Should Cost Modelling - GOV.UK

1 Should cost Modelling GUIDANCE NOTE MAY 2021 Should cost Modelling MAY 2021 1 Contents 1. Context 2 Overview 2 Contact 3 2. What is a Should cost Model? 4 Introduction to Should cost Models 4 Levels of complexity 6 Evolution of a Should cost Model 7 3. Why produce an SCM? 8 Benefits of Should cost Models 8 4. When to produce an SCM 10 Requirement for a Should cost Model 10 Using Should cost Models to assess the deliverability of bids 10 Using Should cost Models as formal evaluation criteria 11 5. Producing an SCM 12 Five stages 12 6. Planning an SCM 14 Structured approach 14 7. Establishing the resource requirement 19 Suitably qualified and experienced people 19 8. Procuring an SCM 21 Commercial considerations 21 Should cost Modelling MAY 2021 2 1. Context Overview This Guidance Note provides high-level guidance for contracting authorities on Should cost Models (SCMs), the term used in the Sourcing Playbook and the Construction Playbook to describe whole life cost Modelling .

2 Although the terminology may be new or unfamiliar, contracting authorities have a long history in developing cost models. These include straight-forward spreadsheets through complex, specialist models to plan and monitor activity, support decision making, and drive value for money in the delivery of public services and public works projects and programmes. The term Should cost Model (SCM) introduces a standard terminology for contracting authorities in order to formalise existing cost Modelling activities and set clear expectations, and guidance for what good SCMs look like. Although this Guidance Note has a focus on Should cost Modelling in the context of sourcing services and public works projects or programmes, it is recognised that Should cost Modelling applies to other types of sourcing and is relevant to wider decision-making processes for projects. Effective Should cost Modelling will also involve multiple professional functions, including Finance, Commercial or Economic disciplines.

3 This Guidance Note is the first of a set of Cabinet Office guidance relating to SCMs: SCM Guidance Note (this document) outlines what SCMs are, when and why contracting authorities Should produce them, and key considerations around developing and/or procuring them. It is not intended to be a detailed guide on how to develop an SCM internally. SCM Development Guidance provides contracting authorities with guidance on using internal resources to design, develop, manage, test and govern SCMs; and SCM Technical Build Guidance guidance, based on good practice principles for building SCMs. It is technical in nature and aimed at people who will be building SCMs. Practitioners Should also consult existing good practice, including HM Treasury s Macpherson report, Aqua Book and Green Book. A number of practical Tools and Templates have also been produced by Cabinet Office to support the development of SCMs and to help reinforce good practice approaches (see Section for further details).

4 These are aligned to different phases/ stages of the model development lifecycle (See Figure 1): Should cost Modelling MAY 2021 3 Figure 1: SCM Guidance and Tools & Templates to support the model development lifecycle Contact You Should consult the Cabinet Office Sourcing Programme for further information or before planning an SCM for complex services, projects or programmes via Project Phase / Stage SCM Guidance SCM Tools and Templates Plan Design Test Use Initial Model Assessment Scope specification & Design and Data Build & Populate Review & Formal QA Implement & Use Develop Activities Initial Model Assessment Tool Scoping Template Planning Template QA Plan Template Development Checklist specification Template Example SCM Build Template Book of Assumptions / Data Log Template Development Checklist SCM Build Template Book of Assumptions / Data Log Template Good Practice Build Toolkit Version Control Log User Guide Example Development Checklist Book of Assumptions / Data Log Template Development Checklist Testing Procedures Book of Assumptions / Data Log Template Good Practice Build Toolkit Development Checklist Quality Assurance SCM Guidance Note SCM Guidance Note Development Guidance Technical Build Guidance Development Guidance Technical Build Guidance

5 Development Guidance Development Guidance Technical Build Guidance Should cost Modelling MAY 2021 4 2. What is a Should cost Model? Introduction to Should cost Models An SCM provides a forecast of what a service, project or programme Should cost over its whole life. As summarised below, there are different types of SCMs that may also differ in design as requirements change over the procurement lifecycle. However, the term Should cost Model or SCM is used throughout this Guidance Note to mean all of them. For public works projects, SCMs forecast costs over a period that includes both the build phase and the expected design life. This includes costs of additional market factors such as risk and profit. It provides an understanding of whole life costs, including the impact of risk and uncertainty on both cost and schedule. Notably, the key factor is whole life cost and not the initial purchase price. SCMs Should be used early in the procurement process (see Chapters 4 & 5 in the Construction Playbook) to: Inform the delivery model assessment (DMA), which considers both cost and non- cost criteria, such as the whole life carbon assessment; Drive a better understanding of the whole life costs and the risks and opportunities associated with different options and scenarios; Drive more realistic budgets by providing greater understanding of the impact of risk and uncertainty on both cost and schedule; Inform the first business case (Strategic outline Case for departments and ALBs); and Inform engagement with bidders and the appropriate commercial strategy, including methods to incentivise the supply chain to focus on whole life value.

