Value Management of Construction Projects, 2nd Edition

10Option Appraisal, Risk Management and Whole Life Costing

10.1 Introduction

Maximum whole life asset value can only be attained if all valid business options are considered and evaluated. This is true irrespective of whether the business of the organisation is commercially motivated, socially motivated or a combination of the two. The succeeding sections in this chapter are as follows:

• Section 10.2 describes the fundamental principles of option appraisal. The main reference for this section is the HM Treasury Green Book, Appraisal and Evaluation in Central Government (TGB). Although focused on the public sector, the guidance is equally applicable to the private sector (HM Treasury, 2003 – updated 2011).
• Section 10.3 outlines an approach to risk management and discusses the extent to which value and risk are complementary approaches within business case development and option appraisal.
• Section 10.4 summaries the primary rules for undertaking a whole life costing (WLC) exercise as part of an option appraisal conducted in a manner that allows direct comparison.
• Section 10.5 is a case study illustrating the use of option appraisal, risk management and whole life costing techniques to inform proper cost–benefit decisions, and underpinned by a value management (VM) methodology.

Although the methods outlined in this chapter are described in other texts, including TGB, as free-standing techniques in support of option appraisal, their use is enhanced significantly when used in conjunction ...