8.1 Introduction to business cases
8.1.1 Appraisals should be undertaken and presented within a wider business case. Business cases should provide assessments of strategic fit, option appraisal, achievability, value for money and affordability. A business case should contain an economic appraisal and other information including the proposed arrangements for financing, management, marketing, procurement, monitoring and evaluation of the relevant policy, programme or project. The effort to be put into business cases should be in proportion to the scale and importance of the proposal.
8.1.2 Documentation of the business case is required at various stages to inform key decisions. Prior to each key decision point, the business case document should be treated as a living document, to be revisited and updated regularly as information and assumptions are developed and refined. It is not just to be prepared for purposes of obtaining approval and then shelved.
8.1.3 The terms business case and business plan are not interchangeable. DoF uses the latter term in the context of financially-assisted or commercially-oriented projects, for which a business plan is required in addition to an economic appraisal in order to establish project viability. Business plans are explained at section 4.5.6.
8.1.4 Development of the business case for any proposal should be a continuous process from inception to implementation. Proportionate and appropriate effort should be applied in all cases.
8.1.5 For large procurement projects, DoF generally advocates developing the business case through three stages:
- strategic outline case (SOC)
- outline business case (OBC)
- full business case (FBC)
8.1.6 For proposals involving assistance to the private or voluntary sectors, this three-stage approach is not usually required, and the terms SOC, OBC and FBC are not generally used. In such cases, the business case should be developed through as many iterations as are judged necessary to cover all of the issues set out in section 4 of NIGEAE.
8.1.7 Departments should document the development of business cases at all key stages of project life. For procurement projects, this means documentation of the SOC, OBC and FBC in all cases. Until they have been finalised and served their purpose, business case documents should be regarded as living documents to be reviewed regularly and updated to reflect significant changes to key assumptions.
8.1.8 It is important to consider potential State aid implications at an early stage in the business case development process, in relevant cases. State aid refers to forms of public assistance that have the potential to distort competition and affect trade between Member States of the European Union. Where proposals to provide financial or non-financial assistance to an undertaking have potential State aid implications, appropriate action must be taken to ensure that the proposals comply with State aid legislation. For more details, see sub-section 4.8 on State aid.
8.2 Strategic outline case (SOC)
8.2.1 The SOC is a very brief preliminary document, usually no more than 10 or 12 pages long, that introduces the basic project concept and contains enough detail to support an informed decision on whether to proceed to an OBC. It should include a preliminary assessment of strategic fit, options, value for money, affordability and achievability. Key elements in a SOC include:
- the project concept and rationale for government intervention
- initial statements of strategic aims, business need and project objectives
- relevant management considerations, including necessary stakeholder consultations, legal issues and consideration of any State aid implications
- high level consideration of possible options
- very preliminary assessment of costs, benefits, risks and funding and affordability
8.2.2 Analysis at SOC stage is broad and indicative - too broad and indicative to determine a preferred solution, but sufficient to judge whether it is worth committing resources to the more substantial work of an OBC.
8.2.3 DFP has issued a template which indicates the core content expected in a SOC and is designed to facilitate documentation of a SOC with suitable and proportionate effort. See the SOC template.
8.3 Outline business case (OBC)
8.3.1 The OBC requires a much more comprehensive analysis. It should be completed prior to the commencement of formal procurement and normally provides the basis for formal DoF Supply approval, when it is required. The OBC should include thorough coverage of the 10 Steps of appraisal in accordance with Section 2 of NIGEAE to provide fuller assessment of strategic fit, option appraisal, achievability, assumptions about costs, benefits, risks and funding. The OBC should determine the preferred option in terms of the level and form of service provision, and should recommend a particular procurement route.
8.3.2 When approval has been granted on the basis of an OBC, irrespective of the chosen procurement route, the principles of appraisal should continue to be applied until a contract is awarded. For example, private sector bids obtained through a tendering process should be subjected to the principles of option appraisal, and this process should be fully documented in a FBC.
