Extract from “Report of the Working Group on Cost Over-runs on Public Construction Contracts”
SUMMARY OF MAIN CONCLUSIONS AND RECOMMENDATIONS
1. There is no question but that the efficiency of many public bodies could be substantially improved. The inadequacies brought to light in this Report highlight this point. The adoption of the recommendations below should lead to a substantial improvement in efficiency in regard to project conception and appraisal, effective management, and control.
2. The problem of cost over-runs was found to exist in the public service. It was clear that some public bodies exercised a greater degree of control over costs than others, giving rise to a range of cost over-runs on public capital projects. The extent of the current problem was identified as being of the order of 2½% to 7½% of project costs. In 1982 terms, the potential saving was between £20m and £60m. It is imperative that all public bodies should strive after the complete elimination of this problem. To this end, public bodies should adopt the most stringent controls and pursue rigorously the measures identified in this Report as necessary to avoid extra project costs.
3. There appears at present to be an uneven approach to project appraisal/feasibility. Standards in this regard will need to be developed and improved upon. There is a case for greater co-ordination of approach in this area.
4. Design cost control and management of projects are clearly inadequate in many instances at present. These aspects will need to be given greater attention in future in the public service.
5. There emerged from the consideration of this problem a need in the public service for project personnel to continually review assumptions and ensure that cost control procedures are implemented; to foresee and forestall problems that have the potential to give rise to extra costs; to be conscious of funding costs, and to ensure that projects are completed to the time and price schedules.
6. Improvements in these areas would go a long way towards the achievement of substantial savings of public monies each year and would result in greater efficiency in the management and control of the expenditure of public funds.
It is difficult to standardise exact procedures to cover the many different types of project/programme covered by the public capital programme. Nevertheless, we have outlined below our main recommendations to apply to public projects/programmes for their effective execution:
AProjects should be formulated only after a preliminary survey of needs, objectives and means of achievement (exploring all options).
BThe approval of the sanctioning authority should be obtained for expenditure on planning/feasibility studies.
CProjects should be subject to feasibility/investment appraisal taking into account projected cash flows for all options (the Department of Finance should be consulted if necessary about discounting methods and rates). Where outside consultants are employed to assess feasibility on complex or specialised projects, they should be informed that they might not be employed on the project itself.
Note: the scope of and resources to be devoted to the preliminary and feasibility studies will vary depending on the scale and type (e.g. one-off or part of an on-going programme) of the project.
DA vetting committee, to be called into existence as required, should be established to assess the adequacy of feasibility reports. It should be composed of a permanent core of officials with the addition of experts in particular areas as required. A set of guidelines on feasibility reports should be prepared by the Department of Finance in conjunction with An Foras Forbartha.
EIn the case of proposals of a non-confidential nature, feasibility reports should be published.
FIf the feasibility study is positive, approval should be sought from the sanctioning authority to proceed in principle with further planning for the project.
GCost limits, determined by reference to previous similar projects, and following consultation with other State Departments/bodies about similar experience on recent or on-going projects, should be specified for the project to the consultants.
HThe design of a project should be complete to the greatest possible extent before tenders are sought.
IWhere a large programme of building is concerned, consideration should be given to standardising the design as much as possible. This should ensure not only a lower initial estimate, but should also lead to avoidance of excess costs, and a reduction in consultants’ fees.
JWhere a design furnished by consultants exceeds the costlimits for the job, the matter should (i) be referred back to the consultants to reduce costs in some areas so as to stay within the overall financial target or (ii) the feasibility of the project should be reassessed in the light of the increased cost.
KThe Standard Government Conditions of Contract should be used for all public construction works (except when in commercial State-sponsored bodies the specialised nature of the work warrants different conditions); the price variation clause of those conditions should be adopted for the general construction contracts of commercial State-sponsored bodies. Where feasible, fixed price tenders should be sought.
LFinal approval for the project should be sought from the sanctioning authority following a final review of all assumptions made in the light of subsequent developments and the actual tender prices received for the project; the cost of borrowing for all public sector projects should be specifically identified and added to the expected final cost of the project. On-going programmes should be approved on an annual basis by the Minister for Finance. Major one-off projects not part of an on-going programme should be submitted for the specific approval of the Minister for Finance.
MConsultants should be required to exercise careful management and control over the project during construction. The public or State-sponsored authority concerned should designate particular personnel to oversee execution of the project and should establish a cost control/supervising committee to oversee major one-off type projects (costing over, say, £10m). A representative of the Minister for Finance should be appointed to such committee if he so wishes.
NDesign changes should not be permitted unless warranted by changed circumstances: any design changes leading to extra costs should be offset by cost reducing changes in other areas. Where this is not possible, approval from the appropriate sanctioning authority to incur significant extra costs should be obtained.
OExtensions of time should be agreed by consultants only for exceptional circumstances outside the control of the contractor; the payment of damages for non-completion of specific aspects of the contract on the scheduled dates should be considered.
PConsultants’ fees should be paid in two moieties (i) related to the cost of the project at tender stage and (ii) (the smaller portion) related to the final cost of the completed project. The second portion of the fee is in respect of management of the project in the post-contract stage and this duty should in future be emphasized to consultants. All steps should be taken in good time by consultants to ensure that the client does not incur unnecessary extra costs. In appropriate cases, reductions in normal consultants fees should be sought, particularly where repetitious projects are involved, and for major contracts, design etc., costs should be open to price competition.
QThe Foras Forbartha booklet “National Standard Building Elements and Design Cost Control Procedures”, should be updated and followed by all public bodies placing construction contracts. Use of the procedures should be a condition for approval of such projects by the Department of Finance.