Finding the Right Solution

FINDING THE RIGHT SOLUTION
A guide to option appraisal

May 2002

Acknowledgements

We are grateful to the following individuals and organisations that have contributed to the development of this guide:

Alun Owen and Rod Taplin, Bristol City Council

Alan Beastall, Derbyshire County Council

Mike Walsh, London Borough of Richmond

Simon Brown, North Tyneside MBC

Tony Chapman, Peterborough City Council

Andy Beard, Sheffield City Council

Martin Lipson, 4Ps

Roger Turner, York Consulting

April 2004 – Paragraph 85a added.

FINDING THE RIGHT SOLUTION
A guide to option appraisal

Who this guide is for:

Chief Executives (CEs) of Local Authorities (LAs);
Chief Education Officers (CEOs) of Local Education Authorities (LEAs);
Directors of Finance;
Other officers responsible for strategic planning;
LEA Capital Programme Officers and Capital;
Head teacher, Governor and Diocesan representatives on Asset Management Plan (AMP) Working Groups;
Dioceses and main Foundations;
Private sector providers of asset management services to Authorities.

Contents

Page

Executive Summary……………………………………………………………………………… 4

Section 1: What is this guide for?

Section 2: The basics

Section 3. The steps of appraisal

Section 4: Questions and answers

Section 5. Glossary and references

Appendix A. Whole life costs example…………………………………………………………37

Finding the Right Solution

EXECUTIVE SUMMARY

After decades of under investment, spending on school buildings is set to increase sharply over the next few years, rising to £3.5 billion in 2003-04. This is a five-fold increase over 1996-97 levels. Over the last four years, much has been done to address the problems created by that under investment. But much more needs to be done. Many schools are in buildings beyond their original design life and are expensive to maintain and operate, as well as being unsuitable to meet the educational and community demands on them. We have yet to move beyond a short-term patch and mend approach, and much building work is still procured on the basis of lowest cost rather than best value.
The challenge now is to accelerate the programme to modernise the school estate, so that schools have high quality, flexible and sustainable designs; attractive and well-equipped working environments; fully accessible and secure accommodation, catering for a wide range of users including parents, adult learners, early years provision and support services; and state of the art facilities supporting learning through ICT.
School accommodation must support the improvements in standards we seek, underpinning the Transforming Secondary Education and Schools Workforce[1] agendas. It needs to provide for the building implications of specific programmes and policies, such as the moves to increase school diversity, and individualised learning routes at 14-19.
Option appraisal is an essential tool to help those managing capital programmes and projects to deliver these goals. Where used effectively, option appraisal will help to target investment to where it will make the biggest contribution towards improving service performance and raising standards. This guidance explains how option appraisal can provide the decision-making framework for defining the investment objectives, identifying the different ways in which these can be achieved, and then examining the important factors before taking a decision on implementing the project.
Section 2 of the guidance sets option appraisal in the context of Authorities’ corporate and service strategies, Asset Management Plans (AMPs) and prioritisation. It explains why and when appraisal should be carried out, and how it relates to subsequent project evaluation.
Section 3 takes you through the steps of appraisal, illustrating each step by reference to worked examples. One of these shows how a range of service objectives can be ‘joined up’ and delivered through a single modernising project. The section outlines how to develop options that will meet your objectives, to gather the necessary information, and then to assess and report on each option - leading to the selection of the preferred option.
Section 3 also explains how to forecast the whole life cost consequences of alternative solutions, and how to compare financial and non-financial costs and benefits through a simple scoring and weighting system. It emphasises the importance of consultation throughout the process, and of identifying and joining up funding sources.
Sections 4-5 provide answers to some frequently asked questions, and where to get more detailed information on option appraisal.

Finding the Right Solution

SECTION 1: WHAT IS THIS GUIDE FOR?

After decades of under investment, Local Education Authorities (LEAs) and schools are receiving increasing levels of capital funding for buildings. In support of the DfES’s capital modernisation and Schools for the Future[2] agenda, capital investment in the schools sector will total some £8.5 billion over the period 2001-04, reaching £3.5 bn in 2003-04, a five-fold increase over 1996-97 levels.
This high level of investment makes particularly crucial the need for capital planning decisions by Authorities to be underpinned by rigorous appraisals. These will help to identify best value projects that will make the most effective contribution towards raising educational standards, support inclusion and provide better working environments for pupils and the school workforce.
This guide provides a framework to help you to appraise your building projects and select the option that will best meet your requirements. While the examples in this guidance relate to the schools sector, the principles apply equally to asset management in other Local Authority service areas.
The guide contains the following elements:

an explanation of the reason why we carry out appraisals and the links between appraisal and asset management (Section 2: The Basics);
a description of the general approach which should be used (Section 3: The Steps of Option Appraisal);
the Key Questions that you may have about option appraisal (Section 4).

This is intended as a general guide to option appraisal, which will be enough for some readers. If you would like more detailed information, Section 5 includes some Useful References.
This document is available from the DfES website at The website also includes a downloadable copy of the spreadsheet used for the whole life costs table shown in Appendix A.

