9. Describe and estimate costs
This section explains how to describe and estimate the costs of your appraisal options for use in your economic appraisal and to establish funding requirements.
Use the appropriate level of detail
You should estimate costs to suit the stage of appraisal you are at. You should include enough detail to allow you to:
- comparisons between different your FCERM options
- select a preferred option when appropriate
- estimates of funding requirements of FCERM GIA and funding partners
You should always include allowances for risk and uncertainty. These will be larger at early stages of appraisal. At later stages allowances can reduce as your understanding of your options increases.
You can also focus your effort on items most likely to make the greatest difference to the overall cost. For example, consider the main cost items for your option and any cost items with the greatest uncertainty. When you present costs you should always put them in the context of the appraisal stage when they were estimated and record your underlying assumptions.
Estimating whole life costs
You should take a whole life cost approach to systematically consider all costs to be incurred by an FCERM option over the life of that option.
Your basic whole life cost estimation should include:
- the estimation of all costs
- determining the life of any assets so that the cost of necessary future replacements can be included
- identification and allowance for risks and uncertainties that affect costs
You will need to calculate different types of cost including: - whole life cash costs – estimated using the current price base and excluding future inflation
- whole life discounted cost – cash costs reduced to a single present value figure. Also referred to as the whole life present social value cost.
- financial cost for approval – the cost for which formal approval is sort to implement a particular investment. This may include an allowance for inflation
You will need record how you built up your estimates for each of your options. In a business case you will need to be able to present them in different ways including:
- project development costs – main stages of SOC, OBC, FBC
- project implementation costs – typically the upfront costs to implement your FCERM option
- future costs – costs of future interventions after initial implementation including both capital and revenue funded activities
Cost categories
You should use the typical cost categories for FCERM options as a guide when you are estimating costs. Your estimates for interventions in early years will be improved by considering the categories in turn. It can help to group categories together when you think about future interventions. For example, the estimated capital cost of a future asset replacement could have added an informed lump sum to reflect the associated cost categories of appraisal, design, supervision and so on.
You should include any necessary quality assurance and peer review in your costs.
The main cost categories you should use to estimate whole life costs are:
- project management
- appraisals
- surveys
- design
- capital construction and supervision
- operation and maintenance
- mitigation
- revenues
- residual values
- decommissioning
Calculating costs for your economic assessment
You need to identify and estimate all costs needed to achieve the stated benefits over the life of each option. You must show when these will be spent and include both revenue and capital costs irrespective of who pays.
You need to consider the following issues when you calculate your costs.
Discounting
This gives you a single figure that represents the social value of all the different costs identified over the life of your option. You can use this figure to compare the costs of different options. Once you have identified your costs you can use the standard spreadsheet to calculate your single figure of discounted costs.
Inflation
You should not include inflation in your estimates of future costs for economic assessment. You must use the same price base for all costs which should typically be within 6 months of completion of your appraisal report.
This will mean you need to update your estimates as you proceed through different stages of appraisal. Updates to all costs should be done using the gross domestic product deflators.
Taxes and other transfer costs
The purpose of economic appraisal is to understand the change in net social welfare in the UK. Taxes are an example of simply transferring money from one place to another with no change in UK net welfare. This means you should exclude them from your cost estimate. They should be included in your financial costs as taxes and other transfer payments in an option must be paid.
Sunk costs
Sunk costs cover any expenditure you have already incurred and which consequently cannot be changed. You can exclude sunk costs from your economic assessment. Your sunk costs can include previous expenditure in your project area on FCERM assets and services and the cost of producing FCERM plans and local strategies.
Partner costs and contributions
You must include all costs in your option whole life cost regardless of who pays. You should include any cost incurred by partners as a contribution in your partnership funding calculator and financial planning.
Consider risk, uncertainty, and optimism bias
Your estimate of costs must be realistic. This means you must make allowances for:
- known risks associated with intervention that you cannot fully mitigate
- uncertainties in options design and differences between your project and the closest benchmarks
- optimism bias which is the systematic tendency for all appraisers to be over-optimistic about key project parameters, including capital costs, operating costs and project duration
Carbon costs
This appraisal guidance refers to carbon which in this context means carbon dioxide equivalent (CO2e) and usually expressed in tonnes (t). In FCERM, the term carbon is used to represent emissions from all greenhouse gases.
The Environment Agency uses a net carbon benefit approach to capture the monetised carbon costs, carbon emissions avoided and any carbon sequestration of FCERM. This uses the Green Book approach to carbon costing combined with specific research on the carbon emissions avoided and carbon sequestration that FCERM can provide.
Inputs to describe and estimate costs
Before you estimate the costs of your option, you must have:
- a description of your FCERM option in sufficient detail that allows cost estimation that is appropriate to the stage of appraisal - for example, a high level understanding at early appraisal stage stages increasing to detailed descriptions for use in investment choices and preparing a full business case (FBC)
- access to specialist advice, partners and stakeholders
Checkpoints to describe and estimate costs
After assessing costs, you should:
- consider if your objectives need reviewing, particularly where costs are very high
- use your cost information to inform your long to short list exercise
- reconsider the packages of measures within your options and refine them if possible so that it is clear whether an option can be carried forward in the appraisal process or must be rejected
Outputs to describe and estimate costs
This step in the appraisal process is complete when you have:
- estimated the whole life costs of your FCERM options
- recorded how you estimated your options costs including all your assumptions
- updated your Appraisal Summary Table (AST)
- informed stakeholders of the conclusions of the costing exercise and next steps
Read the full technical guidance
If you need to understand the full technical content you should see section 9 – describe and estimate costs in the FCERM technical guidance.