Its been announced this week that the cost of the two new aircraft
carriers being built for the Royal Navy is now expected to be almost twice the
original estimate. In the latest budget, the Ministry of Defence is set to
estimate the cost of the two ships at £6.2bn. The department says it is
renegotiating the contract to avoid further significant rises. Six years ago,
when the contract was approved, costs were put at £3.65bn !
Blimey !!! A Government project where the final cost is way more than the
initial price? Who'd have ever thought such a thing could happen?
It’s a pity that our politicians can't pitch their wits to improve procurement
as well as they do with their expenses! You’d think that any government, with
all its top notch barristers, would be able to draw up water-tight contracts
with severe penalties if they were not met, in terms of time and money. It’s not a one off either, this story is
repeated over and over, with no lessons ever learned. No apologies to the tax
payer, Oh I forgot! It's only us tax payer’s money they’re losing so who cares
? Well I do !
When bankers' greed costs us billions we rightly call for their heads,
then when civil servants demonstrate financial incompetence and cost us
billions it seems we give them a fat pension ! 'When will someone be sacked' everyone shouts ? If you are that far over budget you don't actually have
one. Any private sector business would
have had the banks screaming long before now.
Or so the shouters would have it. BUT – Dig below the surface and
there’s a lot more to it than basic incompetence.
Historically We’ve Always
Failed
According to a report published in May, a third of the Government’s
200 biggest infrastructure projects are either over-budget or have been
delayed. At least 70 road, rail, defence or IT schemes are running into trouble
and need further changes or new leadership to see them through in time and on
budget, but it’s always been that way.
Way back when, the Suez Canal cost 20
times as much as the earliest estimates; even the cost estimate produced the
year before construction began underestimated the project's actual costs by a
factor of three. The Sydney Opera House cost 15 times more than was originally
projected, and Concorde cost 12 times more than predicted.
Other more recent examples, large and small include :
Millennium Dome
Original estimated cost: £399m
Final
Cost : £789M
Scottish Parliament
Original estimated cost: £40m
Final
cost: £414.4m
Swipe cards for benefit claimants
Original
estimated cost: £1bn
Final
cost: Project scrapped after spending £1bn
Jubilee Line
Original estimated cost: £2.1bn
Final
cost: £3.5bn
Channel Tunnel
Original estimated cost:£4.8bn
Final
cost: £10bn
Swanwick Air Traffic Control Centre
Original
estimated cost: £350m
Final
cost: £623m
NHS IT System
Original
estimated cost: £2.3bn
Final
cost: Project scrapped after spending £12bn
Astute Class Submarines
Original estimated cost: £2.58bn
Final
cost: £3.8bn
Type 45 Destroyer
Original estimated cost: £5.48bn
Final
cost: £6.46bn
Nimrod Upgrade
Original
estimated cost: £500m
Final
cost: Project scrapped after spending £3.8bn
Olympic Games
Original estimated cost: £2.4bn
Final
cost: £9.3bn
I could go on, there were the network of Fire Control Centres that
were all abandoned after spending a fortune on them because they weren’t able
to get the IT to work.
There was the cock-up with the Chinook helicopters where the MoD
failed to specify access to the software code in the original contract with
Boeing, they were consequently stored unused from 2002 until 2011.
Unless things change, HS2 will go the same way for sure. £50bn today
will easily go to £100bn before its even delivered.
Suffice to say our Government’s, whichever party is in power, have
always been appalling at managing the procurement of large capital projects.
So Who or What’s To Blame?
Those of a left wing pursuasion like to see ‘big business’ being
continually blamed for this, going on about profiteering, fingers in the till,
Government ministers having an ‘interest’ in the winning company etc. I don’t
think this is the real the reason. If the right processes and management were
in place these things couldn’t happen anyway.
Having been involved in bidding and managing public sector
construction projects for many many years I’ve a good idea what works and what
doesn’t, and where the cost escalation comes from.
Most people question how it is that government contracts can increase
in price. They say surely whoever in the government agrees these contracts,
creates a fixed price project with penalties if it arrives late? They think
there should be no clauses allowing prices to increase. And in general, there
aren’t !