8.3.3 In some cases, the OBC may be developed in two stages, referred to as the OBC1 and the OBC2. DoF is prepared to be flexible about the precise approach in individual cases, but it is advisable to agree the details with DoF Supply in advance. For example, some OBCs have been staged as follows:
Outline business case 1
The OBC1 includes a full economic appraisal and provides a basis for approval of the project need, objectives and preferred option. This approval may permit funding to be released for exemplar design and, if necessary, for land purchase or option to purchase land; and/or enabling works. The OBC1 includes:
- full statement of need and objectives
- detailed option appraisal and determination of preferred option in terms of e.g. nature, scale and location of service provision
- high level affordability analysis
- if appropriate, justification for up-front costs including land purchase/option to purchase land; and/or enabling works
- section covering business case as per FD(DFP)07/12 (and the accompanying guidance note) and FD(DFP)13/12 to justify external consultancy input to OBC2, including exemplar design
Outline business case 2
The OBC2 reports key changes since OBC1 and provides a basis for DoF approval to initiate the formal procurement stage. The OBC2:
- assesses alternative procurement options in accordance with NIGEAE paras 5.4.3 to 5.4.5
- develops exemplar design and output specification for preferred option prior to formal procurement
- refines affordability analysis including detailed cash projections, funding statement and estimated year-by-year capital and revenue DEL implications
- does not usually re-visit the OBC1 options; but may examine variations on the preferred option eg alternative phasings
- includes a draft benefits realisation plan
- includes a section covering a business case as per FD(DFP)07/12 (and the accompanying guidance note) and FD(DFP)13/12 if any external consultancy input to FBC is required
8.4 Full business case (FBC)
8.4.1 The FBC is documented prior to financial closure and award of contract. It should provide all the information needed to support a decision to award a contract and commit actual funding, and should provide a basis for the necessary project management, monitoring, evaluation and benefits realisation. Key components of the FBC include:
- an update on key changes and developments since the OBC
- full details of the procurement process
- thorough appraisal of bids received from suppliers and a conventional procurement option
- final review of strategic fit, options, value for money, affordability and achievability
- plan and timetable for final negotiations and award of contract
- final plans for monitoring, evaluation and benefits realisation
8.5 Business cases and expenditure approval
8.5.1 In approving any project, policy or programme, there should be an early opportunity for approving authorities to consider and influence the choices made. This could take the form of a formal submission of a SOC for approval or, on some occasions, informal contacts between the project sponsor and the approving authority.
8.5.2 Where expenditure proposals exceed the department's delegated limits, DoF Supply will act as the approving authority.
8.5.3 For all major projects and high profile cases, Departments are required to submit a SOC to DoF Supply for approval in accordance with FD(DFP)12/11 before proceeding to develop an OBC. Relevant cases in this context are:
- capital projects with a capital value of £20m or more
- all revenue projects which fall above the department's delegated limits and for which total central government costs will be £20m or more over the project's life
- all projects, irrespective of cost, that set precedents, are novel, are potentially contentious, could cause repercussions elsewhere in the public sector, or are potentially politically sensitive
The £20m thresholds refer to costs expressed in real terms (that is, in prices held constant at their current level), undiscounted.
8.5.4 OBCs must be formally submitted to DoF Supply for all investments over delegated limits, prior to the commitment of resources and commencement of procurement.
8.5.5 DoF approval of FBCs is currently required only for PPP/PFI cases.
8.6 PPP/PFI projects
8.6.1 There are particular requirements for OBCs and FBCs in PPP/PFI cases, as set out in NIGEAE Section 5.
8.6.2 All PPP (including PFI) projects normally require DoF approval at the following stages:
1. at strategic outline case (SOC) stage, in the case of major projects and high profile cases as defined above
2. prior to commencement of procurement, based on submission of an outline business case (OBC)
In addition, all PFI projects (but not generally other PPP projects)* require DFP approval at the following stages:
3. prior to appointment of a preferred bidder, based on an appointment business case (ABC) providing an update on key developments since the OBC and including a detailed BAFO or final tender evaluation and an updated affordability assessment
4. prior to financial closure, based on submission of a full business case (FBC)
DoF reserves the right to require approval at ABC and FBC stages for individual non-PFI PPP cases. This may occur, for example, where the PPP is considered novel, contentious, repercussive or in some other sense significant.
