Committee Reports > List of Committees > Dáil > 1985 > Committee on Public Expenditure > Report - Office of Public Works

REPORT

INTRODUCTION

1. In January 1984 the Committee decided that the procedures for rental/ leasing of offices by the Office of Public Works (OPW) on behalf of Government Departments and Offices should be examined as

(i)there was evidence of waste of public expenditure caused by rents being paid in some cases for considerable periods on unoccupied premises and

(ii)the rental and lease terms being obtained did not seem to reflect OPW’s role in the market.

2. Evidence was heard by the Committee from O.P.W. officials on 24 January 1984. A statement supplied by O.P.W. on renting of office blocks, which was circulated at the first meeting, set out details of the premises leased since 1981 (Appendix 1).

3. Arising from the 24 January meeting the Committee wrote to O.P.W. asking for additional information (Appendix 2). A detailed reply from O.P.W. was received on 28 February (Appendix 3). The Committee heard further evidence from the O.P.W. officials on that day and arising from queries raised by the Committee during the course of the meeting further details were sought (Appendix 4) on

(i)practices in other countries

(ii)delays caused by factors outside of O.P.W. control and

(iii)costs arising from (ii).

Letters from O.P.W. of 15 May and 29 June, 1984 provided the Committee with information in response to the above queries (Appendices 5 and 6).

4. On the basis of the information available the Committee was of the view that O.P.W. procedures in these areas required further study. Because of technical aspects implicit in the review the Committee decided on 17 July, 1984, under par. (4 of its terms of reference, to engage expert advice in drawing up this report based on an in-depth examination of the existing O.P.W. procedures. As a result Mr. John Ballance, of Messrs J.J. Ballance & Co. Ltd., was commissioned to undertake a study and report back to the Committee by October, 1984. The Committee would like to acknowledge its thanks to Mr. Ballance for the work done on its behalf.

5. The report, which follows, sets out the Committee’s recommendations on improving O.P.W. efficiency and cost-effectiveness in two areas, (a) in the control of office fit outs and the provision of office buildings and (b) in the area of rental/leasing of accommodation. While it is difficult to quantify the savings in public expenditure which will result from the Committee’s recommendations it is estimated that savings of the order of £2 million would have been effected if procedures set out in this report had been adopted in the case of the 26 cases referred to in Chart 2 (pages 11 - 13).

OBJECTIVES

6 The Objectives of this Report were defined as follows:-

(a)To examine the project procedures within the O.P.W. which are used to control the overall cost and programme of office fit out works and the provision of new office buildings. To compare these to the best practices in the private sector and where appropriate suggest what improvements might be made.

(b)To report on the rental and lease terms obtained by the O.P.W. in the period 1981 to 1983 and to comment on the value for money obtained.

7. These activities are not isolated parts of the operations of the O.P.W. and inevitably there was some overlap in the investigation into associated areas of the work of the O.P.W. The Report includes references to some of these areas which we feel deserve comment, but which, in the time available, could not be examined in detail.

THE ORGANISATION OF THE O.P.W.

8. Staff Numbers

The O.P.W. is a large and complex organisation with over 1,000 staff with the following authorised numbers as per the 1984 Government Estimates.

Details of the O.P.W. staff are contained in Appendix 7.

9. Organisation Structure

The organisation of the O.P.W. is shown on the attached Chart 1. The areas included in the present investigation are highlighted, and self-evidently represent a small proportion of the total activities.

10. Area of Financial Responsibility

In terms of financial responsibility, the gross budget for the O.P.W. in the 1984 Estimates was -

£104,313,000

but there must be added to this the capital works amounts included in the Estimates for other Departments but which are managed or designed by the O.P.W. These, the O.P.W. estimated at approximately £50,000,000 for 1984 and therefore the area of responsibility exercised by the O.P.W. in 1984 is -

Approximately £155,000,000

11. Role of the O.P.W.

The O.P.W. carries out a variety of roles and these roles can vary from one project to another. The roles are -

(a)Project Manager for the design and construction of all building works under O.P.W. control.

(b)Designer of all building works under O.P.W. control, using O.P.W. staff and/or sub-consultants from the private sector.

(c)Client in the case of the O.P.W.’s own offices, and also such Government buildings as the State Apartments and the Royal Hospital Kilmainham.

(d)Agent for the purchase of buildings and sites, for the negotiation of new leases for accommodation and for the negotiation of the rent reviews on existing leases. This applies to the O.P.W.’s own needs and that of other Departments.

