Archived decisions

Contact: Brian Marsden, ext 6346 email: [email protected]

1. Summary

1.1 Concern has been expressed by Members regarding the process and accuracy of estimating transport capital programme schemes. The aim of this report is to identify the current processes surrounding the development of cost estimates, highlighting the risk areas encountered both in Hampshire and nationally within the construction industry, and to set out an improvement plan to be taken forward over the next 12 months, following an independent review undertaken by the County Treasurer.

2. Corporate Strategy

2.1 This report supports Aim 5 of the Corporate Strategy `Improving Services' by presenting an action plan which will improve the processes involved in scheme estimating and reporting and ultimately the delivery of transport schemes in Hampshire.

3. Background

3.1 Increasing costs affect the whole construction industry and Hampshire County Council is no exception. The Office of National Statistics has published [construction] Industry Averages that indicate on average half of projects completed each year are above the project appraisal estimate. A study by the County Treasurer's Department confirmed that Hampshire performs slightly better than the industry average but, nevertheless, there is scope for significant improvement, as identified in the Best Value Review.

3.2 For example, the Department for Transport (DfT) has recently published new adjustments that project managers should apply to their own estimates to remove the "optimism bias" (the underestimating of time and costs). The DfT recommends that promoters of road, cycle, bus and park and ride schemes, looking for a high degree of certainty that cost overrun will not occur, should generally adjust the costs at the final business case stage (project appraisal) by +32%. Cost increases have a detrimental effect on the programmed allocation of resources, potentially leaving less funding available to start new projects throughout the year and necessitating programme changes.

3.3 An analysis of current and historic experience is necessary to identify the main reasons for time and cost adjustments being applied to projects, and to suggest steps for minimising these in the future. Accepting DfT guidance is an option but a more controlled approach is sought. An action plan has therefore been completed, which is attached as Appendix 1.

4. Reasons for Time and Cost Adjustments

Programming

4.1 The project planning process essentially begins with the submission of the five year Local Transport Plan (LTP). This document forms the basis of the current bid system to the Government. At its inception the LTP contained many strategic headings rather than defined schemes, for example "Andover Cycle Strategy" against which an indicative allocation (£) is assigned. This is based on a simple division of the available funding to particular modes of transport within each strategy area, and not always linked to specific schemes. Appendix 2 outlines the linkage between project estimate stages and project development.

4.2 Government funding (Supported Capital Expenditure) is an annual allocation, time limited to a single year only, and is based on a successful LTP bid and the Annual Progress Report (APR) review process. The allocation, disclosed by the DfT in December of each year, has to be shared between all schemes incurring costs in that year and, accordingly, funds schemes already in progress from current and earlier programmes, together with schemes under development for the future.

4.3 One of the causes of cost adjustment is due to the need to squeeze projects to within the single starts programme year in the budget book. Schemes listed in a particular year's programme (eg 2004/05) which for any reason do not start construction in that year are not automatically rolled forward to a future year's programme. This creates a culture amongst Project Managers of committing or potentially losing their project(s). With such inherent pressure to ensure the delivery of every scheme in the capital programme, there is a temptation for short timeframes and not `fully formed' cost estimates being quoted. The necessary time to develop a financially low risk design is not always available before the scheme first appears in the programme.

Pre-Feasibility and Feasibility

4.4 The project concept (aims and objectives) is only determined after considerable efforts, technical studies, consultations, District and Parish Council discussions, etc, and in some cases may take several years to develop.

4.5 At the project planning phase, pre-feasibility and feasibility analysis play a significant role, prior to presenting the project concept to the Area Transport Strategy Panels. It is at this time that the "initial allocation" (£'s) is further developed for specific schemes to be included in the next capital programme.

4.6 Often for schemes being entered into an annual one-year programme, the project concept and other preliminary considerations are underdeveloped and the value assigned is still only an allocation. The conceptual weaknesses are overcome during preliminary design and a cost estimate is developed during further consultation and design. Earlier development of schemes prior to entering the programme will improve financial planning.

Preliminary Design and Consultation

4.7 The project planning phase continues with preliminary scheme design. This activity will develop existing feasibility studies, which are often desktop designs, by using actual measurements from site, various plans and drawings to visualise the design; and computer models for some projects are then used to test the design. This stage also brings together the improved cost elements, based on a broad brush approach using approximate values and quantities to create the preliminary estimate.

4.8 At this time potentially significant cost elements, such as statutory undertaker diversions and land acquisitions, start to be identified. Moving one BT cable or a gas/water main can add thousands of pounds to a project and early identification of the location of this equipment may result in the need to re-design. Cost estimates for moving affected plant will only be made available by utility companies when the detailed design is nearing completion.