8.7 External consultancy business cases
8.7.1 All proposals for the use of external consultants must be justified by a suitable business case. There are specific requirements for these business cases, as currently stated in FD(DFP)07/12. (See section 5 of the attachment to this FD letter). This requires a full, but proportionate, business case to be completed for all external consultancy contracts expected to cost in total £10,000 or over.
8.7.2 The business case should cover the following issues:
- The purpose of the assignment.
- A reasoned assessment of the alternatives to external resources, and particularly the justification for using External Consultants. Where it is decided not to use internal consultants a full explanation must be provided for this decision.
- The immediate and long-term outputs and benefits expected from the External Consultancy resources, when they are likely to accrue and how they will be measured.
- The proposed project management arrangements, including management of deliverables, expectations and risks.
- The means by which skills/expertise will be transferred to ‘in-house’ staff and/or internal consultants if appropriate. If not appropriate, the business case should state the reasons why it is not appropriate.
- The proposed division of work between the External Consultants and any ‘in-house’ staff and/or internal consultants who will be assisting them.
- The expected costs of both the external and the ‘in-house’ effort.
- The performance review arrangements.
- How the results of the External Consultancy will be implemented and monitored.
- Any other considerations specific to the assignment.
8.8 ICT supported projects
8.8.1 Previously, a separate body of guidance specifically for ICT-related expenditures was given in DAO(DFP)33/03. However, that guidance was withdrawn when the Centre of Expertise for Programme and Project Management website was introduced.
8.8.2 Business cases for ICT proposals should be developed through the stages of SOC, OBC and FBC in accordance with the general guidance in NIGEAE and should be managed following the Centre of Expertise guidance.
8.9 Business cases and gateway reviews
8.9.1 All programmes and projects in central government are subject to gateway reviews. The gateway process examines programmes and projects at critical stages in their lifecycle to provide assurance that they can progress successfully to the next stage.
8.9.2 The following table highlights the gateway review that corresponds with each business case stage. Gate 0 applies only to programmes and may be repeated at key stages throughout the programme. Gates 1-5 apply to projects within a programme.
|Business Case Stage||Gateway Review|
|High-Level||0: Strategic Assessment|
|SOC||1: Business Justification|
|OBC||2: Procurement Strategy|
|FBC||3: Investment Decision|
|Implementation||4: Readiness for Service|
|Benefits Realisation||5: Benefits Evaluation|
8.10.1 All contracts, including direct award contracts, all contract extensions and all procurement projects should be supported by suitable appraisals and business cases; and the advice of CPD, or if appropriate, another designated CoPE, must be sought before commencing any procurement.
8.10.2 There is a need for suitable and proportionate appraisal of options and completion or update of a business case before signing any contract (including direct award contracts) or taking up any permitted/legitimate contract extension or commencing any procurement involving commitment of expenditure and/or changes in the use of public resources.
8.10.3 Procurements and contracts involve commitment of expenditure and/or changes in the use of public resources. Decisions to proceed with them must therefore be supported by appropriate and proportionate appraisals within similarly proportionate business case documents. This includes all decisions to award or extend contracts.
8.10.4 New contracts should only be awarded after a suitable appraisal has been undertaken, a proportionate business case has been completed and any necessary approvals obtained. The same applies to contract extensions.
8.10.5 Where a contract is currently in operation, and there is a desire to consider contract extension, the process of re- appraising service requirements should commence sufficiently in advance of the end of the current contract to allow time for the necessary analysis to be undertaken and the required approvals to be obtained. This should help to ensure a smooth contract extension process.