Who is this guide for?

This guide is primarily for those who are responsible for planning, implementing and managing capital building projects in Authorities, such as Capital Programme Officers and Capital Project Managers. The guidance should complement the relevant skills that have already been developed in many Authorities through, for example, asset management work connected with schools, Housing Business Plans, the Single Capital Pot, Best Value etc.
The guide may also be of interest to others who may not be directly involved in carrying out the appraisals, but who will be taking decisions based on appraisal results. These will include Authority Chief Executives, Chief Education Officers and Finance Officers; elected members; head teachers and governors with responsibility for spending devolved capital in schools; and Diocesan Building Officers.

SECTION 2: THE BASICS

What is Option Appraisal?

Option appraisal is a decision making tool for use in defining objectives, identifying the different ways in which they can be achieved and examining all the important factors before taking a decision on implementing a project.
An effective option appraisal will help you to answer three questions:

Have you taken into account all relevant factors in deciding what the project should be?
Should you go ahead with the project?
What is the best way to carry out the project?

All the decisions that you take will involve some form of appraisal of the options. In some cases, you may consider options totally informally and make a decision based on your feel for the best way forward. In other cases, especially for large capital schemes, you may already have a detailed appraisal procedure. This guide aims to ensure that you use the most appropriate appraisal process for all the capital projects that you carry out.
Option appraisal involves a set of principles that you should use to help you make a decision. The scale and nature of a project will influence the level of detail that you will need to build into your appraisal, but all appraisals will follow the same broad approach. The principles of option appraisal are:

being clear about what you are hoping to achieve – your objectives;
considering the different ways in which they could be achieved – the options;
assessing the costs and benefits of the different options;
identifying all the pros and cons of the options and quantifying them and valuing them wherever possible;
considering any risks and sensitivities;
considering the most appropriate and best value use of resources, not just focussing on the lowest initial costs.

Option Appraisal and Asset Management Planning

Option appraisal is an integral part of the Asset Management Planning (AMP) process. This is reflected in the guidance issued both by DfES and DTLR. Figure 1 shows how option appraisal flows from the capital priorities identified through the AMP process, which itself is linked into the authority’s own corporate strategies and plans. Option appraisal should form part of a ‘top-down’ process that deals with the strategies and plans on a holistic basis, and ensures that the subsequent projects align with them. Anything less would lead to great risks of underused or misused money.

Effective option appraisal, in conjunction with the greatly increased funding for school buildings, should help Authorities move away from the piecemeal ‘patch-and-mend’ policies of the past towards larger, more joined-up, modernisation projects that will deliver best value facilities. This move will inevitably mean that some will have to wait longer than others for investment, but schools now have devolved funding that can be used for smaller scale patch-and-mend capital projects, which will free up the remainder of funding for achieving strategic best value solutions for the highest priority projects.

Prioritisation

Whilst the resources available for capital investment have increased substantially, they are still limited. It is therefore important that you are able to prioritise effectively so as to maximise the use of the resources in order to achieve best value. The resources available will provide the basis against which you begin to prioritise and will be an essential consideration in appraising the available options.
Through their AMPs, LEAs are building up a significant amount of data on the performance and investment needs of their properties. This must be considered alongside information on service-related issues.
Information in these areas would typically include:

the LEA’s AMP Statement of Priorities. This sets out the strategic priorities for capital investment arising from other LEA plans (such as the Education Development Plan, School Organisation Plan etc), major rationalisations, specific initiatives, and from its stewardship responsibilities for maintaining the fabric of the school building stock. The statement would also explain how local capital investment will align with Government priorities, such as the transforming secondary education (TSE), transforming schools workforce (TSW), and Schools for the Future agendas;
in the context of the LA’s Community Plan objectives, information on crosscutting issues and on plans for delivering other service outputs through educational facilities. This will help to identify opportunities for developing and extending schools to become focal points for the whole community by providing or hosting a range of family and social services. These might include childcare, health and social services, adult and family learning, recreational and leisure facilities, ICT access, and possibly legal or housing advice;
available capital resources;
information on recent and projected trends in the school population across the LEA;
information on the schools with the most significant condition needs (by reference to DfES Priority 1-4 classifications[3]) and suitability needs (by reference to curriculum analysis[4] and DfES A-D classifications[5]).
information on the educational outputs delivered through building investment, including assessments of the contribution that new facilities will make towards raising educational standards, improving staff morale, reducing truancy etc;
the LEA’s targets for developing or improving the performance of the school building stock.

By using the appropriate range of information to prioritise potential capital projects, you will be able to ensure that your capital spending is not simply a reaction to immediate building problems, but takes a longer-term view. Your aim should be to progress towards a situation where school premises are not only in good condition, but where they are suitable for delivering a 21st Century curriculum and where their potential for delivering a range of community services is fully realised.