(e)Agent for the payment of rent on buildings occupied by the O.P.W. and other Government Departments.

(f)Paymaster for the cost of all projects, including the fees, covering those in the O.P.W. vote and those in votes of other Government Departments.

PROJECT CONTROL

12. Analysis O.P.W. Fit-Out Projects

In their evidence to the Committee the O.P.W. submitted information on twenty-six Fit Out Projects in which they had been involved over the period 1981 - 1983. These twenty-six projects comprised a total of 349,152 sq. ft. and covered a wide range of projects varying in cost from £13,000 to £1.2m. and in size from 800 sq. ft. to over 50,000 sq. ft.

13. This amount and variety of projects provides a good basis for analysing the efficiency of the O.P.W. Project Control Systems and comparing these with the best practices in the private sector.

14. To avoid a voluminous and repetitious analysis of each project, we have summaried the progress of the projects on the following Chart 2. The analysis has been carried out under the following headings -

(a)Building This column shows the projects numbered 1-21. In a number of cases two fit out projects were carried out in the same building and these are denoted as (a) and (b).

(b)Fit Out Cost & Area This denotes the construction cost for the project as defined by the O.P.W. and the area involved in sq. ft.

(c)Brief from Client Department This shows the period required by the Client Department to define the requirements so that the Architects can do layout plans.

(d)Design Layouts This shows a period required by the Designers to finalise the layouts. there is a further undefined involvement by the Client Department in this area as layouts will be discussed with them on an on-going basis.

(e)Approvals This generally refers to approval by the Client of the design layouts but in some cases involves approvals such as those from the Landlord.

(f)Bids & Awards This covers the period from approval by the Client of the layouts and includes preparation of tender documents, seeking bids and the award of the contract.

(g)Construction Period This involves the installation of the actual fit out work.

(h)Date Occupied This is the date on which the Client Department had moved into the building.

(i)Start Date for Rent This is the date on which the rent commences. On those leases where rent free periods were obtained, this period is noted and shown as a period before the rent start date.

(j)Rent paid up to completion This is the number of months of rent paid from the rent commencement date until the building has had the fit out works completed.

(k)Rent paid up to occupation This is the number of months of rent paid from rent commencement to the date when the building is occupied by the user Department and starts its productive phase.

15. We consider that in twenty-four of the twenty-six cases the overall project period has been excessive and that the period for rent paid to occupation are grossly in excess of what would be accepted or sustained in the private sector particularly in the cases of the ten projects where this period was over two years and the two projects where it was over three years.

16. We have analysed the twenty-six projects on the basis of the O.P.W. information and we have assessed how performance at each stage has contributed to the overall over-run, and marked the Table as follows -

*A single asterisk denotes that this section contributed to the delay.

**Two asterisks denote that this section was a major contributor to the delay.

These categories apply to -

(a)Brief from Client Department

(b)Design Layouts

(c)Approvals

(d)Bids & Awards

(e)Construction Period

(f)Date Occupied

17. In the case of Start Date for Rent we have applied the asterisks only where the start date for the rent was negotiated too early. Where the rent was negotiated at a reasonable period during the project i.e. after Brief and Layouts, we have not allocat a delay even though the project may have been delayed substantially by other factors such as approvals, construction period or late occupation date.

18. The analysis has been summaried at the end of Chart 2 showing

(a)The occasions when a particular section of the project caused delays.

(b)the occasions when a particular section was a major contributors.

Note

The data provided by the O.P.W. covered the period to the end of 1983.

19. Rent paid up to occupation was, in our opinion, excessive in twenty-four of the twenty-six cases and grossly so in the majority of instances.

20. Rent paid up to completion was, in our opinion, excessive in twenty-three of the twenty-six cases, and grossly so in the majority of cases. Responsibility for this element lies with the O.P.W. as Project Managers. The extra period of rent between completion and occupation is rightly the responsibility of the occupying Department. There were nine projects on which this period was greater than three months and in some cases it exceeded twelve months.

21. The Summary is analysed as follows on the basis of the most frequent occasions when a particular section was a major contributor to the overall delay.

(a)Brief from Client Department. This was a major contributor on nine of the twenty-six projects.

(b)Start date for rent. This was a major contributor to the period of rent paid up to occupation. In our view on eight of the twenty-six occasions leases were entered into at too early a stage and in each occasion the client brief had not even been defined. The O.P.W. state that this occurred partly due to the desire of the Client Departments to take specific buildings.

