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Project costs under attack

Driving out poor cost management is key to cutting the high price tag of civil engineering, Treasury body Infrastructure UK (IUK) has revealed.

It said UK clients needed to instil greater discipline to commissioning infrastructure projects and programmes if costs are to come down.

This could be achieved by using a third party to manage contingency budgets, as is being used on the London 2012 Olympics project, it added.
The proposal is one of 19 areas of potential action identified by IUK in its first update report on its work to identify the cause of cost escalation in UK civils projects since June.

The update was published on the IUK website to coincide with the publication of the government’s National Infrastructure Plan (News last week). IUK will report in full in December.

IUK chief executive James Stewart said the work had identified a fundamental need to change the attitudes of those procuring and delivering projects.

“We need to create a continual downward pressure on costs,” said Stewart. “But the problem is not construction costs. The problem is at the front end of the process.”

“We need to create a continual downward pressure on costs”

James Stewart

He said the process where budgets of every road or rail project are inflated to allow for things going wrong was flawed.

“For every public sector project, before you even start you add a 50% optimism bias to allow for contingencies,” he said. “That then creates an affordability envelope, and then you go and get a budget equal to that affordability envelope.

“So it’s no great surprise that most projects come in to that price.”

The Treasury introduced optimism bias to counter criticisms of cost escalation after the price of dozens of road schemes soared above their original budgets (NCE 9 February 2006).

Stewart said a better model was the London 2012 Olympics where the contingency fund is managed separately and where “if those delivering the project want to claim some of it they have to work very hard to get it”.

The maximum funding available to the Olympic Delivery Authority (ODA) is £8.1bn. Of this, £6.1bn is controlled by the ODA – the balance is held as contingency by central government and is accessed only with specific approval by ministers.

ODA chairman and former Network Rail chief executive John Armitt agreed.

“Optimism bias is a fundamental failing”

John Armitt

“Optimism bias is a fundamental failing,” he said. “We did it at Network Rail [when Armitt was chief executive] and all it does is convince people that the money is there to be spent.”

Other causes of cost escalation identified by IUK’s investigation include stop-start investment hampering efficiency and the UK’s complex web of planning, consents, regulation, process and standards, which absorb time and add considerably to cost.

Poor practice in commissioning is also identified as a major cause of inefficiencies in the specification, design, procurement and construction phases.The fragmented nature of the UK supply chain, with a relatively large number of smaller construction companies acting as main contractors by comparison to its European peer group, is also singled out. IUK’s report suggests this contributes directly to low skills development, training and productivity that add to costs of construction.

The UK’s heavily contractual approach is also blamed, with low prices achieved under competition often increased at outturn as a result of claims.
“There is concern that behaviour in the current economic climate may result in a return to an adversarial culture,” the report notes.

All these factors are compounded by the lack of readily available data on UK infrastructure costs and asset condition, says IUK.

Readers' comments (1)

  • I totally agree.
    Since March 2010, Kent County Council have used independent cost consultants to mancage, report and advise on all project costs for its £87m East Kent Access project. This also includes an extremely thorough risk management process.
    The project has an extremely tight budget and to date this tight control and reporting of finances has been like a breath of fresh air in controlling and managing expenditure. I only wish this project had the luxury of a 50% optimism bias.

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