Examination of Witnesses (Questions 80-99)
SIR WILLIAM MCKAY KCB, MR ANDREW WALKER, MR MICHAEL BARRAM, MR HENRY WEBBER AND MR ANDREW MAKEPEACE
WEDNESDAY 15 MAY 2002
80. Is there any way out of that problem? If we have on future occasions an offer of a better scheme, which obviously we would like to take up, are we always going to be caught by this EU rule which says that you cannot take up a better scheme because you cannot tell other tenderers about it and you cannot do it without telling other tenderers about it; it is a Catch 22 situation?
(Sir William McKay) I do not think the point was the EU aspect, it was the marking put on the paper by its author.
(Mr Walker) Chairman, could I add, that there are things one can do in preparing for an EU tender which avoid that situation, so everybody knows on what basis they are doing it. If you anticipate the kind of challenge we were in at the time, it was that the original bids were not meeting our requirements, and therefore we had to look for compromise solutions of one kind or another.
81. So the problem was not raising the tender document in such a way that anybody tendering for the contract could say, "Actually I think I have a slightly better scheme than you are asking me to tender for, could you please consider this scheme"?
(Mr Walker) One of the things we have been learning from that, and have learnt in the procurement policy of the House now, is to think about that sort of thing more in advance, so that, all being well, we do not get into that position.
82. Given Seele/Alvis produced an alternative scheme which we apparently should not have been considering, given we had not got the tender document right, when they produced that alternative scheme I understand also from Appendix 4 that they submitted also a bid based on the original scheme, a revised scheme which everybody else was basing their bids on. Was Seele/Alvis' bid for the same as everybody else was doing less than or greater than the Harmon bid for that particular design?
(Mr Makepeace) I cannot remember.
(Sir William McKay) We would have to supply you with that information. We cannot recall.
83. It seems as if we may be getting some further information. Mr Walker, do you know?
(Mr Walker) At that stage in the process, when the bids from the different contractors who were still in the race were on a different basis, I believe, having read the papers last night, the Harmon one at that particular point was very marginally below the Seele/Alvis one.
84. So Seele/Alvis would not have got the contract had they had to go for the original design which everyone else was going for?
(Mr Walker) The criteria we were using to select the contract was the best value for money and one of the criticisms was that—and "technically" is not quite the right word—we should have used the terminology "economically most advantageous". The point about that, Chairman, is that one is looking not simply at the lowest cost but the best fit with the needs of the organisation and the project. So simply the lowest cost is not the only factor to look at.
85. My understanding is, having been wrongly given the contract for an alternative design, as we now know they should not have been because they were not allowed to do something individual like that, it was then found not to work properly and, according to the last paragraph on page 55, "In July 1996, Seele/Alvis proposed modifications to its [own] design ... because trials had shown there to be difficulties in constructing ...", and they then offered to go back to something much closer to apparently the original design and a price reduction of £0.6 million but that was presumably still higher than the original Harmon offer by about £2.2 million. My question is, at that point, when they announced to you they could not do the alternative design they wanted to do, which you thought was more cost effective, why at that point was it not cancelled and why did you not go back to them and say, "You cannot do what you said, you have not fulfilled your contract, we are going to go back and offer it to somebody else" at presumably a cheaper price than at least £2.2 million less?
(Mr Webber) Chairman, I think we would need to write to you, if we may, on that point, because we do not between us at the moment have that detail.[4]
Chairman: It seems quite a fundamental part of the issue, I would have thought. If you do not want to make an attempt at answering it now, then I think my colleague has asked what seems to be quite a useful question.
86. My understanding is that Seele/Alvis proposed a design, they were given a contract, they then said they could not fulfil that contract and offered you something else which was more or less going back to the original design. You must surely have had an opportunity at that stage of saying, "Okay, if you can't do it we'll go for the cheaper option which is Harmon", and yet for some reason you decided to accept that Seele/Alvis would then go back to the original design at a higher price than Harmon had offered to you. It is fairly fundamental as to why you did not do it, is it not?
(Mr Webber) Chairman, as Sir William has said, price was by no means the only consideration in the judgement of best value for money. The serviceability and the potential service and reliability of the supplier were also very significant factors in the minds of the construction managers and others advising on this item.
87. So you are telling me that you made a positive decision not to go back to Harmon, because you still thought that Seele/Alvis would be better value for money, even though they were costing at least £2.2 million more for that contract?
(Mr Webber) That was the advice of the project team, Chairman.
(Sir William McKay) We need also, Chairman, to look at the timing of this, because the litigation began in August 1996, and I do not think it was until that month that the revised Seele/Alvis scheme was agreed.
