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The time and cost performance of a project are usually of the essence to the employer and the contractor. This is because late completion of projects can deny employers the benefits or profits that occur through use of the project and may also expose them to serious financial and economic risks such as finance costs and loss of market opportunities. On the contractor's side, delay in completion entails additional cost accruing from extended main office and site office overheads, labour and equipment standby costs and other intangible cost such as opportunity cost.
Despite these effects, it is common that most projects are not completed within the expected contract period and for the price it was tendered for. Notable recent examples in the UK include the Scottish Parliament Building and the Wembley Stadium, which suffered huge time and cost overruns.
This paper will look at why some construction projects suffer from costs overrun and late completion. Wembley Stadium and Scottish Parliament projects will be looked at in detail, it will be identified where problems occurred and analysed. Then conclusion will be drawn and possible solution for the future projects will be suggested.
The contract to build the Wembley stadium was first put out to tender in late 1999 on a fixed price lump sum basis. Several contractors hesitated to put forward bids, warning that sums of money needed to adequately cover the risk of the builders running over budget would be in hundreds of millions of pounds.
Early 2000, Multiplex, a major Australian contractor submitted a bid joint venture with Bovis, a U.K contractor and they were appointed as the preferred contractor. Bovis refused to accept a price reduction below £339 million and in late August the client WNSL terminated the joint venture. Two days later Multiplex made a solo offer to build Wembley in 39 months for £ 326.5 million which was accepted ten days later by Wembley National Stadium Limited (WNSL). In the negotiation that followed, after the funding was secured, the figure was increased by £120 million to a guaranteed fixed price of £445 million.
This 40-month design and build project had the advantage of a late start with a well-developed design and few changes were anticipated. Any savings made by the contractor would be retained by them, likewise they carried all the risks. Multiplex told their shareholders that they were confident of securing a profit on the project.
Wembley's great challenge was the structural design, construction and erection of its main arch. Multiplex awarded steelwork specialist Cleveland Bridge an 81-week, £60 million lump-sum fixed price subcontract to fabricate, supply, deliver and erect the arch and roof.
However, in 2004 the works were severely disrupted between March and August as a legal dispute developed between Cleveland Bridge and Multiplex. Cleveland bridge were subsequently ordered off the site and replaced by Dutch steel subcontractor Hollandia working on a cost-plus basis.
Multiplex filed a claim at Court for non-payment, Cleveland Bridge alleged that from Spring of 2003 there were serious problems arising from late and incomplete design by the civil and structural engineers on the project, Mott Stadium Consortium and delays in providing design information. The design changes and late information caused substantial cost increases, and delays and disruption to the subcontract works.
The Wembley National Stadium is one of the largest, most costly and complex construction schemes in the UK. Like all big projects, it posed enormous technical and logistical challenges. How a project is procured has a huge impact on whether problems arise, and whether disputes break out between different parts of the construction team.
The stadium, which was scheduled to open on 13 May 2006, was being built under a design and build contract. This is a modern procurement method under which the main contractor Multiplex, in effect became the agent for the client Wembley National Stadium Limited (WNSL), as well as being responsible for building the job.
This is a departure from the norm as traditionally, clients would deal independently with a designer, quantity surveyor and main contractor. Under design and build, however, the main contractor becomes the client's single point of contact, managing all other contractual relationships and the associated construction risks. The contract was also given on a fixed price, lump sum basis, shifting project risk to the contractor.
Having a single party who you deal with and who takes responsibility is good, but it shouldn't be absolute, as it was in this case. It is not prudent to put all risk onto the team doing the project. And if you are doing something of national significance, the idea that you can dump risk is naive. Risk dumping happens when companies pass responsibility for danger or problems that may occur during construction to firms they hire to do work for them.
There are some who want to get the lowest possible price and dump risk on the people they hire to do the work. Yet those who really know how to do things are the suppliers and specialist contractors, lowest price generally offers a false economy, since it forces suppliers to compromise on the quality of their technical solution.
