Report of the State Services Commissioner. into the Cost Escalation in the Regional Prisons. Development Project

Transcription

1 Report of the State Services Commissioner into the Cost Escalation in the Regional Prisons Development Project 7 August 2006

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3 State Services Commission Review of Cost Escalation in Regional Prisons Development Project 31 July 2006

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5 Disclaimer In preparing this report, we have relied upon, and assumed the accuracy and completeness of, all the information made available to us from organisations that have provided information relevant to our report. We have been assured by the Department of Corrections that all information relevant to the completion of the review has been provided. We have evaluated that information through analysis, inquiry and review but have not sought to verify the accuracy or completeness of any such information. It should not be construed that we have conducted an audit of the information. The statements and opinions expressed in this report have been made in good faith. Accordingly, neither PricewaterhouseCoopers nor its partners, employees or agents, accept any responsibility or liability for any such information being inaccurate, incomplete, unreliable or not soundly based, or for any errors in the analysis, statements and opinions provided in this report resulting directly or indirectly from any such circumstances, or from any assumptions upon which this work is based, proving unjustified. We reserve the right, but are under no obligation, to revise or amend our report if any additional information which exists on the date of this report, subsequently comes to light. This report has been prepared solely for use by the State Services Commission and the Treasury for the purpose of assisting these organisations in their reporting back to Ministers regarding the processes, systems and contracting practices at the Spring Hill and Otago prisons. We accept no responsibility to any other party, unless specifically agreed by us in writing. Furthermore, we accept no responsibility for any reliance that may be placed on this report should it be used for any purpose other than that set out above.

6 Table of Contents 1 Executive Summary Introduction Background Key Drivers and Causes of Cost Escalation...13 Overview of Cost Increases 14 General Comments Regarding Cost Increases 15 Market Influences 16 Consents and Regulatory Changes 19 Design Finalisation 20 Summary 20 Lessons Learned 21 5 Methodology and Processes: Design, Costing, Procurement and Scheduling...22 Introduction 24 Design 24 Costing 25 Procurement and Scheduling 34 Summary 43 6 Governance and Project Management...45 Introduction 46 Current RPDP Arrangements 48 Development of Governance and Management of RPDP 50 Issues and Challenges 51 Summary 54 Lessons Learned 55 7 Reporting to Ministers...57 Appendix A : Funding Approvals...60 Appendix B : CWA Best Practices...62 Appendix C : Overview of Governance and Project Management...66 iv

7 1 Executive Summary 1.1 Construction of new prisons at Spring Hill in North Waikato (referred to as the Spring Hill project) and near Millburn in Otago (referred to as the Otago project) is underway. In December 2005, Ministers were advised that the cost of the projects had increased by $140.8 million compared to estimates provided earlier in the context of Budget In light of the added cost, the State Services Commission, in consultation with the Treasury, was asked to independently review the processes, systems and contracting practices used by the Department of Corrections (the Department) in connection with the two prisons. 1.3 Consistent with the terms of reference for the review, the report which follows has been structured around the four primary questions: What were the drivers and causes of the cost escalation? What lessons can be learned from, and about, the Department s methodology and process used to design, cost, procure and schedule (excluding commissioning) the Spring Hill and Otago projects? What lessons can be learned in relation to the project management and governance of the projects? What level of reporting to Ministers would be appropriate for projects of this size? Context 1.4 The Spring Hill and Otago projects are part of a wider programme of increasing prison capacity. The Department has been building 325 beds per year on average since 1996 into existing prisons. However, this is not sufficient to meet the expected growth in the prison population. New prisons have also been required and the Spring Hill and Otago projects are part of a wider programme referred to as the Regional Prisons Development Programme (RPDP). 1.5 The RPDP was announced in It comprises two regional prisons in addition to Spring Hill and Otago, both of which are now operational; these are located at Ngawha in Northland and in Manukau (the recently opened Auckland Women s facility). 1.6 Several factors have had a significant bearing on the Spring Hill and Otago facilities (and RPDP more generally). Foremost among these is the expected growth in prison population. In 1999, the prison population forecast for 2008 was 6,800. The current forecast for 2008 is 8,600; a 26% increase. It is important to note that the Department depends on Ministry of Justice prison population forecasts. These forecasts have a five year horizon which is significantly shorter than the lead time for completing a new prison. As a result of this, and reflecting the revised forecasts, the RPDP has required considerable flexibility to adapt to changing circumstances. In particular, there have been changes to the bed numbers at three of the four regional prisons: Auckland Women s 150 to 286 Spring Hill 350 to 650 Otago 220 to 335 Executive Summary 1