4.9 Similarly, early identification of any land requirements needs to be undertaken in order that negotiations can commence and cost and accommodation works agreed.

4.10 This area of financial risk should be expected and, although a provision can be included in the preliminary estimate, may vary considerably when the design reaches the detailed stage.

4.11 Public consultation provides a vital link to the views of the community, and helps crystallise the project concept. Consultations can be costly exercises, both financially and in time. Public and Member opinion can occasionally radically change the concept of a project, impacting on cost and delivery time.

4.12 The Environment Department has been criticised for "over consulting" in recent years, and as a result a new "Consultation Charter" has been developed. This will go some way to standardise the types of consultation, and likely time and costs involved.

Detailed Design

4.13 Only after the project concept is fully realised through preliminary design should the detailed design on the project begin. The detailed design phase includes construction planning covering aspects such as statutory procedures (eg Traffic Regulation Orders), the type, quantity and positioning of materials to be used, sustainable construction methods to be employed, environmental and geotechnical constraints, land acquisition and utility diversions.

4.14 As final details emerge and quantities become refined the detailed estimate can be compiled. It is at this stage that risk analysis should be undertaken, and an appropriate uplift of costs applied to the specific risk areas identified. The Engineering Consultancy and Atkins both use a standard estimating form. This is a simple checklist to ensure that the main cost elements are included. Historically items such as internal fees have been omitted completely and only recently come to light through improved financial monitoring. Accuracy in forecasting is being improved by the introduction of new protocols and training; however, forecasting of elements in the "risk" areas will still lead to variations of costs.

Project Appraisal

4.15 The project appraisal (PA) is essentially the County Council's investment or business case decision. It should bring together both financial aspects and LTP objectives of the scheme. Once the decision is made to proceed, no significant change in project concept, technology and scope should normally be expected or permitted.

4.16 Report authors consider the corporate PA format to be confusing and ambiguous. This view is also reflected in the County Treasurer's study on estimating, indicating that there is more than one format being used. All formats present the financial details at summary level only, indicating the total forecast commitment with no provision for an explanation of risk, breakdown of the estimate or spending plan. There is currently no opportunity to apply a factor derived from the risk analysis, which could impact on the future outturn cost of the project.

4.17 Consideration should be given to providing an upper and lower cost bracket, rather than a single figure. The level of risk can then be clearly identified, depending on the difference within the band-width. However, such banding will create other problems in quantifying performance in the LTP/APR.

4.18 Improving the PA format and introducing a more consistent approach will allow Members to make more fully informed decisions and the people of Hampshire to have greater understanding of the subject.

Construction

4.19 The majority of projects reaching the construction phase are procured by employing a contractor. The contract planning has to be linked closely with the implementation plan, and key members of the project team should remain involved for continuity. The contractors should be considered as partners in project execution, and help should be provided by the project team in solving genuine problems.

4.20 During the construction phase costs can increase due to a number of risk areas, some of which are outside the project teams' control (*):

(i) statutory undertakers delays in moving their equipment (*);

(ii) additional work required due to public utilities' plant not being where it was expected to be (*);

(iii) delays due to weather can add costs (*);

(iv) public/political pressure to speed up construction process can add costs (eg night working);

(v) specialist furniture/equipment incorrectly supplied (*);

(vi) design changes on site;

(vii) inability to change specification to reduce costs;

(viii) residents raising issues whilst construction is in process that require changes;

(ix) additional work required resolving problems regarding ground conditions on site; and

(x) slippage due to uncontrollable events (*).

[The above are not identified in priority order as cost increases resulting from these events may vary significantly from scheme to scheme].

4.21 A number of these areas are uncontrollable as they relate to ground conditions, outside agencies and the weather. The 10% contingency added to the works' estimate is intended to cover these eventualities but depending on the nature of the unforeseen item this can be exceeded. Improved communications between site staff and head office management will allow earlier warning to Members of the likely financial impact.

5. Summary

5.1 Control mechanisms and monthly forecasting recently employed on the management of the capital programme have resulted in scheme outturn cost increases being lower than the construction industry average.

5.2 Issues which have been identified in this report will, when actioned, bring improved accuracy in predicting and controlling outturn costs. Process and communication improvements are equally essential for addressing Members' concerns, these can be summarised and resolved by:

(i) Addressing Perception

- raising awareness

- performance measurement

- information provision

(ii) Managing Costs

- improved estimating

- greater understanding of the reasons and associated cost of variations

Recommendation

That the attached action plan (Appendix 1) be developed and agreed as a method of improving communications and financial management.

8917/BM

APPENDIX 1

APPENDIX 2

FLOW CHART IDENTIFYING THE LINKAGE BETWEEN PROJECT

ESTIMATE STAGES AND PROJECT DEVELOPMENT