(c)Approvals These caused major delays in seven of the twenty-six cases. These were mostly the responsibility of Client Department but in some cases were due to delays in getting Landlord, approval which shows some shortcomings in programming the Fit Out Project.

(d)Date occupied The matter of the Department delay in occupying buildings was highlighted above.

(e)Bids & Awards Although this was only a major contributor on four occasions, it was a contributor on fifteen of the twenty-six occasions. The bid procedure in the O.P.W. is not particularly complex and they must as Project Managers carry responsibility for processing matters through their own system.

(f)Construction Period Although this was only a major delay on four of the projects, in our view, the construction periods were longer than would have been expected for the scale of the project in twelve out of the twenty-six cases.

(g)Design Layouts This was only a major contributor in one instance (Project No. 6) where it was exceptionally long, taking almost two years. In general the design layouts were produced in good time.

22. The analysis of the twenty-six projects indicated the absence of the following:-

(a)A method to highlight the rent paid before occupation.

(b)A method to highlight the extra inflation and interest charges occasioned by delays.

(c)A system whereby Client Departments are directly aware of the extra rent, fees etc., occasioned by their delays, but absorbed in the O.P.W. overall vote.

(d)A method of highlighting additional fee costs.

(e)A method for establishing the O.P.W. costs on a project.

23. From the above, it is clear that a review of the existing procedures the management of overall cost and programme of projects in the O.P.W. is needed.

Present Control Systems in the O.P.W.

Introduction

24. The assessment of the project control procedures in the O.P.W., of necessity involved discussion of these procedures as they applied, not only to office fit-out but also to the construction of offices and to the other areas of building construction undertaken by the O.P.W. The objectives of the Report did not include consideration of the other areas of building construction in detail and it may be that application of the comments and proposals in this Section might require adaptation before application in these areas.

Annual Estimates

25. Each Autumn the O.P.W. reports to the Department of Finance on the overall estimates covering in total

(a)Committed Contracts

(b)Pending Contracts

(c)Other Demands

26. Financial control is exercised on the basis that the Actual Outturn should be on or below the Estimate for that particular year. This is a necessary control on Cash Flow and Cash availability and is a system which occurs also in the private sector.

Capital Projects

27. Where an organisation is involved in capital projects and particularly when these projects may extend in total time from briefing to completion over a number of years, it is essential to have a specific project control system.

28. Any control system requires comparison between an actual performance and an original estimated performance. This however could be just a post fact statement of events with only historic value. To be a management control system it requires

(a)an original estimated performance

(b)regular progress comparisons to allow control during the process

(c)final comparison which with good control should be in line with the original estimate.

29. These principles apply to any management system but require particular care and expertise in the capital project area.

The information which would be needed would be:-

(a)Feasibility and Basic Project Data

(b)Routine and Regular Project Management Controls

(c)Feedback system comparing actual outturn to Basic Project Data and reviewing the effectiveness of Management Controls.

30. This Project Control system is an essential addition to the overall annual cash budget system, as it shows the effectiveness of the individual projects.

Feasibility Stage

31. At the moment the O.P.W. carries out its own Feasibility Studies on projects costing less than £1 million, (this limit is soon to be increased to £2 million) but the Department of Finance is responsible for the Feasibility Studies on projects costing in excess of £1 million.

32. Although this information is obviously somewhere in the O.P.W. files, it is not incorporated into a Basic Project Document.

Basic Project Data Document

33. No Basic Project Data Document is prepare for use in control procedures.

Routine Management Controls

34. No regular and routine Management Controls are operated on projects which would facilitate control during Design and Construction.

Feedback Systems

35. We were informed by the Department of Finance that there is no routine procedure for comparing the actual out-turn of individual projects with the initial feasibility study. We were informed by the O.P.W. that in their case also there is no routine procedure for comparing the actual outturn on specific projects with the original feasibility data.

36. There are partial comparisons where the final account is compared to the tender figure but these are essentially on a post fact basis.

Overall Costs

37. There is no system within the O.P.W. at the moment to set out and routinely review the overall costs of projects including:-

(a)Fit out costs

(b)Client extras

(c)Professional fees

(d)Additional re-design fees

(e)Rent in unoccupied space

(f)Inflation

(g)Interest charges

(h)O.P.W’s own costs on projects

38. There is an emphasis on the construction stage contractor costs only, but ever here there is no routine for comparing figures to those elsewhere in the industry.