8 1.7 The increases have impacted on planning, consents, design, construction and cost. 1.8 A second key factor influencing the RPDP has been the process of obtaining consents under the Resource Management Act. The outcome of this process (which is not part of this review) has resulted in changes to the approach to design and construction. These changes have, in turn, contributed to the Department using a form of procurement referred to as a Collaborative Working Arrangement or CWA that is fundamentally different to the more traditional fixed price form of contracting. The change in procurement method has assisted the Department to deliver the regional prisons in time to meet growth in the prison population. However, the CWA methodology has also raised a number of issues and lessons. 1.9 The third contextual consideration is the fact that the new prisons have been built during a heated construction market. As a result, substantial cost increases have been experienced in relation to labour and materials. Moreover, the sheer size of the RPDP project in relation to New Zealand s construction, design and quantity surveyor capacity has stretched available resources. Key Findings 1.10 Growth in the prison population has been a key driver for the RPDP. The Department has successfully responded to this, and the changes in forecasts, by delivering the Northland and Auckland Women s prisons on time, within budget and to the standard required. It is on track to complete the Spring Hill and Otago facilities in time to meet requirements The costs of the Spring Hill and Otago facilities have increased by $140.8 million compared to estimates presented as part of Budget 05. Several factors have contributed to the increase including: market factors, including inflation in relation to input costs (e.g. steel) and labour, as well as the need to pay increased allowances to attract scarce labour resources. The remote location of the construction sites added to these pressures; the outcome of consent processes and regulatory changes; and design changes following the completion of Northland and additional work on a range of infrastructure services It is important to note that the estimates provided as part of Budget 05 should have been clearly communicated as indicative only. In particular, the level of cost escalation incorporated into the Budget 05 numbers was based on external forecasts that are known to have limitations. Further, the estimates were based on traditional quantity surveyor data that did not sufficiently recognise the specific circumstances of the Spring Hill and Otago projects It is also important to note that the CWA methodology used for the RPDP projects differs from traditional procurement methods in that the principal contractors do not submit fixed price quotes. Instead, the overall cost of the projects is a function of direct costs (labour and materials) plus agreed allowances for margins and overheads. There is a process referred to as the development of the Target Outturn Cost (TOC) that is fundamental to agreeing the level of overall costs. Various factors including, in particular, constraints around the availability of design and cost estimation resources, have delayed Executive Summary 2

9 the development of the TOC until much later in the construction phase than is desirable. This has exposed the Crown to cost risk, which the Department has managed through independent scrutiny of cost data presented by contractors The CWA methodology has a number of inherent advantages compared to traditional forms of procurement and the Department has captured many of these: there has been close integration of design, construction and commissioning teams which assists in achieving an optimal balance between design, construction and operational requirements; several value management reviews have been undertaken to further optimise designs and take out unnecessary costs; at a site level, resources have been mobilised to deal with day-to-day issues thereby increasing the efficiency of on-site resource utilisation; the collaborative approach to dealing with issues has helped to maintain momentum with the projects, thereby enabling the timing of projects to be completed on, or near to, expectations; high levels of transparency in relation to costs have been achieved at the project level consistent with the open-book philosophy that underpins CWA (with some opportunity for more transparency over margins see Section 5); and costs submitted by the commercial CWA partners have been exposed to extensive third party scrutiny and review Overlaying all of these benefits, the methodology chosen by the Department means that it is on track to deliver Spring Hill and Otago in time to meet the expected growth in the prison population. There were sufficient indications to suggest that had the Department elected to follow a traditional procurement method, timeframes for completing the projects would probably not have been met Projects of the size and complexity of Spring Hill and Otago need tight management. RPDP project governance and management arrangements have delivered (or will soon deliver) four regional prisons to accommodate the growth in prison population Current arrangements for project governance, following a review during 2005, have resulted in improved governance and project management of RPDP. In particular, we consider desirable changes have included: establishment of the Programme Management Office (PMO) and a specialist construction sub-committee; separating responsibilities for direction of construction from commissioning; and the inclusion of a Department employee on the CWA Principals Groups in Spring Hill and Otago Under arrangements prior to late-2005, the Steering Group established for the RPDP was often constrained in its decision-making effectiveness through a lack of sufficient information to support decisions (notwithstanding the transparency of cost Executive Summary 3

