Incremental Assessment

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Introduction

This section provides guidance on incremental assessment to assist option selection, optimise programme business cases and evaluate proposed scope changes and applications for targeted enhanced rates.

What is incremental assessment?

Incremental assessment involves the evaluation of differences in effectiveness and benefit and cost appraisal amongst mutually exclusive investment options, including proposed changes in scope to preferred options. The incremental assessment informs the investment decision, e.g. which option should be selected as the preferred option?

Considers full assessment profile

Incremental assessment considers the full assessment profile as follows:

• Strategic fit – this is set by assessment of the underlying issues, rather than any aspect of the scope of the proposed activity, and will be consistent across all options of the activity. For instance, if the strategic fit of a project has been assessed as High, this rating will apply to all options of the project under incremental assessment.
• Effectiveness – assessed incrementally, this considers how much more or less effective an option or proposed change is against other options or the base case. This difference is rated as High, Medium or Low and is likely to differ from the effectiveness rating assessed for the base project, given that it is a measure of relative, rather than absolute, effectiveness of an option.
• Benefit and cost appraisal – this will involve incremental benefit-cost analysis amongst options for improvement projects. It may involve a least whole of life cost approach for some activities, e.g. maintenance programmes.

The Transport Agency’s investment assessment framework is to be used to determine incremental assessment profiles.

Transport Agency requirement

The Transport Agency requires incremental assessment to be applied to all investment decisions involving option selection, changes to supported preferred options or applications for targeted enhanced rates for any activity where funding is being sought or has been approved from the National Land Transport Fund.

When to apply incremental assessment

Incremental assessment is expected to be applied in the following situations:

• project optimisation – to assist the selection of the preferred option;
• programme business case implementation plan optimisation – to assist decisions around the sequencing and timing of elements in an implementation plan (but not between projects in a programme);
• proposed changes to the scope of a project or programme business case – to assist the decision whether to proceed with the proposed change;
• applications for targeted enhanced rates; and
• proposed changes to maintenance or public transport programmes – to inform the decision whether to proceed with the proposed change.

Where incremental assessment is not applicable

Incremental assessment is not applicable where the options are not mutually exclusive, e.g. attempting to decide between projects within a programme business case, where all projects within the programme are critical to its performance and synergistic benefits exist between the projects.

General methodology

The following provides a general methodology to apply in cases of option selection and scope changes. There are some variations required to cover specific situations, as discussed in the following sections.

The general assessment methodology is:

• Strategic fit assessment 
  • the strategic fit of the project or programme applies to all options and proposed scope changes.
• Effectiveness assessment 
  • ranking the options/proposed changes from lowest cost to highest cost is recommended as this provides some consistency with the incremental BCR analysis procedure;
  • the effectiveness of each option/change to deliver against the strategic fit potential is assessed against the effectiveness criteria for the relevant activity class;
  • differences, negative and positive, amongst options/changes should be highlighted;
  • the incremental benefits or disadvantages of options are rated High, Medium or Low in a similar manner as for improvement projects.
• Benefit and cost appraisal
  • The methodology for option selection and proposed scope changes are set out in section 2.8 of the Economic Evaluation Manual.
  • ratings for incremental BCRs are numeric ranges, based on the BCR determined:
    • No rating - BCR < 1
    • 1 - 2.9
    • 3 - 4.9
    • 5+
  • normally, an incremental BCR of at least 1 would be viewed as obligatory for funding approval.
• Incremental profile comparison
  • establish the target incremental assessment profile appropriate to the activity class(es) and/or activity. For project option selection cases the target profile should reflect the funding threshold priority order for the activity class at which the Transport Agency is prepared to fund activities. For proposed scope changes, the target profile should reflect the base case profile/priority.
  • the ratings for strategic fit, effectiveness and benefit and cost appraisal for each option/change are combined to provide an incremental assessment profile. The profiles are then compared with each other and against the target profile and an investment recommendation/decision is then made.

Project option selection – variations to general methodology

For improvement project options, incremental assessment is required to select the preferred option from a short list of options. Short-listing itself may involve a sieving process to score long-list options against relevant criteria, which should include economic criteria.

The incremental assessment for strategic fit, effectiveness and benefit and cost appraisal follows the general methodology above.