39. The Committee sought information from the O.P.W. on the actual costs of fit out on nine projects with a reasonable spread as follows:-

(a)One at £2m

(b)One at £800,000

(c)Five between £100,000/£500,000

(d)Two less than £100,000

40. The contracts occurred over the period 1982 - 1984 and we were provided with an outline specification for each fit out project. We consider that the O.P.W. provided good value for money on these contracts.

41. In the area of inflation costs the O.P.W. do not appear to operate a routine comparison system. The Committee requested O.P.W. to do a spot check in this area and compare the results with the R.I.C.S. Index^*. This index is based on a wide variety of buildings and is as such an average figure, but useful as a general check. The Committee note that on two office projects, which the O.P.W. checked, the actual price variation amount paid was significantly less than that based on the R.I.C.S. Index.

Staff

42. At the moment the Project Branch of the O.P.W. (excluding schools) manages a large portfolio of building projects. The staff with responsibility for handling the individual projects consist of nineteen Executive Officers who are responsible for an average of twenty-three projects each at various stages covering:-

(a)Projects at Planning Stage

(b)Projects ready for tender

(c)Projects with tenders in

(d)Project in progress

(e)Projects awaiting final account

(f)Projects processing final account

43. Within this total are five projects in excess of £10m, one at £20m and one at £30m. There are also a number in the £1m to £5m range.

It is obvious that with this number of jobs and the lack of Management Controls, the achievement of tight professional control is not possible.

44. Department of Finance Circular 1/1983

In March, 1983 the Department of Finance issued a Circular on Capital Expenditure in the Public Sector (Circular 1/1983) to all Government Departments and Offices. There was no evidence of the application of the guidelines set out in that Circular having been implemented in the projects reviewed in the Report.

Feasibility Stage

45. To date Feasibility Studies have been done by the Department of Finance and by the O.P.W. on the basis of cost figures at the date of the Feasibility Study. Currently the Department of Finance are changing to a “current cost” basis which means costs current at the time the project will take place i.e. including inflation. This “current cost” approach is essential if one is to adopt the professional approach of an initial Final Estimated Cost including inflation which can be realistically compared with a Final Actual Cost also including inflation.

46. This would avoid the recurrent problem of Public Sector projects where the Final Actual Cost with inflation is compared to an Initial Budget excluding inflatior It becomes impossible in these circumstances to establish whether genuine over-runs have occurred.

47. Four large office projects at or near completion were discussed with the O.P.W. No project controls of the form proposed here were applied. Being convention. offices they would be ideal for the exercise of a good Project Management Control System, and the Feasibility stage document proposed here is based on its applciation to one of these conventional office projects. The Feasibility document should include:-

(a)Basic Building Cost normally provided by a Developer in a speculative office building.

(b)Return on Investment based on the market rent.

(c)Building Fit Out Costs based on O.P.W. criteria.

48. Such a form of Feasibility document would be as shown opposite.

49. This kind of Feasibility Document should be held by the Project Manager and any extension or alterations to the Brief would be assessed on the basis of the original Return on Investment.

50. This is only an indication of the type of Feasibility Document and obviously the Return on Investment criteria could not be applied to non-commercial type projects. But there should be some statement of the output benefits envisaged by the project in terms of accommodation provided or other criteria.

POSSIBLE FEASIBILITY DOCUMENT

51. On Fit Out projects for existing buildings an important element in this Feasibility document would be the amount of rental payable before occupancy. Although this may be paid through current account channels it is actually a part of the total project cost.

52. Even on smaller jobs, a simple document of this sort could be proposed.

Basic Project Data

53. The Basic Project Data is the information to which the Management Controls will be compared throughout the project and it is a matter of judgment when it is defined enough to be adopted. The usual sequence on projects is:-

54.We would suggest that the Project Commitment phase is the stage at which this Basic Data should be defined.

55.The form of this information and the level of detail depends on clients’ particular needs and the level of management to which reports are issued. In essence, it is the information in the Feasibility Document as finally agreed at Commitment.

56.The elements in the Feasibility Document are self-explanatory but two items need further explanation.

57.Contingency Capital projects by their virtue are imprecise but over the years in a large project organisation, knowledge builds up as to the percentage contingency normally occurring at different phases in a job. Naturally the percentage changes as the information becomes more precise. This contingency should only be authorised by the Project Manager to cover genuine but normally unforeseen items such as those associated with ground excavations etc.

