Should Cost Modelling - GOV.UK
SHOULD COSTMODELLINGGUIDANCE NOTEMAY 2021
SHOULD COST MODELLING – MAY t is a Should Cost Model?42.1Introduction to Should Cost Models42.2Levels of complexity62.3Evolution of a Should Cost Model73.Why produce an SCM?83.1Benefits of Should Cost Models84.When to produce an SCM104.1Requirement for a Should Cost Model104.2Using Should Cost Models to assess the deliverability of bids104.3Using Should Cost Models as formal evaluation criteria115.Producing an SCM125.1Five stages126.Planning an SCM146.1Structured approach147.Establishing the resource requirement197.1Suitably qualified and experienced people198.Procuring an SCM218.1Commercial considerations211
SHOULD COST MODELLING – MAY 20211.Context1.1Overview1.1.1This Guidance Note provides high-level guidance for contracting authorities on‘Should Cost Models’ (SCMs), the term used in the Sourcing Playbook and theConstruction Playbook to describe whole life cost modelling. Although theterminology may be new or unfamiliar, contracting authorities have a long history indeveloping cost models. These include straight-forward spreadsheets throughcomplex, specialist models to plan and monitor activity, support decision making,and drive value for money in the delivery of public services and public worksprojects and programmes. The term ‘Should Cost Model’ (SCM) introduces astandard terminology for contracting authorities in order to formalise existing costmodelling activities and set clear expectations, and guidance for what good SCMslook like.1.1.2Although this Guidance Note has a focus on Should Cost Modelling in thecontext of sourcing services and public works projects or programmes, it isrecognised that Should Cost Modelling applies to other types of sourcing and isrelevant to wider decision-making processes for projects. Effective Should CostModelling will also involve multiple professional functions, including Finance,Commercial or Economic disciplines.1.1.3This Guidance Note is the first of a set of Cabinet Office guidance relating toSCMs: SCM Guidance Note (this document) – outlines what SCMs are, when andwhy contracting authorities should produce them, and key considerationsaround developing and/or procuring them. It is not intended to be a detailedguide on how to develop an SCM internally. SCM Development Guidance – provides contracting authorities with guidanceon using internal resources to design, develop, manage, test and govern SCMs;and SCM Technical Build Guidance – guidance, based on good practiceprinciples for building SCMs. It is technical in nature and aimed at peoplewho will be building SCMs.Practitioners should also consult existing good practice, including HM Treasury’sMacpherson report, Aqua Book and Green Book.1.1.4A number of practical Tools and Templates have also been produced by CabinetOffice to support the development of SCMs and to help reinforce good practiceapproaches (see Section 5.1.2 for further details). These are aligned to differentphases/ stages of the model development lifecycle (See Figure 1):2
SHOULD COST MODELLING – MAY 2021Figure 1: SCM Guidance and Tools & Templates to support the model developmentlifecycleProject Phase /StagePlanDesignDevelopTestUseQuality AssuranceActivitiesSCM GuidanceInitial ModelAssessmentScopeSCM Guidance NoteSCM Guidance NoteInitial ModelAssessment ToolSCM Tools andTemplatesSpecification &Design and DataDevelopmentGuidanceTechnical BuildGuidanceBuild &PopulateDevelopmentGuidanceTechnical BuildGuidanceReview &Formal QADevelopmentGuidanceTechnical BuildGuidanceImplement & UseDevelopmentGuidanceScoping TemplateSpecification Template SCM Build TemplateTesting ProceduresBook of Assumptions /Planning TemplateExampleBook of Assumptions / Book of Assumptions /Data Log TemplateQA Plan TemplateSCM Build TemplateData Log TemplateData Log Template Development ChecklistDevelopment Checklist Book of Assumptions / Good Practice BuildGood Practice BuildData Log TemplateToolkitToolkitDevelopment Checklist Version Control Log Development ChecklistUser Guide ExampleDevelopment Checklist1.2Contact1.2.1You should consult the Cabinet Office Sourcing Programme for further informationor before planning an SCM for complex services, projects or programmes viasourcing.programme@cabinetoffice.gov.uk.3