Despite what people believe, prices are fixed. They’re fixed against
the scheme design that was advertised, bid and won. However, this is very
rarely the final scheme and that’s where the problem lies.
A quote on a newspaper website which a member of the public posted in
the comment box below the aircraft carrier article was :
“My brother builds small
ships, once he prepares a quote, he can't add thousand of pounds halfway through
the build. Perhaps a bit for inflation for material but that's it. If he get
the quote wrong that his problem not the buyer.”
And there lies the crux of public perception. His brother will have
provided a fixed price against a specification. After entering into contract,
if the client then changed the specification, under contract law, his brother
would be entitled to change his price for the element that has changed as he’s
now providing something he didn’t tender for.
"Why can’t they get the
price right at the beginning?" is a commonly asked question. In many
cases they do for the design as it stood then. But then the Government/Client
changed what they wanted and that costs money to re-develop, re-design, and
then build. That’s called a Variation to Contract, it raises the capital cost
and adds time to the project timescale, which then adds even more cost. The
more variations you have, the more the cost escalates.
It’s often alleged that some defence industry suppliers win contracts
by offering bids which are less than the cost of production in the certain
knowledge that specifications will be changed and modifications demanded by the
MoD during the procurement process. When the specifications are changed
significantly, contractors are free to ‘renegotiate’ their contract with the
MoD. Leading to vast over spends on procurement.
So these cost escalations are no doubt largely down to changes in
specification by the client, some maybe driven by Government policy and
changes, but often its just persistant meddling with the design by the client
and his team.
Having worked on projects, I know that if the brief is changed
part-way into the project the money spent thus far will often be lost, and
effectively re-spent getting back to the same position, added to new costs for
a different specification. Under the contract, all this is claimable from the
client by the contractor. And so it should be !
Quite simply, if contractors build what they tendered for in the first
place the cost will not change.
What Needs To Change ?
A number of things.
Firstly the addressing of ‘scope
creep’ is essential. Designs should be frozen at the point the contractor is
appointed. If changes are required then do them after it’s handed over to the
client. It’s often argued that it’s cheaper to do changes during construction,
and yes the straight capital cost of a change can be cheaper then, but add on
the extension of programme to incorporate the change and associated cost that
that attracts and it starts to become expensive, especially when a number of
changes are made simultaneously.
Stopping scope creep leads to clients having to get it right at the
start, this is difficult for them and may increase their costs but it should
bring down the ultimate outturn cost of the scheme.
Too many client side people are involved in the development of
equipment and projects. One department wants this, another department wants
that and it all means more changes which costs time and money. Cut out the
number of departments involved and once a design has been agreed, stick to it
and look at modifying and upgrading later. If we had waited for the Mk 10
Spitfire to be built we would now be speaking German.
Secondly, the private sector are
very good at project management, they have to be, its their money they’re
protecting. Civil servants managing complex procurement schemes should change.
The government should establish an arms length project management company
operating as a private sector business, manned by private sector cost and
project managers and leave them to manage projects without political
interference.
Where fixed price tenders aren’t suitable due to risk and unknowns
then a Guaranteed Maximum Price should be agreed, that GMP can include a
pain/gain mechanism whereby additional profit is shared between the client and
contractor whilst all losses are the contractors alone. It can also detail who
holds monies against different risks – client or contractor. To simply put all
risk to the contractor will simply lead to an inflated cost or no bidders in
the first place.
Call me simple, but the whole process should quite simply be:
1) Put work out to tender in a detailed form as possible
2) Review bids
3) Award work to best value bidder
4) Don’t change the design or specification
5) Work is done
6) Payment is made at the price they bid.
If a contractor moans, "But
the price of steel has gone up globally". So what? He should have seen
that coming and included for it. Build such things into your original bid or bear
the additional cost yourself.
These simple remedies may
sound like common sense and they might solve some of the problems. However, government
procurement and common sense have never been good bed fellows, so don’t hold
your breath. Just watch us carrying on doing what we’ve always done and getting
the same results we’ve always got.
HS2 will cost over £100bn
by the time its finished, in fact I’m off down the bookies to put some money on it - though I don’t think I’ll be getting good odds on it. Do You ?
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