58.Scope Changes are changes required by the Client in the scope of the work and not part of the original brief.

59.In commercial situations such as O.P.W. office developments these changes could be assessed on the Return on Investment basis. Frequently this is not possible and it is therefore essential that these scope changes are clearly identified and allocated as a responsibility to the Client.

60.The whole approach to provide Basic Project Data is essential to an establishment of Management Controls. These Controls compare on-going performance to original plans such that trends can be established and corrective action taken if the project is straying from the original plan. There is no point in establishing factual information after a project is complete, showing it to be over budget in terms of cost and programme. In particular the subsequent explanations confuse together -

(a)Genuine contingency items.

(b)Client scope changes which require an alteration to the budget.

(c)Incompetence on the part of designers.

(d)Incompetence on the part of contractors.

(e)Delays and indecision on the part of the client.

(f)Incompetence on the part of the project manager.

61.Rather than repeat the table twice, we have incorporated a suggested format for the Basic Project Data in the next section of Management Controls.

Management Controls

62.We suggest that Management Controls be commenced at Design stage and run throughout the Construction stage and up to Final Account. They should be reviewed monthly during the Construction Phase with the regularity of review being usually less frequent during Design and during Final Account stage.

63.Apart from their use to the Project Manager for control purposes, the formal reporting by the various design specialists on this regular basis encourages them to keep information up to date and avoid oversights.

The system has to cover both cost and programme as time means money and the impact of time alteration on all the other elements must be spelled out if delays occur.

64.A notional Management Control Document is set out below and this shows how the one document can summarise -

(a)The original budget (Basic Project Data).

(b)The Final Estimated Cost of the Project as confirmed last month.

(c)The Final Estimated Cost of the Project as confirmed this month.

(d)How the Building Cost figure has increased from last month to this as a result of an unforeseen problem. (i)

(e)How the Contingency has been reduced to allow for this problem, and confirmation of the level of Contingency still available to cope with unforeseen problems. (ii)

(f)A Client extra since budget for a larger ground floor. (iii)

(g)The fact that the office area has been increased due to the larger ground floor, thus increasing rent, (iv)

(h)The extra rent justifies the extra cost and the yield is virtually unchanged. (v)

(i)The fact that the client provided his brief late. (vi)

(j)This late information delayed the design. (vii)

(k)This will delay start of construction and the only way to keep on programme is to reduce the building period. (viii)

POSSIBLE MANAGEMENT CONTROL FORMAT

CONCLUSIONS AND RECOMMENDATIONS - PROJECT CONTROL

The Committee recommends the following:-

1. Feasibility Document

1.1 Basic Feasibility documents for reference and management control are not presently prepared. A Feasibility Document should be prepared for all but the smallest projects including as far as possible all costs associated with the project.

1.2 This will require costs to be included on a “current cost basis” i.e. including inflation estimates.

1.3 The document must include an allocation of O.P.W. costs.

1.4 A contingency figure should be included based on previous experience and the precision of information on the project. The Project Coordinator within the O.P.W. would have the professional responsibility of controlling the job within this contingency figure allocated for normal imprecision.

1.5 Where occupation of the rented space is concerned, the document should include an allocation for rent payable from lease commencement to occupation date.

2. Basic Project Data

2.1 At commitment stage Basic Project Data can be defined and used as a basis for management controls. This procedure should be adopted by the O.P.W. and general include the data contained in the Feasibility Document.

3. Scope Changes

3.1 After commitment stage changes in the scope of the project or delays occasioned by the Client Departments must be highlighted and allocated as a responsibility to the Client Department.

4. Management Controls

4.1 A Management Control System be set up particularly on the larger projects comparing the Basic Project Data with regular projections of the final estimated cost. The Management Controls must also incorporate the comparison with the Programme data on the project.

4.2 The Management Control data must be formally signed by the Project Coordinator and any cost information and programme information from consultants should also be formally signed.

4.3 Once established the Management Control information should be integrated with other computer based controls in the O.P.W.

5. Project Management

5.1 There is not enough emphasis within the O.P.W. on the Management aspect of their work. In our view the O.P.W. are Project Managers for the State and as such are responsible for the organising of capital projects on time and on programme. The Project Coordinators should be appointed particularly on sizeable jobs whose responsibility would be to ensure the overall achievement of cost and programme targets.