SHOULD COST MODELLING – MAY 20212.What is a Should Cost Model?2.1Introduction to Should Cost Models2.1.1An SCM provides a forecast of what a service, project or programme ‘should’ costover its whole life. As summarised below, there are different types of SCMs thatmay also differ in design as requirements change over the procurement lifecycle.However, the term Should Cost Model or SCM is used throughout thisGuidance Note to mean all of them.2.1.2For public works projects, SCMs forecast costs over a period that includes boththe build phase and the expected design life. This includes costs of additionalmarket factors such as risk and profit. It provides an understanding of whole lifecosts, 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. SCMsshould be used early in the procurement process (see Chapters 4 & 5 in theConstruction Playbook) to:2.1.3 Inform the delivery model assessment (DMA), which considers both cost andnon-cost criteria, such as the whole life carbon assessment; Drive a better understanding of the whole life costs and the risks andopportunities associated with different options and scenarios; Drive more realistic budgets by providing greater understanding of the impactof risk and uncertainty on both cost and schedule; Inform the first business case (Strategic Outline Case for departments andALBs); and Inform engagement with bidders and the appropriate commercial strategy,including methods to incentivise the supply chain to focus on whole life value.For public services an SCM should be used to help evaluate different deliverymodel options: In-house - This (also referred to as a ‘Public Sector Comparator’) is the wholelife cost to deliver a service in-house using internal resources and expertise. Itincludes the cost of acquiring and maintaining assets and the necessarycapability. This should be used early in the procurement to compare costsagainst the ‘Expected Market Cost’ and/or ‘Mixed Economy’ options at a highlevel to inform a DMA (see Chapter 3 in the Sourcing Playbook). Expected Market Cost - This is the expected whole life cost of procuringa service from an outside supplier. It includes the cost of additional marketfactors such as risk and profit. If the decision is to procure the servicefrom an outside supplier, the ‘Expected Market Cost’ option can be usedto inform engagement with bidders. Use early market engagement to helpensure that the model structure can be evolved to enable comparison tothe bids you expect to receive from the market.4
SHOULD COST MODELLING – MAY 2021 2.1.4Mixed Economy - A delivery model will often be a combination ofinsourcing and outsourcing different components of the service. In thesecases, a combination of the ‘In-house’ and ‘Expected Market Cost’options, referred to as a ‘Mixed Economy’ option, can be used to calculatethe cost of the service.SCMs are calculations of what a service, project or programme ‘should’ cost overits whole life, irrespective of where it has been obtained from. See Figure 2.Figure 2: Demonstrating the evolution of an SCM over a procurement lifecycle1 Understand totalcost of options(e.g. make vs buy)2 Gain insight into supplier proposals 10 10120120FacilitiesCostsFacilitiesCosts affCostsMovements from should tsOption AOption BOption eCostsStaffCostsFacilitiesCostsProposalEvolving needs, approach and maturity over a procurement lifecycle2.1.5It is important to define and ensure decision makers are aware of what costs areincluded in the SCM, how they are treated and the limitations of the SCM. AnSCM is an estimate of a specific set of costs under particular circumstances overa defined time period, usually defined as the whole life of the service, project, orprogramme.2.1.6An SCM is a both a financial model (e.g. they may use financial techniques suchas Net Present Value calculations) and an analytical model and should follow theprinciples set out in the Green Book and Aqua Book. An SCM will:1 See 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 sensitivitypurposes.the Aqua Book for a more detailed commentary on uncertainty and risk5
SHOULD COST MODELLING – MAY 20212.2Levels of complexity2.2.1SCMs vary in complexity and the time they take to create. The complexity of anSCM should be proportional to and reflective of the complexity and criticality ofwhat you are trying to source. The complexity will also depend on the purpose theSCM is serving (e.g. high-level analysis compared with detailed forecasting). Avery simple SCM could be key cost drivers and assumptions captured in aspreadsheet, which may be appropriate for sourcing something that is low value,simple, and stable. In contrast, a complex SCM could be a detailed financialmodel, which may be appropriate for sourcing something that is high value orcomplex and could take several months to prepare.2.2.2If going to tender, factor in the time that suppliers will need to create theirequivalent cost models when setting the procurement timetable.2.2.3Simple SCMs with fewer data sets and less complex calculations are less resourceintensive to produce than complex SCMs with advanced features. Sufficient time toplan, design, develop and test the SCM should be planned into any programme orprocurement activity.2.2.4The level of detail in an SCM can vary significantly and it may need to beiteratively developed over time as more information becomes available and asgreater certainty is required. Simple models based on an initial service, project, orprogramme definition and key cost drivers may be appropriate during the earlystages of the decision-making and procurement process.2.2.5As the procurement process progresses, the service, project or programmespecification and other determining factors develop, and greater confidence isrequired, SCMs may need to become more detailed and the data within them morerobust. There may be a need to revisit and recalibrate the assumptions. Forexample, the SCM may require further development to allow for greater insight intocost 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 tocreate. The complexity of an SCM should beproportional to and reflective of the complexity andcriticality of what you are trying to source.”6