WNSL thought that a fixed-price, lump-sum contract could be the solution to all its problems. But that is only fine if the contractor has all the resources, time and money required for the project.
For such a contract to work, there has to be a rigorous work programme in place, and the client also needs to understand how the work is going to be subcontracted. Through using a design and build contract, WNSL thought it had offloaded risk to Multiplex, but it hadn't.
The stadium, which was scheduled to open on 13 May 2006, was finally handed over to the client (WNSL) in March 2007, after extensive delays and cost overruns. It was reported that Multiplex made a loss of £147 million on the project and the Australian company stopped working in England and then was overtaken by Canadian firm in June 2007.
The Scottish Parliament Building is the home of the Scottish Parliament at Holyrood, within the UNESCO World Heritage Site in central Edinburgh.
Controversy surrounded the project from the very beginning, when the sensitive site on the edge of a park wilderness was chosen in January 1998 over other possible Edinburgh homes at Calton Hill, a converted school, Haymarket, or in Leith. The ministerial power behind the project, first minister Donald Dewar, died suddenly in 2000, and then Spanish architect Enric Miralles also passed away soon afterwards. Official cost estimates changed 10 times and ballooned from the initial £40 million estimate to a final £431 million, providing a platform to an ever changing cast of project managers as the Scottish Office handed the project over to the devolved Scottish Parliament in 1999. The building, which was originally due for completion in mid 2001, was still surrounded by construction workers during its inaugural session in 2004.
After much finger pointing, the procurement model chosen for 'Scottish Parliament' in early 1998 has emerged as the root of the problem. The official inquiry 'A Report by The Rt Hon Lord Fraser of Carmyllie QC' found in September that procurement method was the main factor due to which most of the misfortunes have befallen the project.
In 1998, civil servants selected a fast-track contracting method known as construction management to build the new 'Scottish Parliament project'. It works by splitting a large building job into numerous smaller packages that are designed, tendered and let independently of one another. Its main advantage is to speed up construction, because the overall design does not have to be complete before basic building work can begin. But it has been described as a expensive procurement vehicle, because it does not allow a client to know the total cost of a project until well after work has begun. It is considered risky for the client, which is responsible for running each individual package, in this case there were more than 60 packages. This was the wrong type of contract for this project. The client would have been much better off to say we are not going to start this job until we have got a design. In a case like this, the client acknowledges the fact that it's got to have elastic outwork cost, because it doesn't have a definitive design. It goes on really fairly clueless, and in the case of this job, relying on a cost plan that looks like £40 million. Then the contractor gets on site, and the designers get on site, and they start to design the project. The problem is, of course, that there are numerous different voices with wish lists. So if a client, through the civil service team, cannot manage the position and cannot keep an eye on costs and basic management control, the project runs out of control. This is what has happened, as the project cost escalated from about £40 million in 1997 to £109 million in 1999, £241 million in 2001 and £294 million in 2002, before coming to a stop at £431 million in February 2004.
The complexity of the job was partially to blame. There were 18,000 design change orders over the five years of construction, which resulted in a three-year delay. The floor space required by members of the parliament doubled in size during the course of construction, to more than 30,000 square metres, and £40 million of blast-proofing had to be added to the superstructure after the 11 September 2001 attacks in the US.
Requests for design freezes on three occasions were ignored. However, with the insistence on quality and speed over cost at every step of the way, there was no alternative to the construction management, says some experts in the construction industry. They says that Lord Fraser in his inquiry was unfair on construction management. The experts says that "His criticism was that the civil servants chose this without reference to the politicians at all, but at that point in time, given that the pressure was on them for time and to appoint a contractor, no one knows what other route they could have taken."
Few experts strongly defends the procurement model chosen and the reality is that construction management was the only contract option for a client wanting to make an early start on a project that was still at the design concept stage. They also say had the client waited until the design was complete to appoint a contractor, completion of the parliament would have been greatly delayed and considerably over budget.