10 information at the project level that was emerging from August 2005). Decisions were often taken with discussion, but before the provision of supporting information. The Steering Group comprised a majority of busy Departmental functional line managers, with heavy reliance on contractors for advice regarding large construction project decisions. These managers did address some knowledge gaps through the appointment of an independent member with construction, project and procurement methodology experience in 2004, and the conduct of internal and external audits to assess aspects of process Prior to 2005, there was a lack of clarity amongst some, including Steering Group members, of the role of the Steering Group as to its role as an advisory group representing the different areas of Department endeavour, or a governance group. This may have affected the strength of the Steering Group to challenge the issues with reporting and information for key decisions Due to the pressing nature of the growth in the projected prison population, the completion of the projects to the proposed schedule became a paramount factor in decision-making Overall, these arrangements made it very challenging for the Steering Group to assess governance risks and to communicate these beyond the Steering Group. The Steering Group seemed surprised to learn of the actual size of the cost escalations in late The nature and level of reporting to Ministers was also an issue. In our view, the information provided to Ministers as part of Budget 05 did not sufficiently or clearly signal the uncertainty around the estimates and the risk of cost increase. Further, the fiscal risks should have been on the radar for the pre-election fiscal update in mid-august 2005, at least in a qualitative sense. Lessons Learned 1.23 Growth in the prison population drives the need for additional capacity. Given the long lead times involved with building new prisons, a longer term view of future capacity requirements is needed (than is provided by the Ministry of Justice five year forecasts) in order to enable the Department to appropriately plan, resource and schedule the delivery of additional greenfield capacity The choice of CWA methodology has assisted the Department to deliver the required increase in capacity. However, CWA will not be suited to all projects. There is a need to identify the conditions under which CWA is likely to be preferred ahead of other forms of procurement. The methodology chosen should be justified on a project by project basis The CWA methodology adopted by the Department requires careful and experienced management to protect the Crown s interests. A blend of competencies and experience (commercial, construction and public sector management) is required for effective management. For future projects of this size and complexity, sponsoring agencies need to be confident that they have the appropriate mix of competencies and these are represented within the CWA Principal s Group The development of the TOC is a central part of the CWA methodology adopted by the Department. It needs to be finalised sooner than has been the case with respect to Spring Hill and Otago. Specifically, the TOC should ideally be completed at, or about, the time construction commences. However, appropriate time and resources need to be planned for to enable this. Until the draft TOC is well developed, estimates of construction Executive Summary 4

11 cost should be seen as indicative only. Pre-TOC estimates of cost involve significant levels of risk and uncertainty and this needs to be made clear. Once TOC estimates begin to emerge, there should be transparent reporting of these to provide the Department and, as appropriate, Ministers with opportunities to explore options for saving cost if budgets are under pressure With respect to project management and governance, for projects of this size and importance, there is a need to ensure that: project goals and objectives are agreed and clearly communicated to all parties at the commencement of the project, and that they encompass all three key elements of time, costs and quality, even in cases of fast-tracking ; the Steering Group has the appropriate mix of knowledge and skills to be able to represent the Department and the wider Government interests, and manage a large scale project; the roles and accountabilities of the respective governance and management groups and individuals are clearly specified and communicated from the commencement of project planning; there are independent quality assurance processes in place for oversight of governance and project management approaches, as well as the lower level project management processes for cost calculation and quantitative risk assessment; the Steering Group is provided with adequate information in a timely fashion to assess and manage risks, support effective decision-making, and reporting to Ministers; and project reporting not only assesses historical progress but also estimates future issues and progress remaining against all project objectives In terms of reporting to Ministers, the following should be noted: the regular discussions with the Minister should include clear reference to cost developments and associated risk estimates as work on the TOC proceeds; where cost estimates are uncertain (as was the case with these projects), this needs to be clearly explained to Ministers. For the purposes of providing advice to Ministers, it would be appropriate to indicate a range of possible cost estimates and, moreover, indicate the level of uncertainty attaching to the estimates. Such estimates should be clearly distinguished from formal Budget processes and funding decisions (where point estimates specified to the nearest $1000 are required); and on projects of this scale, reporting should be linked to significant project milestones rather than to the Budget cycle. For example, cost estimates developed for Budget 05 preceded the start of construction on Spring Hill and Otago. A report to Ministers at, or about, the start of construction would be better practice. Executive Summary 5

