the guideline When should I use this guideline? This guideline may support activities undertaken at all stages of the investment lifecycle as uncertainty can impact all aspects of infrastructure development and delivery through to asset operation. Who should use this guideline? Your function Your responsibility The guideline can help you: Investor/Senior Responsible Owner (SRO) Directing an investment through its development and delivery, approving/recommending changes to budget, time and scope where necessary. Leading project governance activities. Delivering the project benefits, managing an asset through its operational life and achieving ongoing service delivery requirements. Identify potential uncertainty impacting your project, including the trigger points that indicate when a different action may be required. Identify strategies to allow you to respond flexibly to uncertainty realised during project delivery and/or the asset’s operational life. Exercise actions to allow you to respond advantageously to any changing conditions. Manage stakeholder expectations regarding project delivery and exercising options. Business case writer Planning and developing a full business case for investments of all sizes and types. Understand real options analysis and associated real options valuation techniques, and manage consultancies to develop real options analysis. Cost and analyse options incorporating real options analysis required. Build real options trigger points and strategic planning requirements into project plan and procurement strategy. Project/Program Delivery Team Manage an investment through delivery within approved budget, time and parameters. Reflect real options requirements in project planning, procurement and contract documentation. Consider real options requirements in tender assessment, decisionmaking processes and contract negotiations. Manage investment delivery through uncertainty, monitoring conditions and triggers, and using approved options to respond advantageously to changing circumstances. Ensure the of real options identified in the business case is realised, as appropriate.
Switch technology, markets, products Have you considered the opportunity to change inputs (use of materials), outputs (products and markets) and use technology during operation to improve the business case? Switch between conventional and new technologies or methods of delivery. Grow (project or corporate growth) Have you considered benefits from new technology, market access, knowledge and experience gained during this investment project? Have you accounted for the fact that exercising one option can open up further options? Reserve space for additional lanes. Use technology developed in other projects/markets. Time Have you considered the optimal timing for making an investment decision based on information becoming available or investment conditions improving? Does the value of deferring exceed that of investing now? Delay project until information on costs and/or benefits are more certain. Invest in better information earlier. Delay procurement until completion date is more certain. Phase Have you considered the opportunity to divide a project or investment into separate investments that can be phased over time? Did you consider adjusting the definition of a consecutive phase based on the results of the previous one? Staged development on priority needs. Invest early in elements of a project with long delivery times, with flexibility to invest in high cost elements of a project when required. Scale Have you considered the opportunity to adjust the capacity both up and down? temporary peak hour car pool or bus lanes. Table : Identifying scope for flexibility within your investment strategy Also consider if flexible decisionmaking is required to ensure: benefits can be achieved under uncertain circumstances (uncertainty in demand); for money can be achieved under uncertain circumstances (uncertainty in market supply); and there is scope to minimise Government’s obligations in situations characterised by uncertainty and irreversibility. Step 3: Draw the triage together – determine the most appropriate approach for dealing with uncertainty for your investment proposal At this agencies should have a good understanding of the uncertainty that impacts the investment, its vulnerability to the uncertainty and the capacity of the investment to respond to the uncertainty. You need to draw all this information together to determine any managerial actions that could be taken to address uncertainty during the investment’s life, and whether detailed real options analysis and valuation is warranted in the business case. Agencies should liaise with their DTF representative to confirm the appropriate application of real options for each investment. 4.2.3 Conceptualise summary Key decision point – End of Stage 1: Conceptualise
Construct only Flexibility can be fully considered during the planning and design phase. Flexibility can be retained by entering into a construct only contract for specific project elements as decisions are made to proceed with that project element May pay a higher cost to contract progressively for project elements If contract entered into upfront for multiple project elements, may not facilitate a real options approach Does not for innovative solutions to emerge until late in the process No incentive to facilitate a real options approach during operations Design and construct and variants Flexibility can be considered during the planning phase May allow for innovative solutions to emerge at the design stage Poor contractual flexibility does not facilitate a real options approach No incentive to facilitate a real options approach during operations phase Managing contractor Flexibility can be fully considered during the planning phase Allows for innovative solutions to emerge at the design stage Provides greater flexibility for a real options approach than the traditional design and construct The trigger points, and how they will be exercised, need to be clearly set out in the contract No incentive to facilitate a real options approach during operations phase contractor involvement Allows for innovative solutions to be identified early in the process Could improve the ability of the contractor to implement a real options approach Alliance Flexibility can be considered during the planning phase Use of functional requirements specification rather than design specification could increase design flexibility opportunities The trigger points, and how they will be exercised, need to be clearly set out in the agreement No incentive to facilitate a real options approach during operations phase Public Private Partnership Use of functional requirements specification rather than design specification increase design flexibility opportunities Contractor involvement in service delivery could provide an incentive to consider inproject options Depending on contract, contractor may not have appropriate incentives to adopt a real options approach Own Operate (BOO) Flexibility can be fully considered during the planning and design phase Provides an incentive to facilitate a real options approach during the operations phase Constrains real options approach – does not allow innovative solutions to emerge until after design phase Table : Using real options with different procurement methodologies