Select Committee on Public Accounts Second Report


Initiatives to improve the performance of departments

5. The Office of Government Commerce are responsible for the promotion of improvements in the performance of departments and agencies as purchasers of construction and for the dissemination of good practice guidance to help achieve this. One of the Office's key initiatives is the Achieving Excellence Programme launched in March 1999 which includes an action plan for departments including better specification of user requirements before design begins, the use of risk management and performance indicators to improve the delivery of construction projects, and post project completion reviews to identify and implement lessons. The target date for full implementation of the arrangements set out in the Achieving Excellence Programme is March 2002.[5]

6. The Department of Environment, Transport and the Regions have central responsibility for promoting improvements within the construction industry and its clients. One of the Department's key initiatives is the Movement for Innovation, established in November 1998 to promote beneficial change in the construction industry and to share good practice. One way in which the movement does this is to encourage contractors and their clients to put forward examples of good construction practice known as demonstration projects, the lessons from which are disseminated to industry and its clients through conferences and seminars.[6]

7. There have been numerous initiatives intended to improve the performance of publicly funded construction projects, but many projects are still completed significantly late and substantially over budget. We therefore asked the Office of Government Commerce and the Department of the Environment, Transport and the Regions why their current initiatives were going to make a difference when others have failed. They accepted that there were systemic problems in the way construction projects are managed and delivered. The difference, compared with the past, was that they now had a strategy which included all the players involved in construction — both the industry and departments — as well as a range of good practice experience which they were actively promulgating. The Department also emphasised that there was much more effective co-ordination at the central government level which the Office of Government Commerce were leading. That coordination should help to achieve more widespread implementation of good practice, as well as more support by senior management in departments to secure long-term improvements in the performance of construction projects.[7]

Improving cost estimates

8. Because the emphasis on lowest price has resulted in some construction firms pricing their work unrealistically lowCon the assumption that they will subsequently be able to recoup their profit margins through contract cost variations and claims often leading to disputes and litigationCthe Office of Government Commerce has advised departments not to award construction projects solely on the basis of lowest price bid. The Office of Government Commerce expect departments to give careful consideration to achieving value for money in awarding contracts, such as designing and constructing buildings which are cost effective to run and maintain over their whole operational life; this may mean not accepting the lowest price tender.[8]

9. In explaining how they were persuading departments to take construction procurement decisions based not just on price but on quality, the Office of Government Commerce told us that they were seeking to persuade departments through guidance, training and the promulgation of case studies that illustrate the benefits of taking a whole-life approach rather than just making decisions on the basis of initial contract price. The Office also said that they were requiring larger, more complex and novel projects to be subject to independent peer reviews at critical points in their development and implementation, and that this scrutiny would provide a clear view as to whether construction decisions were being made on achieving overall value for money rather than just minimising the initial contract price.[9]

10. The Committee asked the Department of Environment, Transport and the Regions whether they considered that cost estimates for public sector construction projects were often over-optimistic. We referred, in particular, to the extension to the Jubilee Underground Line and whether the difficulties which this project had experienced could have been avoided if the good practice which the Department were promoting in construction management had been followed. The Department told us that the improvements which they were promoting were intended to prevent significant cost and time overruns in the future. The Department considered that the performance of the Jubilee Line project would have been better because the parties would have identified at the beginning that the project was going to cost more than the original estimates.[10]

11. We also asked the Department whether annual limits on capital expenditure contributed to unrealistic estimates because, in order to improve the chances of their construction projects being approved, departments set their cost estimates to come within annual expenditure targets. In these circumstances, however, the project costs could increase significantly, following approval, as estimates become more realistic. The Department explained that there were three solutions to this problem. First expenditure was now planned on a three-year basis and in some cases, such as with the transport programme, over a ten-year period; second Accounting Officers needed to exercise more vigilance in ensuring that projects coming forward were affordable on a value for money basis; and third departments needed to have proper budgeting and business planning systems to secure better control of construction projects.[11]