SHOULD COST MODELLING – MAY 20212.3Evolution of a Should Cost Model2.3.1Delivery model assessments (DMAs) are expected to be iterated over time in‐linewith the Business Case development process set out in the Green Book. Similarly,SCMs are also expected to evolve over time as more information becomesavailable and requirements change. These requirements may, for example,include using the SCM to help demonstrate value for money, to inform thedevelopment of payment mechanisms or to help protect government from ‘lowcost bid bias’.2.3.2SCMs have utility across the procurement lifecycle and the level of detail, whichcan vary significantly, may require iteration over time. Their evolution is similar tohow the Green Book describes the Business Case development process: Initial Should Cost Modelling – Informs the initial strategic deliverymodel assessment (Strategic Outline Business Case). Developed Should Cost Modelling – A more detailed model that provides anevaluation framework for options to help demonstrate value for money.(Outline Business Case). Evaluative Should Cost Modelling – This is a full cost model that includesall cost drivers and data to support evaluation of the costs of supplier returnsthat have been received. This is possible only where the SCM has beenmade available to bidders during the procurement. Contracting authoritiesshould carefully consider the potential risks and benefits of sharing SCMs(Full Business Case). Performance Should Cost Modelling – This is a full cost model using actualcost data and volumes, allowing comparison to expectations and robust openbook contract management (Full Business Case).7
SHOULD COST MODELLING – MAY 20213.Why produce an SCM?3.1Benefits of Should Cost Models3.1.1The three fundamental benefits of SCMs are to provide a better understanding ofthe costs associated with different delivery model options; to provide insight intothe potential delivery models; and help protect the Government from ‘low-cost bidbias’ (the tendency to favour the lowest cost bid as the preferred option).3.1.2Where services, projects or programmes are complex, there is a risk of low-costbid bias and departments are required to refer abnormally low bids prior toaccepting them (see Chapter 10 in the Sourcing Playbook and Chapter 9 in theConstruction Playbook): 3.1.3If the bid is more than 10% lower than either the average of the other bids orthe Should Cost Model estimate it should be referred to the ContinuousCommercial Improvement Team (i.e. if it fails either of these criteria it shouldbe referred). The SCM comparison should be made between the bid and theShould Cost Model estimate at the 50% confidence interval for probabilisticestimates or the median scenario for deterministic estimates.SCMs are powerful tools that can be used to support a much wider range ofanalysis. These may be best understood by reference to the Five Case modeloutlined in the Green Book: Strategic Case – Supporting the case for change by clearly defining the scopeof the offering and associated delivery costs, including confidence rangesaround the costs. Depending on the required scope of the SCM, this may alsoinclude providing a quantitative understanding of aspects of the currentsituation, referred to as Business as Usual (BAU). Economic Case – Having a should cost model will allow for the costingelements of the business case to be better articulated and understood, andsupport discussions around options and value for money. In assessing valuefor money, whole life cost considerations will extend beyond those of just thecontracting authority and benefits will also form part of the evaluation. Therequired scope of the SCM and the extent to which it will be used to supportthe Economic Case will drive its overarching design. Commercial Case – Designing an SCM for first generation outsourcing orwhere services, projects or programmes are novel will help to drive anunderstanding of their commercial viability through a better understandingof cost components, including risk and timing, and whether or not there isa market from which they can be procured. Financial Case – Having a granular cost profile of a target service, project,or programme will help to determine issues of affordability and financialviability through highlighting whole life costs and confidence ranges aroundthem. Akin to the Economic Case, the extent to which the SCM will beused to support the Financial Case will impact the broader costs andbenefits included within the SCM and drive its overarching design.8