5.2 To achieve this the Coordinators should have the power to pressurise all concerned to perform. A formal definition of this role and its confirmation to all concerned would assist in improving performance. In addition good management systems would assist the Coordinators by highlighting the effect of outside factors such as delays or indecision by a Client Department.

5.3 Because of the key importance of this Management role additional training should be considered for the staff of the Projects Branch of the O.P.W.

6. Review

6.1 A routine review system should be set up at Assistant Secretary level to compare performance on projects on an on-going basis. With the installation of a Management Constrol system this annual review should be relatively straightforward.

6.2 The general guidelines outlined in Department of Finance Circular 1/1983, “Capital Expenditure in the Public Sector” are excellent and a necessary prerequisite for the application of the type of Project Controls recommended in the Report.

7. Implementation

7.1 A working party should be set up with key personnel from the O.P.W. and outside expertise as required to review these recommendations and to plan their application. A key part of this implementation should be the setting up, early on, of pilot schemes to try out and develop the systems to suit the precise O.P.W. needs.

RENTS AND LEASE TERMS

65. Total Market 1981 - 1983

The total amount of space newly let in Dublin in the period 1981 - 1983 is difficult to define precisely. The computation is complicated by such factors as the advance letting of buildings before completion and, in some cases, the sub-letting of complete buildings by tenants who signed leases but changed their minds.

66. The approximate figures are:-

67. The O.P.W. Share of this Market

In this period the O.P.W. leased the following Office areas in Dublin.

68. The O.P.W. share of the market even in 1982 was large, but in 1981 it was the dominant force in the office market in Dublin. By 1983 the O.P.W. involvement, even in a reduced market, was insignificant.

69. In a free market, a lessee taking the proportion of space absorbed by the O.P.W. in 1981 and 1982 would be in a dominant position and could extract very favourable terms. The O.P.W. state that a number of factors militated against them.

(a)During the period and particularly in 1981, it was a sellers market.

(b)The market included other Government bodies notably the then Department of Posts & Telegraphs.

(c)The market included other Public Sector tenants such as Semi-State bodies.

(d)Even in some instances the O.P.W. had to compete with other Public Sector bodies.

(e)Certain client Departments demanded specific buildings, thus limiting the negotiating scope for the O.P.W.

70. It is impossible to recreate the conditions of the office market in Dublin over these years, but the Committee felt that an overall comparison of the rents paid by the O.P.W. in this period as compared to the market average would give an indication as to whether the O.P.W. had achieved reasonable value for money.

71. Rental Levels in 1981 and 1982

The Committee had access to all the required rental information at the O.P.W. offices to carry out an analysis, but for obvious reasons of confidentiality specific figures are not quoted.

72. Comparison of rental levels is an extremely complex subject as they are influenced by many factors such as -

(a)Location of the building

(b)Location of the space (ground, basement or upper floors)

(c)Lease Terms

(d)Specification of the building and services

(e)Size of the letting

(f)Proportion of the letting i.e. all or part of a building

73. The Committee arranged for the examination of 95% of the rental situations agreed by the O.P.W. in 1981 and 1982, ignoring the very small non-typical units. This was compared with information on the known rents in the market for equivalent type of space.

74. In both 1981 and 1982 the weighted average of rental paid by the O.P.W. was marginally below the weighted average of the known market rents.

75. Lease Terms

The modern thirty-five year lease with five year rent reviews has become standard in the Dublin office market and has progressively become standardised in its clauses This standardisation of clauses in our view has been progressively to the disadvantage of tenants, particularly those with a full repairing and insuring lease on a total building. Of particular concern to tenants are -

(a)Upward only rent reviews

(b)Break clauses in leases

(c)Structural guarantees from the Landlord

(d)Guarantees on mechanical and electrical services from the Landlord

(e)The associated matter of rent free periods for fit-out

(f)User clauses

76. The typical small tenant is usually in no position to influence these developments, but a large organisation such as the O.P.W. who are in the market on a large and long term basis should be able to apply pressure in these areas.

77. Over the 1981 - 1983 period the O.P.W. accept that they achieved nothing significant in the matter of lease terms or in the related area of rent free periods. They state that the market conditions were the main factors preventing them achieving this.

Rent Reviews 1983

78. As can be seen from the figures at Par. 67 an insignificant amount of space was leased by the O.P.W. in 1983. In that year, however, the O.P.W. were involved in rent reviews for approximately 177,000 sq. ft. of office space (excluding non-typical space).