Measuring improvements in construction performance

12. There is no information yet available to quantify the benefits being achieved from the implementation of the measures intended to improve construction performance. But NHS Estates estimate that a 10 per cent reduction in construction costs for the NHS as a whole should release 300 million a year; Defence Estates estimate that a 250—300 million reduction in the cost of constructing and running buildings is achievable annually by 2005; and the Environment Agency predict a 30 per cent (approximately 35 million) reduction in construction costs by 2008—2009.[12]

13. The Committee asked who would be the main beneficiaries of these savings. The Department of the Environment, Transport and the Regions advised that departments were incentivised because they were not required to surrender such savings to the Treasury; so, if they improved performance of their construction projects and saved money, that released funds for other priority projects.[13]

14. In 1999 a benchmarking study of 66 central government department construction projects with a total value of 500 million showed that 78 per cent were over budget and 70 per cent were delivered late. We asked how that public sector performance compared with that of the private sector. The Office of Government Commerce did not have accurate data with which to make a comparison but they noted that a number of private sector clients had achieved dramatic improvements in building costs, construction times and overall value for money in construction projects by employing the techniques which the Office are advising departments to use as part of the Achieving Excellence Programme. The Office admitted that they did not have relative figures on public sector performance over time, but that the 1999 benchmarking study had established for the first time a comprehensive baseline position against which they would be able to measure future improvements in the performance of departments' construction projects.[14]

Improving the performance of smaller government organisations

15. Many departments fund building projects indirectly through grants. For instance the Department for Education and Employment and the Department for Culture, Media and Sport cover a number of bodies which distribute funds for capital projects such as the Sports Council and Arts Council. The Office of Government Commerce have started discussions with these departments on how they could contribute to improving construction procurement practices among grant recipients.[15]

16. The Office of Government Commerce was asked what progress they had made in promoting improvements in the way smaller public sector organisations procure and manage construction projects.[16] They told us that during the coming year, as a result of an internal reorganisation, they expected to have 35 staff devoted to improving construction performance compared to the ten they had currently engaged on this work. Some of that increase in resources would be focussed on documenting more good practice and promulgating it to smaller departments and agencies. Staff would be given specific responsibility for helping smaller public sector organisations with their management of construction projects. The Office also said they would be discussing with their Supervisory Board, which is chaired by the Chief Secretary to the Treasury and included a number of permanent secretaries, ways in which they might impress on non-departmental public bodies the importance of adopting construction good practice.[17]


17. We welcome recent initiatives to improve construction performance. There have been, however, numerous previous initiatives over many years which have failed to secure improvements. If the current drive is to succeed it is essential that all departments and their agencies promote change in the industry by improving their management of construction projects through practices such as clear project sponsorship and robust project management.

18. Ensuring that departments improve their performance in managing construction projects requires reliable information so that progress can be monitored and corrective action taken where necessary. The Office of Government Commerce should monitor what benefits are being achieved by departments against the baseline established in 1999, should spread examples of good practice, and should encourage departments to use this information to improve their performance.

19. Much of the effort by the Office of Government Commerce to improve the performance of construction projects is directed at the large spending departments. Smaller departments and agencies individually may spend less but collectively have a substantial construction programme. The Office of Government Commerce have started discussions with smaller departments on how they can better their construction performance. The Office should secure the adoption of the same rigorous project management and controls and principles of achieving long-term value for money.

5  C&AG's report HC 87 (2000—2001) paras 1.8, 1.10  Back

6  C&AG's report paras 1.8, 1.10 Back

7  Qs 3—4, 61, 65 Back

8  C&AG's report paras 8, 1.11, 2.2, 3.2  Back

9  Qs 5, 42  Back

10  Qs 28—31 Back

11  Qs 66—67, 69 Back

12  C&AG's report HC 87, (2000—2001), paras 9, 2.10 Back

13  Qs 44—46 Back

14  Qs 19—22 Back

15  C&AG's report HC 87 para 1.15 Back

16  Committee of Public Accounts Fourth report, 2000—2001, Grants Made by the National Lotteries Charities Board;  (HC 168 (2000—01)), Qs 6, 65 Back

17  Q6 Back

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Prepared 5 December 2001