Supplementary memorandum by London Transport
(LU 01C)
Further to my letter of 23 December 1999, I
am now able to provide a response to the balance of the points
raised by Members at the Transport Sub-committee meeting on 15
December 1999.
PROCEDURE FOR
SETTLING CONTRACTORS'
CLAIMS FOR
WORK ON
THE JUBILEE
LINE PROJECT
Details of the Claims Management procedure are
outlined in Annex 1.
EFFECTS OF
JUBILEE LINE
EXTENSION BUDGET
OVERSPEND
The cost pressures faced by LT as a whole during
1999-2000 and 2000-01 were not confined to the funding needs of
the JLE, but included also:
— Higher than expected bus tender prices.
— The assumption in the 1998 Settlement
that there would be no grant for LUL from 2000-01 onwards; without
additional funding this would have meant lower levels of investment
than steady state.
— Costs for planning the transition
into the PPP for the Underground, and into TfL, being higher than
the sums originally advised by Government.
All of these cost pressures were addressed by
the Government in allocating additional funding to LT for 1999-2000
and 2000-01, including in particular the announcement in July
1999 of an additional £517 million of resources for investment.
As a result of this additional funding, LUL is now able to invest
over the three years 1998-99 to 2000-01 at a rate averaging £400
million pa, which is broadly in line with "steady state"
levels of investment. After allowing also for investment through
PFI contracts, the total amount invested on the core Underground
system this year and next will be more than £1 billion.
During the period when discussions on funding
were taking place with Government, some projects were delayed,
but not abandoned. This was to ensure the then existing cash limits
were not exceeded, bearing in mind that LT was having to manage
its businesses within the sums of money made available in the
1998 settlement. These delays were principally in areas such as
Stations, Lifts and Escalators and Track where there is more flexibility
to vary the timing of projects. The funding now available has
allowed investment generally to return to previously planned levels,
although for practical reasons some longer term projects are now
being timed to be implemented through PPP contracts. In the meantime,
planning and design work on these longer term projects is being
funded from the resources now available to LUL.
COST OF
USING BECHTEL
ON THE
JUBILEE LINE
EXTENSION PROJECT
We are in the process of negotiating an extension
to the Bechtel Contract. To protect our commercial position we
ask that we defer response to this question until March 2000,
when we envisage that discussions will be complete.
COST IMPLICATIONS
OF THE
PROBLEMS THAT
HAVE BEEN
EXPERIENCED WITH
THE JUBILEE
LINE EXTENSION'S
SIGNALLING SYSTEM
The original contract was based on deliverey
of a "moving block" signalling system as offered by
Westinghouse Signals in their tender. This would have had a capability
of supporting a train seervice frequency of 36 trains per hour,
the ultimate service level forecast when the Extension was being
planned. Various circumstances led to the implementation of the
moving block system being deferred and a "fixed block"
traditional signalling system being installed instead. The fixed
block system is capable of supporting 24 trains per hour initially,
which provides ample capacity to meet the short-medium term passenger
usage forecasts.
Again we are in the process of negotiating the
way forward with Westinghouse so as to protect our network wide
signalling requirements and would ask that we defer our response
to the cost implications until March 2000, so as to protect our
commercial position.
TRANSITION CONSULTANCY
COSTS
From 20 March 1998 (the date of the Government's
announcement re PPP) to 13 November 1999, £48.06 million
has been spent on consultancy work for the PPP and restructuring
of London Underground. London Transport will not know the final
costs for external advice until the PPP transaction has been completed,
but we are working with the Government to ensure that we receive
the best advice while minimising the overall costs of implementing
the PPP.
EFFICIENCY IMPROVEMENTS
When I gave evidence to the Sub-committee on
29 April 1998 it was based on my experience up until that point.
During the summer and autumn of 1998 we assembled a team of experts
to deliver the PPP. They consisted of, amongst others, our own
people, PriceWaterhouseCoopers and Ove Arup. We tested a number
of scenarios and, of course, a necessary input was the assumption
of improved efficiency by the Infracos. Ove Arup worked with my
own engineers and produced estimates of at least the level that
was used in the recent PriceWaterhouseCoopers paper. My colleagues
and I probed these assumptions in-depth and became convinced that
they were indeed probably valid. They were in our view certainly
valid enough to justify proceeding to the stage of getting real
bids from the market. Based on this information, Government agreed
to continue with the PPP and the Deputy Prime Minister made a
statement to that effect in the House last December.
Denis Tunnicliffe
13 January 2000
Annex 1
CLAIMS MANAGEMENT
ON THE
JUBILEE LINE
EXTENSION PROJECT
1. Background
In considering claims management on the Jubilee
Line Extension Project (JLEP), it is essential to understand that
little new cost is now arising. That is, the relevant costs have
been incurred already, in some cases over a period of several
years.
Contracts for the project followed a form which
has been used for many years in the civil engineering industry,
but adapted to some extent to reflect experience on underground
railway projects in Hong Kong and Singapore. JLE is a huge and
complex project requiring the integration of different technologies
and skills with many contract interfaces. In these "measurement"
type contracts, the contractor is paid for the work actually undertaken
and the contractor is legitimately able to claim for unforeseen
conditions, delays caused by other parties and variations. In
addition, the contract conditions require the contractor to notify
only the intent to make a claim when the event occurs. Substantiation
of the claim can follow on later and in some cases this may not
be finalised until the Final Account is prepared. It was essential,
due to the interdependency of each contract to the overall project
programme, that the contract terms and conditions avoided the
risk of work being halted whilst commercial issues were resolved.