79. Comparisons in this area are, if anything, even more complex than in the area of rental levels for new buildings, for as well as -

(a)Location of the building

(b)Location of the space (ground, basement or upper floors)

(c)Lease Terms

(d)Specification of the building and services

(e)Size of the letting

(f)Proportion of the letting i.e. all or part of a building

Further factors must be taken into account such as -

(g)Age of building

(h)Original lease terms

(i)Original review frequency

(j)Landlord attitude to lessees wear & tear on the building

80. In the time available the total area of space in the market where the rent was reviewed in 1983 was not defined but data was obtained for a total of approximately 350,000 sq. ft. The weighted average of rents for the O.P.W. was marginally less than the weighted average for the total sample.

81. There are however two important factors to bear in mind -

(a)The sample of other offices reviewed contained a very high proportion of small lettings with consequent high rents.

(b)Comparing rents for the large units of offices in the other sectors, the reviewed rents were in fact less than that achieved by the O.P.W.

(c)The O.P.W. proportion of reviews for that year was very high, being of the order of 50% of the sample and possible over 40% of the total.

CONCLUSIONS AND RECOMMENDATIONS - RENTAL/LEASING

82The Committee’s views of the situation regarding rental levels, lease terms and rent reviews over the period stated are set out below. Because of the complex nature of the issues involved and the impossibility of assessing or recreating elements such as market pressure, there must be a significant element of judgment in the comments.

The recommendations are as follows:-

1. Rentals 1981/82

1.1 In the period 1981-82 it is the Committee’s view that the O.P.W. did a satisfactory job on rents in a market not favouring tenants and with the constraints imposed by their client Departments.

2. Lease Terms 1981/82

2.1 An organisation such as the O.P.W with its large share of the office market and its long experience should have had an established strategy on lease terms and rent free fit out. The defensive attitude expressed was that the leases and lease terms were set up by the landlords and that, in effect, there was little the O.P.W. could do.

2.2 O.P.W. should have a “bottom line” recommended form of lease terms which the O.P.W. considers necessary for Government Departments as tenants, and a long term strategy to improve those terms in key areas when the market is favourable.

2.3 The argument is advanced by the O.P.W. that Departmental pressures for immediate occupancy and for specific buildings has meant that they have reduced leverage in dealing with landlords. It is the Committee’s view that if the O.P.W. is the repository of professional knowledge and experience in this area, then they must hold to their convictions and formally confirm their views if they are overruled by specific Departments. Professional conflicts of this nature are not uncommon in the commercial sector both within companies and between professional advisors and clients.

3. Rent Reviews 1983

3.1 The O.P.W. were involved in a very high percentage of the rent reviews in 1983. Again there appears to be a professional but defensive approach. It is the Committee’s view that the O.P.W. cannot be certain that they have obtained the best possible deal.

3.2 Taking into account the depressed and declining market conditions and with their high market share and major stake in the long term trend of rents, the Committee feels that (i) O.P.W. should have pushed the review situation to the limit and even gone to arbitration if necessary and (ii) that O.P.W. should have availed of the best expertise in the country and used outside professional valuation surveyors to act in selected situations.

4. Strategic Plan

4.1 Although there is a general approach to build office space rather than lease buildings, there is no detailed medium-term office accommodation plan. To allow an ordered approach to accommodation acquisition, a medium term plan covering the next three to five years must be prepared. This would have to take into consideration areas of space need reductions and also increased space requirements per person due to the impact of new office technology.

4.2 The plan must include the consideration of leased buildings, new lettings and existing and new owned buildings. An analysis of this overall situation should establish a series of priorities and desired options for the disposal of less favourable leases and buildings and the consolidation of desirable buildings and leases.

4.3 The present buyers market may give opportunities to switch accommodation and leases with common landlords of present and future space.

4.4 As part of this Strategic Plan the O.P.W. must keep in touch with the present radically altering market with falling rental levels, negative value leasehold interests, changing lease terms and the as yet undefined impact of a likely sustained period of low inflation on capital and rental values. It is, for example, possible at the moment to purchase some buildings at a figure less than the construction costs of a new one.

5. Rent Roll

5.1 According to the 1984 Estimates the O.P.W. has a rents and rates allocation of £16,334,000. Apart from any extra space acquired in the future, this amount will grow as rents are reviewed over the years. Even as it is, this represents probably the largest single rental charge in the country and its management is an important responsibility.