For the incremental profile comparison:

• compare the incremental profiles with each other and against the target profile for the activity class. The option with the highest incremental profile, using the priority order set out in the prioritisation section, should be selected as the preferred option, provided it matches or exceeds the target profile.
• in some cases, the use of incremental assessment may not provide material differences amongst option profiles. For these, it is likely that the results of incremental BCR analysis will be the main determinant for the investment decision.
• where the effectiveness of a lower incremental BCR option is markedly better than a high incremental BCR option, there may be grounds to select the more effective option. Robust evidence for such judgement calls is needed and, where there are significant cost implications, the decisions should be peer reviewed.

Programme business case/plan optimisation – variations to general methodology

Incremental assessment should be used to optimise programme business cases and implementation plans.This includes consideration of project/element timing and sequencing within operational and funding constraints.

The assessment methodology requires a first step of developing mutually exclusive options, which reflect the range of sequencing/timing alternatives available within realistic operational and funding scenarios.

The incremental assessment for strategic fit, effectiveness and benefit and cost appraisal follows the general methodology above.

For the incremental profile comparison:

• compare the incremental profiles of the mutually exclusive options with each other and against the target profile for the activity, which should reflect the preferred programme option. The option with the highest incremental profile, using the priority order set out in the prioritisation section, should be selected as the preferred option, provided it matches or exceeds the target profile.
• apart from the selection process immediately above, the same considerations as for project option selection assessment above are to apply, i.e. likely use of incremental BCR analysis as the deciding factor and need for robust evidence for incremental effectiveness to override the results of BCR analysis.

Project/ programme business case scope changes – variations to general methodology

Scope changes proposed to projects and plans following preferred option endorsement must be assessed incrementally, regardless of whether the project/programme plus the scope changes can be delivered within the approved funding budget. The funds proposed for the scope change could instead be used to fund an alternative higher value activity, which means that their allocation to fund the scope change must be justified.

The assessment methodology requires that the project/programme with its endorsed preferred option is to be treated as the base case. The scope change is to be treated as an option and incrementally assessed against the base case.

The incremental assessment for strategic fit, effectiveness and benefit and cost appraisal follows the general methodology above other than the incremental effectiveness of the scope change being assessed as a higher cost option against the base case. Scope changes may increase or decrease the project's/programme’s effectiveness and this difference is to be rated in the incremental assessment.

For the incremental profile comparison:

• compare the incremental profile of the scope change against the target assessment profile for the activity class.  If this is of higher priority order, using the priority order set out in the prioritisation section, then it should proceed, subject to funding availability.
• apart from the selection process immediately above, the same considerations as for project option selection assessment above are to apply, i.e. likely use of incremental BCR analysis as the deciding factor and need for robust evidence for incremental effectiveness to override the results of BCR analysis.

Programme scope changes – variations to general methodology

Material scope changes proposed to maintenance and public transport programmes, e.g. new additional public transport services, need to be assessed incrementally. This is regardless of whether the programme plus the scope changes can be delivered within the approved funding budget. The funds proposed for the scope change may be used to fund an alternative higher value activity, which means that their application to the scope change must be justified.

The assessment methodology requires that base programme is to be treated as the base case. The scope change is to be treated as an option and incrementally assessed against the base case.

The incremental assessment for strategic fit, effectiveness and benefit and cost appraisal follows the general methodology above other than the incremental effectiveness of the scope change being assessed as a higher cost option against the base case. Scope changes may increase or decrease the programme’s effectiveness and this difference is to be rated in the incremental assessment.

For the incremental profile comparison:

• compare the incremental profile of the scope change against the target assessment profile for the activity class.  If this is of higher priority order, using the priority order set out in the prioritisation section, then it should proceed, subject to funding availability.
• apart from the selection process immediately above, the same considerations as for project option selection assessment above are to apply, i.e. likely use of incremental BCR analysis as the deciding factor and need for robust evidence for incremental effectiveness to override the results of BCR analysis.

Targeted enhanced rates - variations to general methodology

The use of targeted enhanced rates to incentivise delivery of targeted transport outcomes, or to encourage a step change in Approved Organisation performance, must be assessed incrementally.

The assessment methodology requires that delivery of outcomes or programmes under normal funding assistance rates is to be treated as the base case. The use  of targeted enhanced rates is the option and is incrementally assessed against the base case.

The incremental assessment for strategic fit, effectiveness and benefit and cost appraisal follows the general methodology above.

For the incremental profile comparison:

• compare the incremental profile of the use of targeted enhanced rates against the funding threshold assessment profile for the activity class.  If this is of higher priority order, using the priority order set out in the prioritisation section, then it should proceed, subject to funding availability.