SHOULD COST MODELLING – MAY 2021 Management Case – Having a view of what the delivery costs should bewill assist in overall project management. It can provide structure toreporting by providing a baseline set of costs against which deviations canbe measured.In addition to the initial delivery model assessment andhelping to protect government from low-cost bid bias, SCMscan support different elements of the procurement lifecycle,provided they are supported with accurate managementinformation and market data.This can include:Options Analysis – Gives objective views on cost estimates and drivers for differentoption combinations, broadening insight into delivery options;Switching Values – Enables, through sensitivity analysis, the threshold at whichchanges in input values would make an option no longer viable;Key Cost Driver Analysis – Provides additional insight through enabling a more detailedunderstanding of key factors that influence cost and raise awareness of their underlyingdrivers;Maximising Value for Money – Establishes cost by cost category, providingtransparency over the cost of something and the output delivered in return;Negotiation Support – Allows for element level comparison between different bidders’proposals and the SCM to identify and understand differences between a bidder’sproposed price and the expected baseline during competitive procedure with negotiation orcompetitive dialogue procurement processes;Budget Setting – Can be used to give a framework to inform budgets;Project Performance Review – Once a contract has been signed, the supporting SCMcan be updated with the contracted costs to provide a cost baseline against which analysiscan be performed, highlighting variances between outturn and plan at a granular level andenabling further investigation; andContract Management – Provides a cost baseline which, along with actual costs, can beused to manage the performance of the contract and supplier, challenge VFM and informcontract change.9
SHOULD COST MODELLING – MAY 20214.When to produce an SCM4.1Requirement for a Should Cost Model4.1.1The requirement to produce an SCM when making sourcing decisions andcontracting outside suppliers for the delivery of public services is set out withinthe Sourcing Playbook (see Chapter 3) and for public works projects orprogrammes within the Construction Playbook (see Chapter 5).4.1.2It is good practice to produce an SCM for all procurements and its developmentshould be agreed as part of the planning stage of the business case andprocurement, prior to advertising the contract and the publication of anyprocurement documents.4.1.3Initially, an SCM should be used, in conjunction with an analysis of non-costcriteria (e.g. whole life carbon), as part of a delivery model assessment to informthe recommended delivery model.4.1.4Prior to developing the SCM it is important to create a definition of the service,project or programme, including what good looks, the desired outcomes and keyperformance indicators to ensure modelling is completed to the right level. Furtherguidance on creating a service definition and delivery model assessments isavailable here.4.2Using Should Cost Models to assess the deliverability of bids4.2.1Through providing insight into potential delivery models and cost drivers, SCMscan be used to help devise the evaluation model. The SCM can inform theunderstanding of what costs should be included and inform discussion with thebidders.4.2.2SCMs can be used during a competitive dialogue or competitive procedure withnegotiation to help ensure that suppliers provide transparency throughout thedialogue/negotiation of all key cost drivers over the whole life of the service,project or programme. An SCM can provide contracting authorities with a betterunderstanding of costs. Where they are higher or lower than expected this shouldprompt a discussion with the bidder around how they arrived at their costing. TheSCM will not normally be shared with bidders during dialogue/negotiation butused to inform the contracting authority’s negotiation position and the robustnessand deliverability of bids.“The SCM will not normally be shared with biddersduring dialogue/negotiation but used to inform thecontracting authority’s negotiation position and therobustness and deliverability of bids.”10
