3. Supplementary memorandum submitted
by the Highways Agency in relation to Question 20
20. Regarding cost overruns on major road
schemes, Mr Robertson told us in the evidence session that much
of the increases could be explained by inflation and the failure
to include some VAT. For each scheme that was listed in the Department
for Transport's answer to Tom Brake MP on 19 December 2005, could
you please provide figures showing what proportion of the overspend
is due to these causes and what reasons exist for any remaining
amounts?
1. The attached list of schemes expands
on the answer given on 19 December 2005 to Tom Brake MP, which
provided data for all current road schemes in the Targeted Programme
of Improvements (TPI) on the expected costs when schemes received
Ministerial approval for entry to the TPI (TPI entry) and the
latest agreed budget cost.
2. Since April 2003 the TPI entry, cost
has been reported on the basis of full projected outturn—making
allowance for identified risks, inflation up to scheme completion,
non-recoverable VAT and for "optimism bias" in line
with revised Treasury guidance[1]
issued in April 2003. Before then, only net scheme costs, exclusive
of VAT, projected inflation and "optimism bias" were
reported at TPI entry. The answer to Tom Brake MP explained that
the greater part of the increase in estimated cost was due to
that change in methodology.
3. The latest Ministerially agreed budget
costs in Tables 1 and 2 represent the latest approved estimated
costs of the schemes. However, the TPI is subject to significant
external cost pressures, including rising energy prices, which
have driven cost inflation above the retail price index in the
road construction industry. We have measures in hand to drive
down costs and improve estimating and budgeting, including working
closely with the supply chain, details of which we have already
provided to the Committee in our response to Question 21. We are
also developing and revising scheme estimates to take a more realistic
view of the likely final cost of projects to be fed into updated
programme costs. The cost forecasts are being finalised as part
of the Regional Funding Allocation exercise. We shall write again
to the Committee when those revised estimates are finalised.
4. The Agency has carried out further analysis
to show the original cost estimate at TPI entry, adjusted to represent
the revised approach to estimating. The Agency has also reviewed
a sample of seven schemes to identify in more detail the reasons
for cost escalation. The National Audit Office (NAO) has worked
with the Agency in compiling and validating the data in this Memorandum.
5. The answer to Tom Brake MP stated that
for some schemes, the estimated costs on TPI entry were not directly
comparable with the latest approved budget cost because of changes
in the way that estimates have been prepared since 2003. Table
1 lists schemes which entered the TPI before April 2003 that have
yet to be completed and provides TPI entry cost estimates and
adjusted entry costs that are now directly comparable with the
latest agreed budget cost (ie the cost that was most recently
approved by Ministers). The remaining differences represent increases
in forecast costs due to reasons other than the revised approach
to estimating. Table 2 lists schemes that entered the TPI after
April 2003, for which the TPI entry cost and latest agreed budget
cost are on a comparable basis and for which no adjustment has
therefore been necessary. In addition to the schemes listed in
Tables 1 and 2, the Agency has completed 30 schemes under the
TPI which are not included in the analysis.
6. Table 1 shows that, prior to the adjustments
to the estimates, the TPI entry cost for schemes which entered
the TPI before April 2003 and which have yet to be completed was
£1,682 million. This compared with the latest agreed budget
costs of £3,217 million, an increase of £1,535 million
or 91% over the original estimates. Our analysis shows that the
revised approach to estimating increased the TPI entry costs of
these schemes, from £1,682 million to £2,695 million.
Thus £1,013 million or 66% of the total cost increase of
£1,535 million is explained by the revised approach to estimating
costs. The remaining £522 million or 34% of the increase
is explained by other factors.
7. Table 2 shows that the latest agreed
budget costs for most schemes which entered the TPI after April
2003 have not changed compared to the estimated costs at entry.
8. We took a sample of seven schemes in
order to examine in more detail the main reasons for the latest
cost estimates being greater than the estimates on entry to the
TPI, other than the differences explained by the revised approach
to estimating. Our analysis shows that the most significant area
of increases is related to those affecting the works (construction)
costs (66% of the total cost increase), which is made up as follows:
— change in preliminaries costs, which
cover site set up, staff costs, large plant, insurance and so
on—22%;
— inadequate early estimate and increased
scope—20%;
— additional risk/contingency allowance—15%;
— inflation due to slippage/higher
inflation rate—4%; and
— third party, statutory and other
requirements (landfill tax, archaeology etc)—5%
9. Preparation and supervision costs have
also increased, accounting for some 7% of the total increase,
due to:
— change of scope and investing more
in design through the early contractor involvement form of contracts
to reduce overall costs—5%; and
— omissions (including historic spend)
and underestimates—2%.