6. Future Lease Terms

6.1 As outlined above, O.P.W. are not maximising their strength in the Dublin office market, particularly as regards rent reviews.

6.2 O.P.W. should carefully review every current lease to seek the maximum advantage to the O.P.W. both as Landlord and Tenant.

6.3 There is no current defined requirement for lease terms for Government Departments. These should be defined by the O.P.W. and should include

(a)Upward and downward rent reviews

(b)Rent free periods for fit out

(c)Lease break clauses

(d)Landlord structural guarantees

(e)Landlord guarantees on building services

(f)User clauses

(g)Any other areas of specific concern to Government Departments such as security etc.

7. Staff Expertise

7.1 The present structure of one valuer responsible for all Dublin rental negotiations and reviews and building and site acquisition with partial back up from two technician surveyors is not adequate.

7.2 In addition, the present rapidly changing conditions in the office market and the preparation of the Strategic Plan require the highest level of expertise and the most up to date market information.

7.3 There should be selective use of professional valuation surveyors and property consultants on negotiating rent reviews, on negotiating new leases and in the establishment of a comprehensive register of market rents and conditions. Their re-appointment must be based on demonstrable evidence of performance in achieving the best rent and terms.

7.4 Professional valuation surveyors and property consultants should be used in the light of the current restrictions on staff recruitment. However, when the situation permits, a person with a Chartered Property Surveying qualification and background should be recruited into the section.

8. Risks

8.1 If the O.P.W. are to obtain the best lease and rental terms in the future their powers of negotiation cannot be unreasonably hampered. There must be an acceptance by Government Departments that this entails risks and could result in the possible loss of a particular desired building.

9. Unoccupied Office Space

9.1 As outlined in the Section on Project Controls, there is no mechanism to highlight the accruing of rental on unoccupied space. The record of the twenty-six Fit-Out Projects referred to in Chart 2 shows clearly that the present system allows occurrence of this waste for periods which would be totally unacceptable in the private sector.

9.2 The annual estimate and annual out-turn for the O.P.W. should show the Rent on Unoccupied Space as a separate figure.

10. Competition from other Public Sector Bodies

10.1 The O.P.W. referred to some cases particularly in 1981 where there was competition between themselves and other Public Sector bodies for available buildings. In the present market there is little likelihood of a recurrence of this problem. However, this is such an undesirable situation that is is important that clear guidelines are laid down and enforced. All Public Sector Bodies should be required to confirm through the O.P.W. that the O.P.W. are not acting in a particular lease or purchase.

11. Reporting

11.1 The Property Services Division of the O.P.W. should prepare an Annual Report to the Commissioners reviewing performance in the previous twelve months on rents, lease terms and rent reviews and comparing this to the overall market situation as objectively as possible.

FURTHER COMMENTS

83. As outlined earlier in the Report, the Committee noted items of a more general nature which it felt deserved comment but which could not be investigated in any detail within the constraints of the present Report.

These were -

(a)Where possible that it is desirable that items such as rent and rates should be allocated directly to the votes of individual Departments on whose behalf they are borne.

(b)The Report referred to the lack of a system for picking up the O.P.W. costs on individual projects. This is particularly important in situations where client Departments delays or indecision occasion additional work within the O.P.W.

The immediate area of O.P.W. cost that springs to mind is that of the Design Staff, but the allocation process could apply equally to Management and Administration costs also.

(c)The Committee understands that the O.P.W. have carried out some investigations on international practice regarding allocating costs such as rents etc. directly to Departments, and that this is the system presently being adopted in Britain.

(d)The allocation of staff in the O.P.W. between Management and Technical areas seems imbalanced, particularly when one considers the relatively small numbers in the Projects Branch. Consideration should be given to the re-allocation of staff in these sectors.

ACKNOWLEDGMENTS

84. The Committee would like to acknowledge the assistance received in the preparation of this Report from all the personnel contacted in the Office of Public Works, in particular the Assistant Secretary Mr. C. Griffith, Mrs. M. Hastings-Doyle and Mr. P. Kenny and also Mr. B. Murphy of the Department of Finance.

Michael Keating T.D.,

Chairman

13 November, 1984.

*Royal Institute of Chartered Surveyors Index.

*The above figures are included to demonstrate the form of the document and do not represent real costs on any project.