8.10.6 There should be no presumption that a contract extension will be taken up. It should be treated simply as one of the options to be appraised before contract expiry. The uptake of a contract extension which has been provided for within the original contract should be actioned only with approval of the appropriate CoPE on the basis that there is a continued business need, that contract extension is the best option of all the available alternatives, that the supplier has provided satisfactory performance, and that the additional expenditure is within the scope of the original business case.
8.10.7 Proportionate effort should be applied at all times. The resources devoted to appraisals and business cases should be in proportion to the scale or importance of the objectives and resource consequences in view. Each contract decision must be judged on its merits, depending on factors such as the scale of the resources that will be committed by the decision. However, the following rules of thumb should normally apply:
- the effort required for a substantial new contract should generally be significantly greater than that for a contract extension
- a new contract will generally require a more substantial business case document than a contract extension; the latter may only require an addendum to the original business case
8.10.8 It is important to recognise that DoF Supply approval of a contract does not generally include approval to proceed with a contract extension. Accordingly, departments must return to DoF Supply for fresh approval before proceeding with any contract extension that lies outside the appraisal period upon which the original business case and Supply approval was based, in the form of a new or suitably updated appraisal and business case
8.10.9 All contract decisions require justification and need to be thought through beforehand, whether they concern contract awards, extensions, modifications or variations. It is always right to think through what is required, consider the alternatives available, weigh up the pros and cons of each alternative, and make the decision that offers the best VFM. That is what appraisal means – thinking decisions through beforehand. Thus every decision should be subject to appraisal. However, business case documentation is not generally required for minor contract modifications or variations that lie within the scope of the original business case.
8.10.10 Nevertheless, substantial modifications or variations may give rise to a need for updated business case documentation in some circumstances. For instance, regarding projects that require DoF approval, the standard approval conditions require re-submission to DoF where total capital or revenue costs rise by more than 10% or where there are substantial changes to the approved project, broadly defined as any variance of 10% or more from an assumption in the approved business case. Where a substantial contract modification or variation will lead to a breach of these conditions, it will be necessary to revert to DoF for re-approval and this is likely to require updated business case documentation. In such cases, the precise requirements should be discussed and agreed with the relevant DoF Supply Division. In all cases where substantial modifications or variations are in view, the need to update business case documentation should be considered.
8.10.11 Continued use of a supplier after the end of a contract should be treated as a direct award without competition in line with CPD Guidance 03/11.
8.10.12 Contracts should not be signed, nor should any procurement be commenced, nor any expenditure committed until a suitable appraisal and business case have been completed and all the necessary approvals have been granted formally in writing. There are no exceptions to this rule. For example, it applies to direct award contracts as much as to all others.
8.10.13 It is vital to consult CPD, or if appropriate, another designated CoPE, from an early stage in the procurement process, and their advice must be sought before commencing any procurement. DoF Supply will normally require evidence of suitable CPD/CoPE involvement when its approval is sought for relevant cases.
8.10.14 CPD provides detailed guidance on the procurement options that are available, and how to conduct the relevant procurement process. The CPD website contains a variety of relevant resources including, for example, several Procurement Guidance Notes and various other items of relevant guidance. Enquiries concerning relevant procurement issues should be made to the Head of Centre of Procurement Expertise who is responsible for the contracting authority’s procurement services.
8.11 Further advice and guidance
8.11.1 Departmental economists can provide general advice on the content of business cases and specialist advice on the relevant appraisal and evaluation techniques and procedures.
8.11.2 A template summarising the expected content of OBCs and FBCs is provided in Summary of DoF OBC/FBC Requirements. A copy of a flow chart showing the business case approvals process can be found on the resources page.
8.11.3 DoF business case guidance is broadly consistent with the relevant HM Treasury guidance. The latter is based on a '5 case model' - the strategic case, the economic case, the commercial case, the financial case and the management case - and HM Treasury's recommended presentation is based around these issues. DoF expects business cases to cover similar issues, but has its own specific requirements for the content and presentation of business cases as indicated above.