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London 2012: breaking down the costs

Costing the Olympics - How does a project initially budgeted at £2.4bn soar to £9bn before a single brick is laid?

Last week the Olympic Delivery Authority (ODA) admitted that the cost of building London's Olympic Park would be 'signicantly higher' than the £2.4bn put forward in London's bid document to host the 2012 Games.

However, claims in the media that the ODA had conrmed a budget of £5bn and rising were false.

What ODA chief executive David Higgins and acting chairman Sir Roy McNulty told the London Assembly last Tuesday was that regeneration, security and VAT had pushed up the price, without mentioning any specic gures.

McNulty denied his predecessor Jack Lemley's claims that costs were rising on an 'exponential' basis. But by NCE's calculations (see box) it would seem media tales of £5bn are, if anything, generous.

The figures show a final construction bill ranging from £3.9bn to £9.8bn, based on a large number of variables being hammered out by the Treasury, the Department for Culture, Media & Sport, the ODA and the Olympic board.

The ODA believes the original bid calculations on the construction cost of venues were reasonably accurate. According to London mayor Ken Livingstone increasing costs can be attributed to regeneration, VAT, security and contingency funds.

The ODA has already secured £1bn in funding from the Department for Communities & Local Government in addition to the original £2.4bn budget.

This £1bn is for infrastructure to support the development of 40,000 homes in the Lower Lea Valley, a cost unforeseen at the time of the bid. However, the ODA has admitted that £1bn will not be enough and is negotiating for an undisclosed additional sum.

Security costs, meanwhile, ramped up considerably following the London bombings the day after the capital won the right to host the Games (NCE 14 July 2005). Any extra policing costs will be picked up by the Home Of , but improved security systems have been drawn into the masterplan.

Onsite security during construction will also be greater than planned during the bid, impacting on building costs.

Although there are no specic security costs identi d in the Candidate File, an examination of security costs incurred at Athens and Beijing, identiy a broad range.

VAT, of course, could push the worst case headline gure to £12bn, but chancellor Gordon Brown, Higgins, McNulty and Livingstone have all insisted that if it does have to be paid then the money will simply be handed to the Treasury, and then back to the ODA.

The item most capable of skewing the gures is the contingency fund. Livingstone said he would rather no contingency be allowed to put pressure on contractors to come in on budget.

However, Livingstone added that under duress he would be willing to accept 20%, a gure recommended to him by former Transport for London commissioner Bob Kiley.

However, contractors have warned that 20% is a contingency used only when they are brought in early to define the scope of the project and that a higher figure of 30% is more common.

This week's NCE 500 reveals that engineers think that 40% is the best estimate.

With this lack of contractor involvement it is unsurprising that the ODA is pushing for a 30% contingency.

It is equally unsuprisingly that the Treasury is pushing for a 60% contingency, having had its ngers burnt on high-profile infrastructure projects such as the Jubilee Line extension, which ended up with a £1.5bn cost overrun - 71% of its original £2.1bn cost (NCE 18 November 1999).

Should he Treasury's pessimism prove well-founded and a large contingency be needed, £9.8bn looks a likely total.

Whatever the nal budget when published in February next year, McNulty was adamant that it would be unmovable.

He said: 'I would expect the budget to be a fixed sum including a contingency. I don't expect an elastic budget.' ODA delivery partner CLM - a consortium of CH2M Hill, Laing O'Rourke and Mace - joined the project at the end of August, 13 months after London won the right to host the Games. CLM is carrying out a 90 day review of the work done so far by the ODA.

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