SHOULD COST MODELLING – MAY 20214.3Using Should Cost Models as formal evaluation criteria4.3.1SCMs can only be used as formal evaluation criteria for final bids if they have beendisclosed to bidders during the procurement. How the SCM will be used for theevaluation and how bids will be scored against the SCM shall be clearly set out inthe procurement documents. If a department doesn’t disclose an SCM it cannot beused for evaluation purposes. If disclosed, an SCM can be used to provide: Better understanding of the make-up of costs and cost components.SCMs can be used to provide deeper insight into the costing of componentsof a bid. An SCM can provide granular insight into the components that makeup the cost of a service, project or programme. Notably, the componentsmay differ between delivery options and this can impact the level at whichcomparisons can be me made. However, using early market engagementcan help to ensure that the SCM is designed in a way that is comparable tothe bids you expect to receive from the market. Figure 3 is an example ofthis. Insight into potential risks relating to costing. Whilst SCMs cannot informassessment of delivery risks directly, they can show the impact of risksmaterialising and highlight areas where costs may appear to be too low orhigh, and therefore represent a risk. Having a well-reasoned and internallyagreed SCM provides an opportunity to investigate where delivery costs arehigher or lower and allow for targeted clarification if appropriate. This willprovide greater insight into the supply side assumptions and costs.Figure 3: Using an SCM to compare cost componentsOption 1Option ttingsUtilitiesBuildBuildCost components may differ between different delivery options11
SHOULD COST MODELLING – MAY 20215.Producing an SCM5.1Five stages5.1.1Whether sophisticated or simple, producing an SCM will follow a process with fivedistinct phases or stages (See Figure 1). Interaction may be required across anumber of different functions ranging across financial, economic, statistical orcommercial disciplines. The approach to model development can be summarisedas follows: Plan: create a model Scope and prepare provisional Delivery, Dataand QA Plans. Set out why an SCM is required and what it needs to do.Establish the high-level design, complexity, data, delivery and resourcerequirements and whether to develop the SCM internally or procure fromthe market. Confirm the stakeholders, timelines, governance and QualityAssurance (QA) requirements. The model Scope will evolve into a moredetailed model Specification (Inc. Design) and provide the blueprint forthe model’s technical development. Design: create a model Specification (inc. Design) for the SCM. Codify theinputs to and outputs from the model, set out in writing the key calculationsand formulae that will be designed into the model and articulate the model’soverall design. Update the Data, Delivery and QA Plans and, together with themodel Specification, have them approved prior to commencing model build.The SCM Development Guidance provides guidance on preparing Delivery,Data and QA Plans and producing a model Specification and Design. Develop: Build and Populate the model. It is important to follow goodpractice modelling principles to help reduce risk and increase usability of theSCM. These principles should be used to guide development of the model inline with the agreed model Specification. The SCM Technical Build Guidanceprovides guidance on good practice model development principles. As themodel is developed, the model developer should perform self-testing prior tosubmitting it for formal QA and testing. Test: undertake formal QA and testing and sign-off the model. Themodel Scope will highlight QA and testing requirements and these will beset out within the QA Plan. This phase of model development is whenformal QA and testing is performed. QA is discussed in detail in HMT’s‘Review of Quality Assurance of Government Analytical Models’ and theAqua Book. Use: put in place governance and control processes to help ensure themodel remains fit-for-purpose. Once developed, tested and appropriatelysigned off as fit for purpose, the model is ready to be used. At this pointappropriate governance and control is required to help ensure that the SCMremains fit for purpose over its lifecycle.12
SHOULD COST MODELLING – MAY 20215.1.2The following practical Tools and Templates have been produced byCabinet Office to support the development of SCMs and to help reinforce goodpractice approaches: Initial Model Assessment Tool – informs the SCM development approachand informs setting an appropriate level of Quality Assurance (QA) andtesting; Scoping Template – proforma document containing key questions to helpstructure and formalise the SCM Scope; Planning Template – project management aid to support scheduling of SCMtasks and tracking roles & responsibilities, delivery risks and project status; QA Plan Template – for agreeing and formalising the SCM QA and testingactivities over the model development lifecycle; Development Checklist – checklist containing QA