Introduction
13.1.1 Deciding on the right amount of effort to devote to an appraisal or an evaluation is largely a matter for case by case judgement. The decision should be based on for example, the experience gained over time through undertaking other appraisals and evaluations of similar scale and type. It is recognised that those undertaking appraisals and evaluations may sometimes find it difficult to judge what the appropriate effort should be, particularly where small expenditures are concerned. This section seeks to give some practical assistance on the subject. Although it is couched largely in terms of appraisal, the principles generally apply also to evaluation.
13.1.2 This guidance refers broadly to proposals involving total public spending (including, for example, all sources of PE, EU and IFI funding) of up to around £1m over the whole life of the project. However, the £1m figure is an indicative rule of thumb rather than a strict upper limit. Whatever expenditure is involved, deciding on the appropriate effort always requires some judgement.
The principle of proportionate effort
13.2.1 Appraisals use up resources. It is therefore important to judge the level of input appropriate to any particular appraisal. The general rule is that the resources to be devoted to an appraisal should be proportionate with the scale and importance of the associated objectives and resource consequences.
13.2.2 The effort that should go into an appraisal and the detail to be considered are a matter of judgement. When the right questions are asked the appropriate effort is often easy to see. Small expenditures generally justify less detailed appraisal than large expenditures, but small items can add up to substantial totals, and small expenditures can have big effects, and the principles of appraisal still apply. These same principles apply also to evaluation.
13.2.3 In deciding the amount of effort required for an appraisal, particular weight should be given to the total public funds (including EU funds) involved, since it is primarily for these that public bodies are accountable. However, it is appropriate to consider not only the costs and benefits to the public sector, but also those to the other sectors of the economy, since appraisal is about encouraging the best use of the nation's resources as a whole. The importance of a project to the economy may be disproportionate to the public sector costs and benefits arising. For example, a small public grant to a private firm or voluntary body may represent only a small proportion of the total resource cost of the project; or a small pilot project may be undertaken in anticipation of a major new programme.
The key steps of appraisal
13.3.1 The key steps of defining needs and objectives, identifying alternative options, and assessing their costs and benefits should always be undertaken, no matter how small the proposed expenditure involved. The reason for insisting upon this is that they represent a way of thinking which is indispensable.
13.3.2 However, while these steps are always to be followed, discretion may be exercised on the amount of effort required on each of them. For example, it may be unnecessary to spend much time or effort on defining needs and objectives when the concern is simply to replenish stationery and other basic office supplies.
13.3.3 It may not always be appropriate to calculate net present values for the smallest of proposed expenditures, particularly where there are no significant recurrent costs or benefits. The other steps of appraisal, such as assessing risk and uncertainty and post project evaluation, should usually be considered even on relatively small expenditure proposals. However, in general there is less likely to be a need for detailed analysis under these steps for small expenditures than for larger expenditures. For instance, although the use of sensitivity analysis is useful for most proposals, there may be no need for it in the case of the smallest expenditures.
13.3.4 There is thus a great deal of flexibility in applying appraisal, particularly where small sums are involved. The use of appraisal principles to think through expenditure proposals represents a common sense approach which need not involve a lot of unhelpful bureaucracy.
Cost of appraisal
13.4.1 It is impossible to provide a definitive norm in cost terms for the effort to be devoted to small appraisals, because the circumstances may vary widely. Nevertheless, the following should act as a rough guide. The cost of the resources devoted to appraisal should normally be expected to be up to two per cent of the value of the public grant or expenditure under consideration. Where the cost significantly exceeds this level, say where it is five per cent or more of the relevant value, the question of disproportionate effort may arise.
13.4.2 In setting out this norm, it is emphasised that it represents a broad guideline rather than a rigid rule. There are likely to be many cases where appraisal will cost substantially less than two per cent of the relevant expenditure, for instance, in simple decisions where the objectives are obvious, the options are very restricted and the costs, benefits and other factors are particularly transparent.
13.4.3 More rarely, there may also be circumstances to justify committing larger costs to appraisal where, for example, the expenditure in view will have a disproportionate impact on the economy or where it will affect a politically or socially important issue.
13.4.4 At the smallest end of the spectrum, involving expenditure of less than £10,000, appraisal should often require no more than one man-day of an experienced appraiser's time. However, different circumstances may justify more or less input.