10. There have also been increases in land
and compensation costs (20%), made up as follows:
— revised estimates due to changes
in land values and the addition of risk/contingency and statutory
interest—16%; and
11. Increases due to statutory undertakers'
works accounted for 7%:
— better understanding of the work
required/inadequate early estimate—4%; and
12. Improved processes introduced by the
Agency, following the revised approach to estimating, means that
we will have this level of detail available for all schemes as
they go through the approval processes. We are currently developing
a costs database for our project teams, together with guidance
on improving scheme estimates. The level of detail available for
the schemes that entered the TPI after 2003 is more comprehensive
than for the earlier schemes. That reflects the increased focus
on delivery processes, following the creation of the Agency's
Major Projects Directorate in May 2003.
13. The National Audit Office has worked
with the Agency in compiling and validating the data in this Memorandum.
The NAO's work involved reviewing:
— the methodology for adjusting the
initial cost estimates;
— the Agency's quality assurance of
the adjustment calculations and validating the calculations for
a sample of schemes, including those marked (1) in Table 1 where
the Agency used a slightly different approach; and
— the reasons for cost escalation,
using a small sample of eight schemes, selected to represent the
range of schemes that form the TPI in terms of value, type of
scheme, progress and geographical region. The NAO's sample included
four of the seven schemes analysed by the Agency (paragraph 7).
14. Based on this work, the NAO has told
the Agency it is satisfied with the methodology and its implementation,
and that the data in Tables 1 and 2 and the analysis in this Memorandum
present the position accurately and reliably. The NAO confirmed
that the range of reasons for cost increases identified from the
Agency's review of seven schemes reflected the range of reasons
for cost increases in the NAO's sample of eight schemes, but notes
that the reasons and their extent vary significantly, scheme by
scheme.
15. The Agency are considering recommendations
from the NAO that we should consider annually publishing updated
cost estimates and outturns for all the roads schemes within the
Targeted Programme of Improvements.
5 April 2006
Table 1
HIGHWAYS AGENCY TARGETTED PROGRAMME OF IMPROVEMENT - SCHEMES THAT ENTERTED TPI PRIOR TO APRIL 2003 AND HAVE NOT YET BEEN COMPLETED
Table 1 - CONTINUED
HIGHWAYS AGENCY TARGETTED PROGRAMME OF IMPROVEMENT - SCHEMES THAT ENTERTED TPI PRIOR TO APRIL 2003 AND HAVE NOT YET BEEN COMPLETED
Table 2
HIGHWAYS AGENCY TARGETED PROGRAMME OF IMPROVEMENT—SCHEMES
THAT ENTERED THE PROGRAMME AFTER APRIL 2003 AND HAVE NOT YET BEEN
COMPLETED
Scheme
|
TPI Entry cost
(£m) |
Latest
Ministerially
agreed budget cost
(£m)
|
% Increase |
TPI Entry Date
|
Start of
Works |
| A14 Ellington—Fen Ditton Improvement |
490 | 490 | 0% |
April 2003 | SIP |
| A57/A628 Mottram—Tintwistle Bypass |
90 | 103 | 14% |
April 2003 | SIP |
| A45/A46 Tollbar End Improvement | 57
| 57 | 0% | April 2003
| SIP |
| M1 Junction 6a to 10 Widening | 241
| 289 | 20% | July 2003
| March 2006 |
| M1 Junction 10 to 13 Widening | 382
| 382 | 0% | July 2003
| SIP |
| Al Morpeth to Felton Dualling | 84
| 84 | 0% | July 2003
| SIP |
| Al Adderstone to Belford Dualling | 14
| 14 | 0% | July 2003
| SIP |
| A1/A19/A1068 Seaton Burn Junction | 30
| 29 | -3% | July 2003
| SIP |
| A19/A184 Testos Junction Improvement | 21
| 21 | 0% | July 2003
| SIP |
| A505 Dunstable Northern Bypass (A5 to M1) |
48 | 48 | 0% | July 2003
| SIP |
| A421 Bedford to M1 Junction 13 | 171
| 171 | 0% | July 2003
| SIP |
| A21 Tonbridge to Pembury | 65
| 65 | 0% | July 2003
| SIP |
| M40 Junction 15 (Longbridge) | 57
| 57 | 0% | July 2003
| SIP |
| A590 High and Low Newton Bypass | 22
| 22 | 0% | October 2003
| SIP |
| M20 Junction 10A | 46 | 46
| 0% | November 2003 | SIP
|
| A30 Carland Cross to Chiverton Cross | 125
| 125 | 0% | November 2003
