9.1 General Principles

In approving any capital project, financial assistance or other expenditure, the following principles should be applied by the approving authority:

1. There should be an early opportunity for the approving authorities to consider and influence the choices made. This could take the form of the formal submission of a strategic outline case for approval or, on some occasions, of informal contacts between the project sponsor and the approving authority.
2. The economic appraisal is an important factor in the consideration of any spending proposal, and Departments are responsible for ensuring that this is carried out and that the proper methodology is used. Points to note in this regard include:-
   • Approvals in principle should not be granted, nor should any commitment to funding be given (e.g. through a Letter of Offer) prior to the completion of a suitable business case, including an appropriate economic appraisal. Only when needs, objectives, options, costs, benefits, risks, funding and other relevant factors have been thoroughly investigated according to the relevant appraisal methodology can approving authorities be assured that a particular proposal is likely to represent VFM and satisfy accountability requirements.
   • Departments should be aware that appraisal techniques should be used for all proposals, not only for those above the limit at which they need to seek DFP approval. The principles of appraisal should be applied with appropriate and proportionate effort to all expenditures, including those at policy, programme and project level. DFP Supply will request sight of appraisals of expenditures below delegation limits from time to time.
3. In some cases, it may be appropriate to grant approval in stages. For example, PFI projects generally require DFP approval at both Outline Business Case and Full Business Case stages. For some other types of proposal, it may be appropriate to grant approval to proceed to detailed planning and design work on the basis of a preliminary option appraisal; and to grant final approval based on a more detailed analysis of the options. Where approval is given in stages, each stage should have a clear statement from the Project Manager (or Project Sponsor for construction projects) of the status and progress of the project (e.g. percentage of design completed) and the accuracy of the estimates of cost and time, highlighting main risks and how they can be managed.
4. Before firm commitment, the approving authority should receive an up-to-date business case and economic appraisal of the project, covering the following:
   • scope of the project;
   • capital costs;
   • annual costs/savings/benefits and their phasing;
   • statement of accuracy of estimates and main areas of remaining uncertainty and their possible effects on the project;
   • recalculated Net Present Values (NPVs);
   • a Project Initiation Document, including definition of roles (Project Board, Senior Responsible Owner and Project Manager), risk management proposals, value management proposals, project timetable (including level and amount of project management resources); and
   • proposed monitoring and evaluation arrangements.
5. No firm commitment should be made by the approving authority until the costs and the timetable for the project are well established. The probability of project cost or time being more than 10% above the estimated figure should be no more than 10%; for straightforward or repetitive projects, the margin of error should be no more than 5%. The stage of firm commitment will vary - for many projects it may be after final sketch plan, but in some cases earlier commitment may be possible. For particularly risky projects, firm commitment might not be given until tenders are received.
6. For particularly risky or contentious projects, approval at strategic outline case (SOC) stage might be given only for development work to refine the estimates further by better project definition, with no commitment to the project itself.
7. At initial approval of each subsequent approval stage, the approving authority should specify parameters or conditions under which the project must be resubmitted for approval. Re-submissions might be required where:-
   • a specified time elapses before the commencement of the next stage of the project;
   • estimated capital costs rise by more than a given amount or percentage of original estimate;
   • the estimated time for completion slips by a specified period; or
   • the NPV of the project alters to a negative figure.
8. Re-submission should generally be required in any case for which a satisfactory economic appraisal has not been completed. Depending upon the case, this may mean complete revision of an appraisal, or re-submission of certain unsatisfactory elements of it. It should be the Project Sponsor's responsibility to monitor progress of the project and to resubmit it as soon as it appears likely that a triggering condition will be met.