is0 #llocation
plus the Contingency+
The estimations for all project ris0s
Ainherent and contingentB are usually
determined through ris0 *or0shops
in,ol,ing e2perienced and capable
oHcials and. as appropriate. consultants+
:stimates need to be prepared by a
Fuali;ed professional and pro,ided as an
appendi2 of the business case+ A9is0s can
result in either a positi,e or negati,e
impact+B
Caution must be e2ercised to ensure that
project ris0s are neither o,er5 nor under5
estimatedG and are benchmar0ed to actual
e,ents and contemporary ris0
management responses+
16
-2
Technical guide
-lossary
Bene;t
Base ris0
allocation
# ;nancial calculation and
judgement of the most li0ely or
probable total ;nancial impact of all
costed project ris0s after the
application of ris0 management
practices+
The base ris0 allocation should include the
allo*ance for escalation+ ASee escalation
de;nition belo*+B
1ote$ ?niFue items. such as land purchase
costs. can be separately identi;ed and
costed+ They should be presented as an
item in the base cost estimate. and if
necessary. in the base ris0 allocation+
:scalation The anticipated ,ariation in project
costs o,er time as a result of
factors such as inSation. mar0et
conditions. supply constraints.
timeframes etc+
The escalation factors Aor ratesB are
sensiti,e to mar0et conditions and are
included in the base ris0 allocation+
The base cost estimate is determined at a
particular point in time. and this allo*s the
project cash So*s to be forecast by ta0ing
into consideration the project
implementation timeline and schedule of
*or0s+ #n allo*ance for escalation is
calculated by applying the escalation
factorAsB to the cashSo*+
XMost
li0elyY
This implies a statistical a,erage of
*eighted probabilities and impacts+
Dstensibly the representation of a
single ;gure estimate represents
the most probable outcome for the
project considering all the ris0s and
their respecti,e *eighted
li0elihoods of occurring and impacts
Aand potentially range of impactsB+
Lo*e,er. it remains a judgement.
one that should be based on
informed analysis and e2perience+
There are a number of techniFues to cost
ris0+ This guide deliberately a,oids the
terminology of probabilistic estimating
Ae+g+ P1!. P(!. P'!B and speci;cally does
not de;ne the use of term <most li0ely
,alue=+ 3t is e2pected that agency
practices *ill determine their preferred
approach to costing ris0s. and that the
costs proposed follo* a methodology that
is defensible and robust+
Contingen
cy
# pro,ision for costed project ris0s
in e2cess of the base ris0 allocation+
This pro,ides a reasonable ;nancial
allo*ance in the e,ent that ris0s
greater than the Xmost li0elyY ris0
impact materialise during project
deli,ery+
This pro,ision is best managed e2ternally
to the agency=s project team+
Project
Cost
:stimate
The sum of the base estimate and
base ris0 allocation+
This amount is normally the <budget= that
is managed by the agency=s project oHce+
Project
Budget
Comprises the base cost estimate.
base ris0 allocation and a
contingency+ 3t addresses all
deli,ery aspects of the appro,ed
project+
This amount is appro,ed as part of the
business case decision+
Technical guide -7
-lossary
Bene;t
Project
De;nition
The project de;nition includes$
a detailed description of the scope
of the capital *or0s Aincluding
dra*ings. speci;cations.
