House of Commons - Adapting the Foreign and Commonwealth Office's global estate to the modern world

Adapting the Foreign and Commonwealth Office's global estate to the modern world - Public Accounts Committee Contents

3 Delivering building projects to time and budget

10. The Department's record in delivering its capital projects to time and budget has been disappointing. The NAO examined the performance of 42 projects which had been completed since 2002. Of these, 29 were delivered late and 14 exceeded their budget by over 10%, a total cost overrun of £57 million.[22] In 2008-09 the capital programme went £11 million over budget because of poor controls over in-year capital spending.[23] The Department felt this also reflected the need to deal with unexpected events, recently exemplified by circumstances in Madrid, where a faulty sprinkler system in its new top floor offices flooded floors below belonging to other tenants, for which the Department may be liable.[24]

11. The Department pointed to a number of challenges it faces when building overseas. Many of the capital projects the Department undertakes are in some of the world's most difficult environments, and the Department attributed £40 million of the £57 million overrun since 2002 to buildings in Baghdad, Basra and Harare which went over budget.[25] For some work, the Department must use UK labour and contractors for security reasons and this can add significantly to the overall cost of the project.[26] For other work, it may be possible in some locations to subcontract non-sensitive areas to local contractors but this is judged on a case-by-case basis.[27]

12. The Department provided more detail on a recent example of the problems associated with building in insecure environments. Work on the new Embassy in Damascus had to be suspended after the Department discovered that the site was not sufficiently guarded early on in the build, allowing unauthorised access. A subsequent review of the contracting arrangements identified concerns, and financial compliance staff were looking at the project. The Department agreed there had been deficiencies in the way it managed this project and that it should have recognised the security risks at the start of the project and built these into its plans. Work was underway to establish the way forward and the likely costs to the Department.[28]

13. Exchange rate fluctuations had also caused cost increases and delays on some projects.[29] The new Embassy in Algiers was late and over budget due to exchange rate movements although terrorism, security considerations and the retrospective application of Value Added Tax also added to the overall cost of this project.[30] The Department reported a budget shortfall of 12% in 2009-10 due to an adverse exchange rate position.[31] It admitted it had been caught out by the sharp exchange rate depreciation in 2007-08 as it had not been hedged.[32]

14. The Department has an annual target for the sale of its properties. The Department keeps the sale proceeds up to an agreed limit set by Treasury for reinvestment (some £50-60 million over the three years of the Spending Round).[33] The Department has a list of properties which it believes it can sell for a reasonable return, taking account of market conditions. This is not made public in advance to avoid an adverse effect on the market value of the properties listed.[34] The Department looks to sell buildings which are no longer relevant to, or too big for its needs, but aims to retain its prestige buildings if used fully. We believe these prestige buildings play an important role in representing British interests overseas.[35] Recent disposals include a property in Brussels which was sold after the FCO Embassy staff and those from the UK Permanent Representation to the EU (UKRep) co-located together in a refurbished set of offices.[36] The Treasury limit for retaining sale proceeds was increased by £25 million as part of a recent rescue package announced by the Chancellor of the Exchequer. The Department can choose to reinvest these additional receipts in projects to improve the estate, or to cover increased running costs such as those caused by adverse exchange rates.[37]