6 For public services an SCM Should be used to help evaluate different delivery model options: In-house - This (also referred to as a Public Sector Comparator ) is the whole life cost to deliver a service in-house using internal resources and expertise. It includes the cost of acquiring and maintaining assets and the necessary capability. This Should be used early in the procurement to compare costs against the Expected Market cost and/or Mixed Economy options at a high-level to inform a DMA (see Chapter 3 in the Sourcing Playbook). Expected Market cost - This is the expected whole life cost of procuring a service from an outside supplier. It includes the cost of additional market factors such as risk and profit. If the decision is to procure the service from an outside supplier, the Expected Market cost option can be used to inform engagement with bidders. Use early market engagement to help ensure that the model structure can be evolved to enable comparison to the bids you expect to receive from the market.

7 Should cost Modelling MAY 2021 5 Mixed Economy - A delivery model will often be a combination of insourcing and outsourcing different components of the service. In these cases, a combination of the In-house and Expected Market cost options, referred to as a Mixed Economy option, can be used to calculate the cost of the service. SCMs are calculations of what a service, project or programme Should cost over its whole life, irrespective of where it has been obtained from. See Figure 2. Figure 2: Demonstrating the evolution of an SCM over a procurement lifecycle It is important to define and ensure decision makers are aware of what costs are included in the SCM, how they are treated and the limitations of the SCM. An SCM is an estimate of a specific set of costs under particular circumstances over a defined time period, usually defined as the whole life of the service, project, or programme.

8 An SCM is a both a financial model ( they may use financial techniques such as Net Present Value calculations) and an analytical model and Should follow the principles set out in the Green Book and Aqua Book. An SCM will: Use analytical techniques, such as unit cost multiplied by unit volume; Take account of uncertainty and include relevant risks1; Use relevant data, such as day rates and employee numbers; and Usually model a number of different options for comparison and sensitivity purposes. 1 See the Aqua Book for a more detailed commentary on uncertainty and risk Option A Option B Software Costs Hardware Costs Facilities Costs Option B Staff Costs Proposal Facilities Costs Staff Costs Software Costs Hardware Costs Facilities Costs Staff Costs Software Costs Hardware Costs Facilities Costs Staff Costs Software Costs Hardware Costs Hardware Costs Software Costs Staff Costs Facilities Costs 1 2 Understand total cost of options ( make vs buy) Gain insight into supplier proposals Movements from Should cost Evolving needs, approach and maturity over a procurement lifecycle 100 120 120 +10 +10 -20 +10 130 Should cost Modelling MAY 2021 6 Levels of complexity SCMs vary in complexity and the time they take to create.

9 The complexity of an SCM Should be proportional to and reflective of the complexity and criticality of what you are trying to source. The complexity will also depend on the purpose the SCM is serving ( high-level analysis compared with detailed forecasting). A very simple SCM could be key cost drivers and assumptions captured in a spreadsheet, which may be appropriate for sourcing something that is low value, simple, and stable. In contrast, a complex SCM could be a detailed financial model, which may be appropriate for sourcing something that is high value or complex and could take several months to prepare. If going to tender, factor in the time that suppliers will need to create their equivalent cost models when setting the procurement timetable. Simple SCMs with fewer data sets and less complex calculations are less resource intensive to produce than complex SCMs with advanced features. Sufficient time to plan, design, develop and test the SCM Should be planned into any programme or procurement activity.

10 The level of detail in an SCM can vary significantly and it may need to be iteratively developed over time as more information becomes available and as greater certainty is required. Simple models based on an initial service, project, or programme definition and key cost drivers may be appropriate during the early stages of the decision-making and procurement process. As the procurement process progresses, the service, project or programme specification and other determining factors develop, and greater confidence is required, SCMs may need to become more detailed and the data within them more robust. There may be a need to revisit and recalibrate the assumptions. For example, the SCM may require further development to allow for greater insight into cost components and potentially even their evaluation as part of supplier selection, provided the SCM is disclosed to the bidders. See Figure 2. SCMs vary in complexity and the time they take to create.