88. According to this paragraph, which is the bottom right-hand paragraph on page 55, in July 1996 Seele/Alvis proposed modifications to its own design because it had been shown the difficulties in doing it. If you are saying that the litigation hearing in August 1996 was one month later, I would have thought that might be an even better reason for very seriously reconsidering the Harmon design or the Harmon tender, because at that point you could have avoided not only £2.2 million of cost of actually constructing the thing, you also would have avoided, as it later turned out, some £10 million of either legal fees or damages. So you lost by not actually going back at that stage, when you had the chance to do so, and by not going back to the Harmon option you actually cost us £12 million altogether.
(Sir William McKay) As we were suggesting earlier, I am afraid, Chairman, we will have to review the papers and let you have some idea of what was in the minds of those who were supervising the design.[5]
Mr Rendel: I think that is the best we can do, Chairman, and we certainly should do that.
Chairman
89. You can see the point Mr Rendel has made?
(Sir William McKay) Yes.
90. If you look at the last bullet it says that "It was quite clear that the design constructed by Seele/Alvis was virtually identical", so I do not understand the answer that is being given that somehow Seele/Alvis did better fenestration, offered a better option. In fact it ended up virtually identical to the one on which Harmon based its figures, but you did not then open the bidding back up to Harmon. That is what I think the Committee is finding some difficulty with. I think what we were hoping, and Mr Rendel was hoping, was that you could help us with that this afternoon. After all, we have quite a large team with us this afternoon. Is that right, Mr Rendel?
Mr Rendel: Indeed it is, Chairman.
(Sir William McKay) I am afraid, Chairman, that our recollection of that detail is not sufficient this afternoon. I am sorry.
Mr Rendel
91. Perhaps I can press on, Chairman. That is as far as we are going to get today. May I ask now about the question of London Underground and what rights they did have. It did seem to me that in paragraph 3.32 it is rather odd, is it not, that we have insufficient clauses written into the contract to make sure that any delays caused by London Underground were to be paid for by London Underground? I know in answer to the Chairman earlier you said you think we were only able to claim for foreseeable problems and that some of these problems arose rather late in the day and were not really foreseeable. What rights do we have over the site? The site is owned by us, is it not? Do we own it? Do London Underground own it, or do they have some special rights over the underground part?
(Sir William McKay) I think London Underground have some rights over the air.
92. We now own the site?
(Mr Makepeace) When the project started, Chairman, the site was owned by London Underground and the House. Basically London Underground owned the diagonal strip where the District and Circle lines are. As part of the agreement, the House was to buy out their interests and to grant them a 999-year lease of the areas that they now occupy under the surface.
93. So why could you not put into the contract originally a requirement that any delay caused by them would have to be recompensed to us?
(Mr Webber) Chairman, when formulating a contract, not knowing what circumstances are going to unwind, one faces the choice of incorporating liquidated damages in the contract or leaving it at large, with the possibility perhaps of being able to charge unascertained damages if circumstances make that possible. The great advantage and the convention in many contracts of this sort is to include liquidated damages, because they provide a continuing incentive to the supplier—London Underground in this case—knowing that if he fails to deliver as promised, then there is not a penalty, but there is a cost to pay. The legal advice is that the liquidated damages quoted in the contract must be a reasonable forecast of the costs that might be incurred. The difficulty in this case was that delay occurred at a point when it would have been impossible to have forecast in advance what contracts were let, what manufacturing had been done, what additional storage charges might be incurred, etcetera.
94. What exactly was the cause of that delay again—this last-minute delay to London Underground?
(Mr Webber) London Underground's delay was caused in large part by the new Austrian tunnelling problems that they had.
95. Can I finally ask on paragraph 5.31, there are a number of risks that were spotted. 26 risks were identified and those were all costed. What was the total cost of the 26 risks that were identified, the total maximum amount of money thought to be at risk due to those 26 risks? We were told that £3 million of that was possible late handover of the site.
(Mr Barram) Chairman, there were two risk envelopes defined at the beginning of the programme. The average risk envelope was £6 million and the maximum risk envelope was £19 million.
96. So that is £19 million for all 26, the maximum?
(Mr Barram) Yes, 19.
97. The maximum risk altogether was £19 million and that was about half, then, of the total risk in practice, because there are unidentified risks which turned out to cost about £18 million. So in all that risk management work we managed to identify effectively half the risks?
(Mr Barram) Yes, I think that is true.
98. Are we going to be any better than that in the future? Identifying only half the likely risks is really not a very good record. I understand that a lot of people are involved, not necessarily those who are here today. Can we be sure that we are going to identify more than half the risks on a major project of this sort in the future?
(Sir William McKay) I think, Chairman, that the NAO Report is quite complimentary in general on our risk management.
99. I do not know whether the NAO would like to agree that only identifying half the risks was a good effort. I personally would not like to think that identifying half the risks was a particularly good effort.
(Sir William McKay) "In general," they say on page 9, "House officials and the project team did well to recognise and manage many risks associated with the project."
4 Ev 20, Appendix 1. Back
5 Ev 20, Appendix 1. Back
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