calculations etcB
construction methods
program dates
project performance objecti,es
project ris0s that may be
encountered
all necessary and prudent
in,estigations to complete the
project de;nition
the method of deli,eryG and
a description of those *or0s
Aother*ise associated *ith the
projectB speci;cally e2cluded or
not in scope+
The project de;nition in the project scope
statement should be de,eloped to at least
a le,el of 1!5"!] of complete de;nition+
/%
Technical guide
#ppendi2 #$ Presentation of the project budget
#ppendi2 #$ Presentation of the project
budget
Table 1& Eeadline project cost element summary
Base cost estimate K^^^m ATable "B
Base ris0 allocation K^^m ATable B
Project cost estimate
K^^^m
Contingency K^^m ATable B
Project budget
K^^^m
Table 2& .ase cost estimate
Technical guide /1
#ppendi2 #$ Presentation of the project budget
Table 3& *roject risks
/2
Technical guide
#ppendi2 B$ Templates for estimate
certi;cation
.ase cost estimate services
#ddressee$ QSenior 9esponsible D*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 has
been engaged to pro,ide base cost estimating ser,ices Athe <contract=B+ This
letter and the ad,ice it refers to has been de,eloped pursuant to the contract+
The report of our ad,ice *as de,eloped in accordance *ith the Department of
Treasury and Finance ADTFB guidance Determining Project Budgets in Business
Cases Supplementary Technical -uide to the 3n,estment Eifecycle -uidelines
Athe <DTF guides=B. *hich has been *holly and consistently applied in
determining the base cost estimate for the project+
3 ac0no*ledge that the accuracy of this base cost estimate is critical to a
sound assessment of the merits of the business case for the Q^_NR project and
that an inaccurate base cost estimate may lead to Sa*ed in,estment
decisions *ith serious conseFuences for go,ernment+
3 ha,e prepared this base cost estimate in accordance *ith [name of
technical\ Standard and 3 certify that it represents the most li0ely <best in
mar0et= assessment of the outturn costs of the project as described in project
scope statement pro,ided to me. and that it is accurate and reproducible
*ithin W( per cent Aagainst another cost estimator *or0ing from the same
project scope statement and assumption boo0B+
Fimitations
This letter and the report ha,e been prepared in accordance *ith the contract+
Dur analysis does not constitute an audit of either the ris0s or the assumptions
pro,ided by others including the technical ris0 e2perts+ Ie ha,e relied on the
assumptions pro,ided as appropriate and prepared in accordance *ith the DTF
guide+
Ie ha,e carried out our internal Fuality and management re,ie* on the base
cost estimate and are satis;ed as to the integrity and accuracy of the
calculations+ The base cost estimate has been prepared to conform to current
practice in #ustralia and in particular *ith the DTF guide+ Ie note that it is
usually the case that some e,ents and circumstances do not occur as
e2pected or are not anticipated+ Therefore. actual results *ill almost al*ays
diCer from the forecasts+
This letter may only be relied upon by the State pursuant to the terms of the
contract+ This letter and the report cannot be relied upon by any third party for
any purpose *hatsoe,er+ Ie disclaim all responsibility to any other party for
any loss or liability that the other party may suCer or incur arising from or
relating to or in any *ay connected *ith the contents of this letter+
The State should ta0e into account the limitations of the scope of our *or0 and
other factors. commercial and others. *hich it should be a*are of from sources
other than our *or0+
Technical guide /3
#ppendi2
*roject risk services
Q#gencyR
*roject risk and control services 8including risk 6uantifcation9
been engaged to pro,ide project ris0 and control ser,ices including base ris0
allocation and si@ing the contingency Athe <contract=B+ This letter and the
ad,ice it refers to has been de,eloped pursuant to the contract+
Ie con;rm that our professionals engaged to assist you ha,e the reFuisite
bac0ground in project ris0 and control ser,ices including ris0 Fuanti;cation
and associated ;nancial modelling+
.ase risk allocation and contingency
Dur attached report ris0 analysis Athe <report=B recommends an appropriate
base ris0 allocation and contingency for the Q R project Athe <project=B+ The
report *as de,eloped in accordance *ith the Department of Treasury and
Finance ADTFB -uide for Determining Project Budgets in Business Cases
Supplementary Technical -uide to the 3n,estment Eifecycle -uidelines Athe
