Committee Reports::Report - Control of Capital Projects::15 July, 1985::Appendix


Appendix to Department of Finance circular 1/83

Outline guide to procedures to be followed in relation to capital expenditure in the Public Sector.*



1.1Before any project or programme is formulated, a preliminary survey of needs, objectives and means of achievement should be carried out. Such a survey should try to asses the degree to which the project/programme is necessary and whether on clearly defined grounds it merits an allocation of scarce public capital resources (as compared with possible alternative uses of such resources) and should also determine whether sufficient demand will exist (bearing in mind the level of charges users may be required to pay) to justify provision of the asset on the scale contemplated. All options should be explored and due regard should be paid to what the private sector is doing or might be able to do either independently or with State assistance/participation.


2.1If the project/programme is shown to be sufficiently worthwhile by the survey at (1) a detailed feasibility/investment appraisal study should be carried out. The sponsoring body and/or the Department concerned should assess their in-house capacity to conduct this study. Where the in-house capacity is inadequate trained analysts within the public service and personnel with proven expertise in dealing with major projects/programmes should be involved as appropriate, if necessary on a cost recoupment basis.

If it is found necessary that outside consultants be employed for all or part of the appraisal, it should be made clear to them that they may not necessarily be employed on the project itself if it is eventually allowed to proceed. The procedures set out in the Department of the Public Service booklet entitled “Employing Management Consultants Code of practice for Government Departments” should be observed.

Scope of Detailed Appraisal

2.2The scope of this appraisal will vary according to the scale of the project/programme. On major projects costing in excess of £5 million or complex or specialised projects, or the annual review of a five year programme in the Telecommunications, Roads, Sanitary Services, Health, Education & Housing areas detailed feasibility/investment appraisals should be carried out. The appraisal should deal with the following:-

(i)Objective of the project/programme, (together with an assessment, quantified where appropriate and possible, of the need/market to be met and the planned time-span for meeting it).

(ii)Possible alternative ways in which public sector intervention could achieve the objective. The position if the need is not met by the public sector should be assessed, together with the likelihood of it being met fully or partially by the private sector.

(iii)Financial aspects

-Estimate of full cost and its phasing in both cash (i.e. inflation-adjusted future price levels) and real terms (constant prices) of all options. (An allowance should be included for the degree of liability to cost overruns for various reasons e.g. design problems, higher than expected inflation etc). The Department of Finance may be consulted if necessary about assumptions on future price levels.

-Exchequer costs (including the proposed capital contribution from the Exchequer; ongoing current costs to be borne by the Exchequer, directly or indirectly, if the project/programme is undertaken, including interest charges on capital, commissioning costs, additional current expenditure/ staffing requirements etc). This should extend to Exchequer costs, capital or current which, though not directly involved in the project/programme itself could be generated by it (e.g. in associated infrastructure or in higher demands on public services).

-Financing of capital costs and sources and terms of finance

-Any foreign exchange risks and by whom ultimately borne.

-Cost and feasibility of terminating or re-phasing the project/programme at any stage.

-Finance required initially for all work preceding final decisions and budgeting arrangements for such finance;

-Assumptions underlying all projections (to include stated inflation and exchange rate assumptions) to be clearly specified.

-Assessment of uncertainties/sensitivity analysis of the projections.

-Where project/programme is partly or wholly concerned with replacement of existing facilities the proposed utilisation/disposal of the old asset and resultant costs/revenue involved should be indicated.

-Any other relevant financial aspects.

(iv)Assessment of the distribution of the benefits and costs of project/programme. [State ultimate beneficiaries and ultimate bearers of costs (taxpayers, beneficiaries of project etc]

(v)All other relevant factors to include, inter alia,

-Current relevance of strategic considerations, if any

-General economic implications of (a) construction and (b) operational stage of project/programme (e.g. employment, balance of payments, effect on the level of activity, and on prices, in the building industry etc.)

-E.E.C. aspects including, where relevant, possibilities of obtaining Community financing.

-Legislative implications, if any.

-Programme of events from decision date to completion.

2.3For once-off commercial projects the following information should, in addition, be set out:-

-The projected rate of return on the capital employed in the project

-The impact of the project on the body as a whole (e.g. if project leads to spare capacity, what implications would this have).

-The projected return to the shareholders on funds to be subscribed for the project.

-An assessment of the impact of the project on the financial position and the level and phasing of borrowings of the body undertaking it both during the construction stage and subsequently.

-Interest charges during construction, pre-production expenses, commissioning costs and working capital requirements to be included in estimate of all-in cost of project.

-Cash flow associated with the project to be estimated in (a) cash terms (b) real terms (constant prices)

-Possible joint venture arrangements with private sector.

-How the project fits into the company’s overall Corporate Plan.


3.1The case for the proposed investment should be reviewed in the light of the results of the detailed appraisal. In agencies other than commercial State bodies, the responsible planning officials and senior management should make an assessment as to whether the expected economic and social returns are likely to warrant proceeding any further with the outline proposal. The criteria used to assess these returns should be explicity defined.

As regards capital expenditure by commercial semi-state bodies, it must be established by the responsible planning officials, senior management and the Board that the proposed investment, taking account of all possible costs and potential risks etc. associated with the project, is capable of achieving a commercially acceptable rate of return on capital employed before proceeding any further.