It should be noted also that many of the contracts
were bid for and placed when the construction industry was short
of work.
2. Claims Management
(a) The "Engineer"
The JLE contracts are similar in form to the
ICE 5th edition contract forms for civil engineering works. The
role of the Engineer under the contracts is also similar.
Three parties are involved in the JLEP contracts,
the EMPLOYER, the CONTRACTOR and the ENGINEER.
The Employer is defined as London Underground
Limited. In the case of JLEP the Project Contracts Manager is
designated the Employer's representative.
The Contractor is defined as the person whose
tender has been accepted by the Employer and includes the Contractor's
successors and permitted assigns (ie sub-contracting may be allowed).
The Engineer is defined as the person appointed
by the Employer to act as Engineer for the purposes of the Contract.
In other words, the Engineer is required to administer the contract
on behalf of the Employer and in accordance with the conditions
of contract. The Contractor may only take instructions or directions
from the Engineer (or persons with power delegated by the Engineer)
within the bounds of the contract. The Engineer has the conditional
authority to order variations to the works and to value those
variations (after consultation with the contractor). The Engineer
also has the authority to grant extensions of time where the contractor
is delayed or impeded. He may not instruct the contractor to accelerate
the works unless required to do so by the Employer.
The impartial role of the Engineer
The contract places on the Engineer in many
circumstances the job of deciding on the rights of the parties
(the Employer and the Contractor) according to his own opinion
of what is fair and reasonable under the contract and acting accordingly—for
example deciding whether the contractor is entitled to payment
or an extension of time. In this capacity, the engineer must act
independently of both parties in deciding fairly the application
of the contract.
In addition, the Employer may empower the Engineer
to pass on the Employers wishes—for example, if the Employer
wishes to make advance payments outside the contract.
In practice powers are delegated widely so that
most of the day-to-day administration of the contract is undertaken
at "site" level. Certain matters can only be dealt with
the Engineer, as laid down in the letters of delegation issued
to the contractors.
Apart from payments and awarding extensions
of time as mentioned above, the Engineer's powers also extend
to matters such as variations, handover, completion and maintenance
certificates.
Generally, on payments due under the contract,
the contractor applies for payment and the engineer certifies
what is due. This then has to be paid by the Employer, subject
to any bona fide set-off or counterclaim of the Employer
or any right to make deductions from sums due under the contract.
If a dispute arises between the Employer and
the Contractor, including those arising from a decision by the
Engineer, it is first referred to the Engineer to rule on. If
either the Employer or the Contractor is dissatisfied with any
such decision of the Engineer, the dispute may be considered under
the LU Conciliation Procedure. If conciliation does not resolve
the issue it may be referred to arbitration.
(b) The "Employer"
At the present time the Employer's representative
dealing with all commercial matters beyond those dealt with by
"the Engineer" is the Project Commercial Manager who
reports to the Project Chief Executive, both of whom are Bechtel
staff.
The authority process for all claims settlements
rests with the Project Financial Control Group (PFCG) chaired
by the LT Chief Executive and including a LT Non Executive director,
the LT Director of Finance, the LT Legal Director, the JNP Infraco
MD, the Project Chief Executive, the Project Commercial Manager
and other JLE Project team members.
A contract management group comprising members
of the PFCG agree and oversee the close out of major contracts,
including settlement of claims, having determined the structure
of approach and negotiating strategy for all the major contracts.
To ensure the approaches are appropriate and viable there is a
close working with LT Solicitors and external legal advice including
leading Counsel where appropriate.
(c) Claims Management Strategy
The general commercial strategy is as follows:
Concentrate on critical areas
Focus on least contentious issues first
Co-ordinate Variation/Claim substantiation
Utilise expert external consultants if needed
Identify legitimate interim payments
Formal Commercial Settlement process
Approval mechanisms for substantiation and recoveries
Consolidate commercial teams
London Underground faces a number of risks
in dealing with claims, as follows:
Difficulty in obtaining adequate substantiation
from contractors
Adequacy of "historical" documentation
Continuing availability of key personnel
Contractors' willingness to settle amicably
Residual issues such as "moving block signalling"
Sustaining contractor commitment and pereformance
Faced with these risks, for the past 18 months
or so LU's approach has been, where necessary, to encourage a
climate with contractors of "teaching commercial settlement"
rather than venturing or defaulting into long and expensive litigation.
Obviously, the settlements reached have to represent value for
money, with an auditable outcome or business case for London Underground.
(d) Contract Close Out Strategy
There exists for each contract a well documented
close out strategy which clearly is highly confidential. This
is supported with a financial summary and contract status summary,
all of which are updated each four weekly accounting period.
There also exists a time based schedule of activities
to achieve "Final Account" status for each contract,
as follows:
Works completion
Maintenance Period
Notional Final Account
Contractor Negotiations
Contractor Final Submittal
Employer Final Settlement
It should also be mentioned that the contract
itself gives up to 18 months after completion to agree Final Accounts.
We are aiming to have "notional" final accounts settled
for many of the contracts by March 2000.
10 January 2000
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