Optimism bias
The demonstrated, systematic tendency for project appraisers to be over-optimistic about costs, benefits and duration, corrected by an explicit empirically based adjustment.
HM Treasury publishes recommended adjustment ranges by project type. For capital expenditure the upper bounds run from 24 per cent for standard buildings to 51 for non-standard buildings, 44 and 66 for standard and non-standard civil engineering, and 200 for equipment and development.
The method matters more than the numbers. The instruction is to begin at the upper bound and reduce it only in proportion to contributory factors that have been mitigated, with clear evidence that should be independently verified before any reduction is made.
The upper bounds are the average bias observed at outline business case stage, not the worst case. The guidance notes that earlier estimates may require more.
Sources
HM Treasury, Supplementary Green Book Guidance, Optimism Bias, Table 1 for the adjustment ranges, paragraph 3.3 on the outline business case stage and paragraph 3.17 on independently verified evidence. Prepared from Mott MacDonald, Review of Large Public Procurement in the UK, 2002.
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Inception & Development
Argued in full
The largest contributor to optimism bias is the document that starts the project