It is also clear that this was a classic case of procurement expertise being bypassed. As was made clear in the course of the inquiry, the procurement department at the Scottish Office was not involved in the project. It was not consulted over the procurement model. Had the procurement department been involved early on, things may well have turned out differently. In several important respects, the way the project was carried out would have been questioned very closely by any procurement professional.
Construction management is often used for simpler buildings, where design risk is far lower, and in commercial buildings where speed is more important than cost. It has been used to great effect in office blocks, where developers stand to gain more by getting the property finished quickly and let than by sticking to a fixed budget. But it has a history of success in more complex buildings, too. Some other construction industry expert says there is nothing wrong with construction management as a procurement route. It is best suited to high-quality, potentially high cost projects, where the client is fully engaged, has a clear goal and works closely with the supply side team. But the inquiry into Holyrood found that the project managers were not fully engaged. They failed to fully appreciate the cost downside and the risks involved with managing 60 contractors according to design brief.
In the inquiry it was found that the civil servants didn't really understand construction and the demands of construction management. When reporting up to their seniors, the politicians, they were filtering the information from their technical teams without really understanding it. They thought construction management gave them the opportunity to make design decisions later, which was their mistake. Some estimates put the money lost to delays over design changes at as much as £100 million. If one trade contractor has a problem, it tends to flow through all the others and cause delay and changes. The contracts are with the client, so the client picks up the cost of that.
Other procurement routes were failed to be considered properly. The only real discussion of the alternatives focused on the difference between the private finance initiative and so-called conventional procurement. However, between the extremes of fixed price PFI and speedy construction management, a host of options exist under the heading of "conventional" procurement. Their structures affect the risk and control over the final design that falls to the client. A design and build route would have seen the project management team drawing up a fairly detailed design brief, which the main contractor then builds. It leaves the contractor footing the bill for cost overruns, but freezes the design as well. A middle of the road option known as prime contracting keeps design more open, but cuts the risk of costs going up if things go wrong. This is because a contractor joins the client's project management team, and brings its entire supply chain of proven builders and suppliers along. Then there is management contracting, where the client retains the design brief fully and splits up the project into small packages to be let individually, as in construction management. However, a professional intermediary runs all of the contractors on a daily basis, although they are still contracted to the client, which pays for design alterations.
Given the ever changing design of the building and the fact that it was finished well after the original summer 2001 delivery date, a more middle of the road vehicle could have been used. Even where speed was needed, management contracting may, it seems, have given a more stable framework to the project by introducing an industry expert to run the many contractors.
With hindsight, most experts agree that construction management was not the most suitable procurement vehicle, full partnering should have been used to share the risk between client and contractor. If they had started on a full partnering basis at the very beginning, but with a design and build approach to it, they could have absorbed many of the costs and still had a magnificent design but they would not have said at the beginning that it was going to cost £40 million. This route would have given the client proper cost control and brought in value management at the earliest stage to design out the things that add cost but not value.
A similar approach is the well-defined "joint contract tribunal" vehicle. This is a form of partnering that can be adapted so that the client finalises the design brief before inviting tenders, then hands the design team over to the main contractor. On a design and build basis, where the client is novating the design team, this is moving risk to the contractor and seeking a traditional procurement route. The client takes competitive prices on a fixed-price arrangement while remaining responsible for the design. Today the industry's customer base knows that it can shift design risk on to the contractor while holding on to the key design issues. Another option in this mould would have been prime contracting, although this was still evolving in the late 1990s. It gives you a joined up team from the beginning with the supply chain on board and you work together from a quite strategic brief to produce the asset, so they would probably have had a lot of say in the quality.
It can be clearly seen that the main problem in both above mentioned construction projects is the procurement method. That is as a result of poor initial planning and lack of foresight. For future projects it is recommended that good initial planning be carried out before embarking on any substantial work.