| SIP |
| A30 Temple to Higher Carblake Improvement
| 41 | 41 | 0% |
November 2003 | SIP |
| A27 Southerham to Beddingham Improvement
| 19 | 19 | 0% |
March 2004 | SIP |
| M1 J21-30 | 1,915 | 1,915
| 0% | April 2004 | SIP
|
| M25 J1b-3 Widening | 66 | 66
| 0% | April 2004 | SIP
|
| M25 J5-7 Widening | 214 | 214
| 0% | April 2004 | SIP
|
| M25 J16-23 | 496 | 496
| 0% | April 2004 | SIP
|
| M25 J23-27 Widening | 419 |
419 | 0% | April 2004
| SIP |
| M25 J27-30 Widening | 402 |
402 | 0% | April 2004
| SIP |
| A21 Kippings Cross to Lamberhurst Bypass |
68 | 68 | 0% | May 2004
| SIP |
| A23 Handcross to Warninglid Widening | 41
| 41 | 0% | May 2004
| SIP |
| A453 Widening (M1 J24 to A52 Nottingham)
| 90 | 90 | 0% |
May 2004 | SIP |
| M25 Junction 28/A12 Brook Street Interchange
| 8 | 8 | 0% |
March 2005 | SIP |
| M27 J11 to J12 Climbing Lanes | 27
| 27 | 0% | March 2005
| SIP |
| M27J3 to J4 Widening | 52 |
52 | 0% | March 2005
| SIP |
| M1 J30 to J31 Widening | 135 |
135 | 0% | March 2005
| SIP |
| M1 J31 to J32 Widening | 20 |
20 | 0% | March 2005
| SIP |
| M1 J32 to J34S Widening | 139
| 139 | 0% | March 2005
| SIP |
| M1 J34N to J37 Widening | 246
| 246 | 0% | March 2005
| SIP |
| M1 J37 to J39 Widening | 224 |
224 | 0% | March 2005
| SIP |
| M1 J39 to J42 Widening | 202 |
202 | 0% | March 2005
| SIP |
| M1 J31 to J32 Northbound Collector/ Distributor
| 29 | 29 | 0% |
March 2005 | SIP |
| M62 J25 to J27 Widening | 215
| 215 | 0% | March 2005
| SIP |
| M62 J27 to J28 Widening | 83 |
83 | 0% | March 2005
| SIP |
TOTALS | 7,094
| 7,154 | | March 2005
| |
| |
| | | |
Notes:
Note 1: The TPI entry cost adjusted to include optimism bias,
VAT and inflation (Table 1, column C) is the TPI entry cost revised
so that it is calculated on the same basis as the latest Ministerially
approved budget cost (Table 1, column D) as follows:
— Making an allowance for non-recoverable VAT on
the works cost. The other key elements of scheme costs (preparation
and supervision, and land) are for the majority of cases fully
VAT recoverable. For schemes marked (1) in Table 1 the cost breakdown
between these elements was not available so non-recoverable VAT
has been applied to the total cost inclusive of land and preparation
and supervision thus marginally overstating the TPI entry cost.
— Making an allowance for "optimism bias"
as required from April 2003 in the Treasury Green Book on investment
appraisal. Optimism bias is the tendency of those appraising a
new project, and those engaged in bidding for its operation, to
over-estimate the benefits and to under-estimate the costs and
the risks associated with delivery. To counter this tendency,
scheme cost estimates are expected to include an allowance for
optimism bias, set at between 3% and 65% depending on the quality
of the risk assessment and the stage and complexity of the scheme.
The level of optimism bias decreases as a scheme progresses and
has therefore been applied according to the stage of each scheme
at TPI entry and the complexity of the scheme (more complex schemes
require a higher level of optimism bias).
— The TPI entry cost has been adjusted to Quarter
3, 2001 prices using the Road Construction Tender Price Index
(based on price rates contained in accepted tenders for public
sector road schemes). The latest Ministerially approved budgets
are all at Quarter 3, 2001 prices. All estimates are therefore
on a common price base.
— Inflation has been applied to the TPI entry cost
at a rate of 2.5% per year for 2001-02 to 2007-2008 and 2.7% thereafter
in line with Treasury guidance. In order to apply inflation the
scheme costs were profiled in line with the expected timetable
at TPI entry. 10% of the scheme cost was profiled over the preparation
years and 90% across the construction years.
Note 2: The figures included for the two DBFO schemes (Al
(M) Ferrybridge to Hookmoor and A249 Iwade to Queenborough Improvement)
represent the Financed Capital Cost of the schemes.
Note 3: SIP denotes that the scheme is in preparation (prior
to start of works).
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