The return should be greater than the average cost of the funds over the life of the project. (All funds used should be costed, whether internal, equity or borrowed). In addition it should cover the risk factor which will vary from project to project. In this regard, the rate of return in a high risk project in a new technological area would have to provide a margin of 7%+ over the cost of funds but lower risk projects would be acceptable at a lower margin.


4.1Provided the results of the studies referred to above are positive, approval in principle should be sought from the appropriate sanctioning authorities to proceed with further planning for the proposed project/programme.

Requests for such approval in principle, whether submitted to superior officers, to the sponsoring Department (under delegated authorities to be decided), to the Department of Finance or to the Government, should set out the results of the preliminary survey and the detailed feasibility/investment appraisal under the headings set out at (3) above.

Approval in principle to proceed with further planning of the project is not to be taken as approval to proceed with the project/programme.


5.1If approval in principle is secured, the following action should be subsequently taken both in relation to once-off projects and to the component projects of major programmes:-

-Cost limits should be formulated for the project by the sponsoring agency. (These costs limits should be within those specified in the appraisal submitted to the sanctioning authorities).

-A comprehensive brief should then be prepared by the sponsoring agency to enable a detailed design to be completed.

-Where outside consultants/architects etc. are engaged to draw up design, plans, secure tenders etc. the terms on which they are contracted should be treated as negotiable. Standard scales of fees should be regarded as maxima; in appropriate cases reductions in normal consultants fees should be sought, particularly where repetitious projects are involved and for major contracts, the design etc., contracts should be open to price competition (competitive tendering).

-Where the design furnished to the sponsoring agency exceeds the cost limits for the project, these should be referred back to the advisers to determine whether costs can be reduced to stay within the overall financial target. If they can not, the case for proceeding with the project in the light of the increased cost should be reassessed.

-The final design should be complete before tenders are sought. (Where a large programme of building is concerned the design should be standardised as much as possible).


6.1Tenders should generally be invited on the basis of the standard Government conditions of contract. Where feasible, fixed price tenders should be sought; in suitable cases contractors should be given the opportunity of tendering on both bases. Contracts on a cost-plus basis may not be entered into only in the most exceptional circumstances when specific authority shouldbe obtained from the Government Contracts Committee or the Department of Finance.

The standard Government contracts price variation clause should whenever possible be adopted for the general construction contracts of the commercial State-sponsored bodies.

In the case of major projects, consideration should be given to the inclusion in the conditions of contract of monetary penalties for non-fulfilment of specific aspects of the contract by scheduled dates.


7.1The case for the project should be re-assessed in the light of actual tender prices before approaching the sanctioning authority for a final decision. If the sponsoring Department/Agency wishes to proceed further, a full up-to-date appraisal of the project under the headings listed at para 2.2 above should be submitted to the sanctioning authority for final approval in the light of this re-evaluation and the actual tender prices received for the project. Under no circumstances should any contract be placed until such approval has been secured.


8.1The following instructions are to be adhered to for all projects/programmes including those now in course of execution:

-There should be a clearly designated individual project manager with responsibility for overseeing the execution of the project.

-All concerned (officials of the sponsoring agency, outside professional consultants or others) should be required to proceed on the basis that proper management of the contract must ensure that costs are minimised and that, the project will be completed within the budget cost.

-In addition to the normal provision for managerial and technical supervision, major once-off projects with a value in excess of £10 million should have a cost control/supervising committee charged with responsibility for overseeing the execution of the project. This Committee should include representatives of the sponsoring Department and of the relevant public authority involved (including appropriate professional staff e.g. architect/engineer/quantity surveyor). The Department of Finance will normally nominate a representative in the case of major projects. The committee should -

(a)maintain continuous liaison with consultants, contractors and others involved in the construction work. They should insist on careful management and control throughout.

(b)prepare frequent reports (at least once every quarter) summarising all relevant developments relating to the project costs and its viability and submit them promptly to the sponsoring Department and other relevant authority. (Copies of the reports on all sizeable projects should be sent to Department of Finance if it is not represented on the committee).

(c)Review the project as each stage/contract is completed and ensure that the next stage/contract can appropriately proceed having regard to the overall cost approved by the sanctioning authority and to the availability of funds;

(d)If adverse developments occur which call into question the desirability/viability of the project, a special report should be submitted at the earliest possible moment to the sanctioning authority with an assessment of the costs/ benefits of terminating it before completion.

-Similar committees should be established to oversee ongoing programmes such as roads, housing, hospitals, etc. and should produce six monthly reports.

-Design changes should not be countenanced unless warranted by changed circumstances; any extra costs on design changes found necessary should be offset by cost reducing changes in other areas; if this is not possible, the approval of the sanctioning authority for the design changes and the extra costs should be sought before any commitment is entered into with the contractor/consultants in relation to such changes.

-Extensions of time should only be agreed by consultants for most exceptional and unforeseeable circumstances outside the control of the contractor.

* (In order to avoid undue delays, projects already in course of preparation and due to start very shortly may be allowed to proceed under existing procedures subject to specific approval of the appropriate sanctioning authority for such exemption).