Documentation
13.5.1 Any expenditure of up to £1m can be classed as a small expenditure but there is a considerable difference between spending £1 and £1m so the relevant business case documentation requirements will vary considerably according to the scale of the spending in view.
13.5.2 The key steps of establishing need, considering alternatives, and assessing costs and benefits are generally relevant even for small expenditures, but it is not always necessary to have detailed step by step documentation.
Examples
At the upper end of the cost range, a project costing several hundred thousand pounds is likely to require a document covering the main steps of appraisal, perhaps using a standard pro forma for the purpose. Most or all the standard appraisal steps will be covered to some degree, but the level of detail will be significantly less than would be expected for a multi-million pound project.
At the lower end, a few hundred pounds spent on travel expenses or to purchase stationery can normally be documented extremely briefly, without going through the standard steps of appraisal. Departments may already have standard forms to enable quick and efficient authorisation of such small routine expenditures.
Much the same applies to replacement of a modest piece of kit such as a photocopier or a printer. A 10-step business case is not expected for something on this scale. A couple of pages confirming need and VFM should suffice. Of course, if the decision is to replace a number of pieces of kit rather than a single item, then more appraisal effort and fuller documentation will be appropriate.
13.5.3 There are often well established procedures for recording small scale, business as usual, spending such as travel expenses or routine purchases of office supplies or small items of equipment. Excessive effort on very small expenditures should be avoided. There is no need for a detailed step-by-step appraisal or a lengthy business case document in such cases.
13.5.4 Ongoing recurrent expenditure does not warrant the perpetual production of business cases. Once expenditure has been approved for a given period, or for a particular contract, it does not generally need another business case until the end of that period is approaching or the expiry of the contract is drawing near. For instance, there is no need to produce business cases every year for staff costs or regular utility bills such as electricity, oil and gas, and so on.
13.5.5 The need for a business case document usually arises when a spending decision needs to be taken. This may arise when new expenditure of any kind is proposed, or when existing spending needs to be reviewed; for example, when there is a change in policy or a contract is coming to an end, or there are alternative options to consider. For example, if there is an opportunity to consider moving from oil to gas heating, or assess some other potential cost saving or quality improvement opportunity, then a business case would be needed to examine the options.
13.5.6 In the end, judgment must be applied to ensure that suitable and proportionate documentation is in place and that excessive documentation is avoided.
Pro forma documentation
13.6.1 The use of standard pro forma documentation can be helpful for appraising small expenditure proposals. A pro forma approach is very useful where there are a substantial number of small appraisals with similar characteristics. The basic steps of appraisal serves as a summary of the kind of issues that should generally be addressed in a pro forma, but clearly there is a need to tailor forms specifically to suit particular programmes and projects. For example, the appraisal of small grants can be facilitated by designing application forms so that they provide the information that funding bodies need to appraise them. (See 4.1.14-16 for elaboration).
13.6.2 The pro forma approach has been applied in practice to small projects in numerous areas, and departmental economists can assist with their design. DoF has developed a general pro forma for small expenditure business cases which may be used as it stands or adapted to suit specific spending areas. This pro forma is geared to suit the larger small expenditures; for example, those of £50,000 and above. As illustrated by the examples at 13.5.2 above, there is no need for such a sophisticated pro forma for many of the smallest expenditures.
13.6.3 A simplified template for benefits management in small expenditure cases is available on the programme and project management and assurance page. See the benefit profile for small projects, which is suitable for use with any project costing up to £1m. This template should be useful for managing benefits in many of the larger small expenditure cases, but there is no need to use it for the smallest expenditures, including, for example, those below £50,000.
Evaluation of representative samples
13.7.1 It would be impractical and of limited use to conduct an ex post evaluation of every small expenditure. Where an activity consists of a large number of small scale expenditures it will normally be appropriate to select a representative sample for evaluation.
Expert advice
13.8.1 There remains scope for case-by-case judgement on the issues addressed here. Departments should make the most of the economic expertise available to them in arriving at the appropriate decisions. For example, departmental economists can help design relevant pro forma documentation where this is considered appropriate, and will provide general advice on the effort appropriate to individual cases.