and governance checks tobe performed at each stage of the model development lifecycle; Specification Template Example – key headings, with content examples, toinform production of a model Specification (inc. Design); SCM Build Template – model build template with embedded good practiceelements (e.g. error check network, timelines, style guide etc.); Book of Assumptions / Data Log Template – customisable template fordocumenting SCM data and assumptions and guiding data collection; Good Practice Build Toolkit – toolkit to structure and help automate thereview of an SCM’s adherence to good practice approaches; Version Control Log – template tool to help manage and provide a record ofchanges to an SCM over its life; User Guide Example – key headings, with content examples, to informproduction of a model User Guide; and Testing Procedures – procedural level guidance for testing an SCM (alsoincludes QA Report and Test Memos).13
SHOULD COST MODELLING – MAY 20216.Planning an SCM6.1Structured approach6.1.1Once the decision to produce an SCM has been taken, it is important to planit properly and provide a structured approach to onward development by: Undertaking an Initial Model Assessment (IMA) to determine the SCM’scriticality and sophistication and, in-turn, the associated requirementsfor its governance, QA and testing; Outlining the SCM’s purpose, functionality, data requirements, high-level design,stakeholders and delivery timelines; and Establishing the resourcing requirement and whether this is available in-houseor needs to be procured from the market.6.1.2The approach to model development should be captured in a model Scope, withaccompanying Delivery, Data and QA Plans. These documents form the bridgethat helps to translate requirements into practical SCM development activities.The model Scope, Delivery, Data and QA Plans, should be created on a modelby-model basis. Tools and Templates to support their development are set out inFigure 1.6.1.3SCMs that inform critical decisions may be more sophisticated, require moregranular data and contain more advanced features than models used tosupport less critical decisions. Greater sophistication adds to development timeand invariably brings a greater risk of error. There is a balance to be struck andthe development of SCMs should be driven by the principle of proportionality.6.1.4To assist in determining how to approach the development of an SCM, includingQA and testing, an Initial Model Assessment (IMA) should be undertaken. It isimportant to consider both the criticality of the decision that the SCM is designed tosupport as well as its level of sophistication. For example, consider how detailedthe analysis needs to be, how well defined the service being sourced is, theaccessibility and robustness of data and the availability of appropriately skilledresources may impact the risk profile of the SCM. An IMA Tool has beendeveloped by Cabinet Office to support this assessment. It is informed by theCabinet Office Tiering Tool, which should be used to provide an initial indicator ofthe criticality to the business of the decision that the SCM is designed to support6.1.5These considerations should inform thinking around: Procedures and Controls – how the SCM should be managed andcontrolled over its lifecycle, including what QA and testing should beapplied to help assure its fitness for purpose; and Roles and Responsibilities – what are the various roles and responsibilitiesacross the SCM’s lifecycle. This will include determining whether people aresuitably qualified and have sufficient experience to perform the task2.2 SeeReview of Quality Assurance of Government Models for additional information on assessingexperience.14
SHOULD COST MODELLING – MAY 20216.1.6When preparing the model Scope, the factors outlined in Figure 4 should beconsidered proportionally in the context of the criticality of the SCM. The modelScope should be owned by the Model Senior Responsible Owner (Model SRO), whohas overall responsibility for the SCM, including its development and use. Onceprepared, the model Scope, Delivery and QA Plans should be agreed and signed offvia appropriate governance.Figure 4: Key factors in developing the model Scope1: Overview Frame the challenge by setting out why the SCM is required, what its primary functionis (e.g. what does it need to show or compare?) and what the required accuracy is. Outline user requirements, key outputs, and what supporting documentation will berequired (e.g. a model Specification, Book of Assumptions / Data Log, User Guide, etc.). Identify if similar modelling has been undertaken previously, any lessons learnt andwhether there are any materials (in addition to the Cabinet Office Tools an
SHOULD COST MODELLING . SCM is serving (e.g. 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
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