Presenting AMP data

The figures below illustrate different ways of presenting AMP data, which can be used to benchmark the performance of buildings. This can help in identifying priority areas and informing the appraisal process.
Figure 2 shows a simple ranking of schools in an LEA according to their repair needs per m2. Similar analyses can be provided for suitability needs, space standards etc.

Figure 2. Ranking school needs.

Figure 3 indicates a form of presentation that can be helpful where investment is required to address both condition and suitability needs at the same school, with each need indicated on different axes of the graph. Schools in the upper right quadrant have the best accommodation with the lowest needs. In the example shown below, School A has extensive condition and suitability needs for which it may be necessary to explore the opportunities for complete replacement; on the other hand, School B has only condition problems, which may warrant more modest improvements. This form of presentation can provide a useful basis for tracking the progress of an an investment programme, by showing how many schools are ‘moved’ over time from the lower left to the upper right quadrant.

Figure 3: Condition and suitability needs.

Figure 4shows a ranking of secondary schools in relation to both building needs (condition and suitability) and educational performance as measured by GCSE results.

Figure 4: Combined building needs and educational attainment.

Another form of presentation may include plotting on a map the schools with the greatest needs in terms of their accommodation and/or educational performance. This will help to identify their distribution across the LEA and highlight areas where investment can make the biggest contribution towards raising standards.

Why should you do an Option Appraisal?

to enable informed and transparent decisions;
to provide a consistent approach to decision-making;
to help achieve maximum effectiveness and best value;
to provide a clear basis for review.

Carrying out a formal appraisal of the options will help you to make informed decisions about the capital projects that you choose to take forward. It ensures that the decisions you take are based on a clear consideration of the relative merits of all the options and provides a clear justification for the decisions that you take. This will include making explicit any assumptions that you have made and communicating them to your stakeholders.
Using a clearly defined appraisal process will mean that consistent decisions can be made by different individuals or groups in the organisation. This is particularly the case where decisions are being made which affect several departments or service areas.
The adoption of appropriate option appraisal is good practice in decisions about capital projects. The importance of developing an effective appraisal system is reinforced by it being a requirement for many funding programmes. Best Value seeks to ensure that resources are used to maximise effectiveness and value for money through joining up funding streams and focusing on lowest lifetime costs rather than lowest cost.
Used properly, an appropriate appraisal system should lead to better decisions. It will also help you to judge whether the decisions you have taken are the right ones, by providing a clear basis for later evaluation.

When should you do an Option Appraisal?

You should carry out an option appraisal whenever you are planning capital projects for which there are a number of possible different approaches to meeting your desired objectives. Other factors that should lead you to carry out an appraisal include:

where you have any doubts about whether to go ahead;
where there is a change of use or disposal of a site or building;
where there might be wider objectives which could be achieved as part of the same project with relatively low incremental cost, and certainly lower than if two or more separate projects were carried out (eg extending the scope of a project to meet the needs of a range of users in line with Schools for the Future principles);
where there are particular sensitivities about a project affecting a range of stakeholders;
where there is a high level of risk or uncertainty;
where the project involves the authority entering into a long term relationship or partnership with another organisation;
where you need to demonstrate transparency in the decision making process;
where the long-term solution may be different from the short-term solution.

With some capital projects, it is easy to see the benefits of carrying out an option appraisal. For example, a LEA considering amalgamating two secondary schools in support of its TSE/TSW commitments, or as a result of sufficiency, condition or suitability assessments, would be faced with a number of options, such as:

refurbishment and modernisation of existing buildings on either site;
new build on one site, with disposal of the other;
disposal of both sites, with new build on a new site.

In each of these cases, there will be further possible solutions relating to designs and specifications. Detailed appraisal of each of these options will help to ensure that the right decision is taken in the light of current circumstances.
However, you should not only regard option appraisal as something to be used when large or complex projects are being considered. With less complex projects, the principles of appraisal still apply, but the scale of the process should be proportionate to the planned project.
For an option appraisal to be meaningful, you should carry it out well before a final choice has been made on the preferred approach. This is clearly better than deciding on a course of action and then carrying out a retrospective review of the possible alternatives in order to justify the decision. At best, this will be documenting the informal appraisal that has already been carried out. At worst, this is a purely additional activity that adds no value and provides no credible justification for the decision. It is an approach that is likely to lead to a poor value for money end product.
By going through the option appraisal process before the decision is taken, you will ensure that each of the options is considered appropriately. This is not to say that each will be appraised to the same level of detail, as you may be able to rule out some options early on in the process.
The specific timing of your appraisals will be influenced by a number of factors, including:

the authority’s planning cycle for capital spending;
the timing of specific funding programmes;
the range of priority projects which your authority is considering;
the nature of the project. A repeat project with reliable data can be appraised relatively quickly. New and complex projects will need more time (and resource);
the level of sensitivity associated with the project, and therefore the extent of consultation needed;
planning applications and decisions, eg in relation to Section 77 and Schedule 8 consents [6] etc.

These need to take place in sufficient time to enable all options to be considered meaningfully and properly, without any having to be rejected because of lack of time etc.

What are the links between Option Appraisal and Evaluation?