<DTF guides=B. *hich has been *holly and consistently applied in determining
the base ris0 allocation and si@ing the contingency for the project+
The assumptions contained in the report *ere de,eloped in conjunction *ith
the agency and its ad,isers including technical ris0 e2perts+ The ad,ice and
recommendations ha,e been discussed *ith your nominated sta0eholders+
The base ris0 allocation represents the most li0ely outcome for the project+ The
contingency represents the appropriate con;dence limit. that is. it pro,ides an
appropriate upper limit for the total project budget <beyond the most li0ely
,alue for all ris0s= Ai+e+ the base ris0 allocationB+ This con;dence limit pro,ides
a realistic estimate Aand not an easy targetB that the project cost is unli0ely to
e2ceed this amount based on information a,ailable at this time+ Ie analysed
the base ris0 allocation and contingency in accordance *ith the DTF guide as
documented in our analysis in the report+ Dur ,ie* is that the base ris0
allocation and contingency recommended are appropriate for the project+
Fimitations
This letter and the report ha,e been prepared in accordance *ith the contract+
Dur analysis does not constitute an audit of either the base cost estimates or
the assumptions pro,ided by others including the technical ris0 e2perts+ Ie
ha,e relied on the assumptions pro,ided as appropriate and prepared in
accordance *ith the DTF guide+
Ie ha,e carried out our internal Fuality and ris0 management re,ie* on the
base ris0 allocation and contingency models Athe <ris0 model=B and are
satis;ed as to the integrity and accuracy of the calculations+ The ris0 model
has been built to conform to current practice in #ustralia and in particular *ith
the DTF guide+ Ie note that it is usually the case that some e,ents and
circumstances do not occur as e2pected or are not anticipated+ Therefore.
actual results *ill almost al*ays diCer from the forecasts+
This letter may be relied upon by the State pursuant to the terms of the
contract+ This letter and the report cannot be relied upon by any third party for
any purpose *hatsoe,er+ Ie disclaim all responsibility to any other party for
any loss or liability that the other party may suCer or incur arising from or
relating to. or in any *ay connected *ith. the contents of this letter+
The State should ta0e into account the limitations of the scope of our *or0 and
/4
Technical guide
4or project risks services for technical e<perts
Q#gencyR
been engaged to pro,ide technical ris0 e2pert ser,ices Athe <contract=B+ This
letter and the ad,ice it refers to has been de,eloped pursuant to the contract+
Ie con;rm that our professionals engaged to assist you ha,e the reFuisite
technical bac0ground and e2perience necessary to pro,ide these ser,ices+
Dur ad,ice *as de,eloped in accordance *ith the Department of Treasury and
Finance ADTFB -uide for Determining Project Budgets in Business Cases
Supplementary Technical -uide to the 3n,estment Eifecycle -uidelines Athe
<DTF guides=B. *hich has been *holly and consistently applied by us in
contributing to determining the base ris0 allocation and si@ing the contingency
for the project+
.ase risk allocation and contingency assumptions
3n relation to the report ris0 analysis Athe <report=B that recommends an
appropriate base ris0 allocation for the Q R project Athe <project=B. *e prepared
the ris0 assumptions Athe <ris0 assumptions=B identi;ed in the report+
The ris0 assumptions *ere de,eloped in accordance *ith the DTF guide+ 3n our
professional opinion the ris0 assumptions are appropriate for the purposes of
estimating the base ris0 allocation and contingency+
Fimitations
This letter and the ris0 assumptions ha,e been prepared in accordance *ith
the contract+
This letter may only be relied upon by the State and the project ris0 and
control ser,ices pro,ider engaged by the State pursuant to the terms of the
contract+ This letter and the ris0 assumptions cannot be relied upon by any
other third party for any purpose+ Ie disclaim all responsibility to any other
party for any loss or liability that the other party may suCer or incur arising
from or relating to or in any *ay connected *ith the contents of this letter+
The agency should ta0e into account the limitations of the scope of our *or0
and other factors. commercial and others. *hich it should be a*are of from
sources other than our *or0+
Technical e2pert APartner or PrincipalB
[Company name\
Signature$
Date$
Technical guide /-

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Preparing Project Budgets for Business Cases

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