12 2 Introduction 2.1 The Regional Prisons Development Project (RPDP) is a major construction programme undertaken by the Department of Corrections (the Department). The project involves the delivery of new prisons in Northland (referred as Northland Region Corrections Facility or Northland), Auckland (referred to as Auckland Women s) North Waikato (referred to as the Spring Hill Corrections Facility or Spring Hill) and Otago (referred to as the Otago Region Corrections Facility or Otago). 2.2 The focus of this review is on the Spring Hill and Otago facilities which are located near Meremere and Milburn respectively. The other two facilities (located at Ngawha and Manukau) have been considered to the extent that they have assisted understanding of the arrangements at the Spring Hill and Otago sites. 2.3 Both the Spring Hill and Otago projects are still under construction. Spring Hill is due for completion by July 2007 and Otago by March A key driver for the review is the significant increase in the estimated cost for these projects. As part of Budget 04, the costs for Spring Hill and Otago were forecast to be $248 million and $161 million respectively. As part of Budget 05, these estimates were increased to $283 million and $175 million respectively. These estimates were revised further in light of detailed costing analysis and reported to Cabinet in December Spring Hill is expected to cost $380 million and Otago s cost has been estimated to be $218 million; a combined increase of approximately 31% over and above the Budget 05 estimates. 2.4 In light of the cost increases, the Cabinet invited the State Services Commissioner, in consultation with the Treasury, to independently review the processes, system and contracting practices at the Spring Hill and Otago prisons. PricewaterhouseCoopers has been engaged by the Commission to undertake the independent review. Review Objectives 2.5 The primary objective of the review is to learn lessons from the Spring Hill and Otago projects for the benefit of future capital projects. To this end, the review is to recommend best future practices that can be applied to future projects in the Department and, if relevant, to the wider state sector. 2.6 A second objective for the review is to identify the key drivers and causes of the cost escalation. Review Scope 2.7 In order to meet the objectives for the review, its terms of reference have required: an evaluation of the end-to-end process of designing, costing, procuring, scheduling and project management of the new facilities; an assessment of the adequacy and quality of approach in these areas against best practices in the public and private sectors; an assessment of project governance and management; and a review of the quality and timeliness of reporting to Ministers for capital projects of this size. Introduction 6

13 2.8 As indicated above, the scope of the review includes the Spring Hill and Otago projects, but regard has been given to the other projects in the RPDP where appropriate. The scope of the review has also focused on events post completion of consent and related approvals up to the current day (which for the purposes of the review includes the period up to approximately March 2006). The scope of this review has specifically excluded: consideration of the regional prisons policy (i.e. the policy has been taken as a given); the commissioning of the facilities; and the consents process. 2.9 It should be noted that at the time of undertaking this review, several other, and related, reviews were also been undertaken in relation to the projects. This includes various reviews being undertaken by the Department into aspects of the projects costs (e.g. a review of the methodologies for establishing margins and reviews relating to preliminary and general costs). Where available, the findings of these reviews have been incorporated into this review. It has not been our intention to duplicate the other work being undertaken. Approach to the Review 2.10 Our approach to this review has involved a process of documenting good practices and comparing actual practices against these. This has assisted in identifying areas where procurement and management of the projects has met the standards required as well as those areas where there are opportunities for improvement The assessment of actual practices has relied heavily upon information provided to us by the Department and on interviews with a range of Department and other personnel involved with the projects. It is important to note that the interviews were conducted on a non-attribution basis. The process of reviewing relevant documentation and conducting interviews took place during April, May and June After several requests, and the subsequent receipt of information after completion of draft reports, we have now been assured by the Department of Corrections that all relevant information to enable us to complete the review as required has been provided. It is important to note, however, that the projects that are the focus for this review are still in the process of construction and, accordingly, fresh and updated information is continually coming to hand. As far as possible, we have sought to include information up to and including June Reflecting its nature and objectives, this review has not sought to independently verify the accuracy of the information provided to us. In this regard, the review should not be interpreted as an audit or inquiry. Report Structure 2.13 The report is structured as follows: Section Three Section Four Section Five provides some context within which the new prisons have been built. discusses the causes and drivers of the cost increases. assesses methodologies and processes in relation to design, costing, procurement and scheduling. Introduction 7

14 Section Six Section Seven assesses project governance and management. comments on reporting to Ministers. Introduction 8

15 3 Background 3.1 Before discussing the processes, systems and contracting practices associated with the new facilities, it is important to outline some of the environmental and contextual factors bearing upon the prisons project. To varying extents, these factors have had a significant impact on the approach to, and cost of, the new prison builds. Prison Population Growth 3.2 The Spring Hill and Otago projects are part of a wider programme of increasing prison capacity. The Department has been building 325 beds per year on average since 1996 into existing prisons. However, this is not sufficient to meet the expected growth in the prison population. New prisons have also been required and the Spring Hill and Otago projects are part of a wider programme referred to as the Regional Prisons Development Programme (RPDP). 3.3 The RPDP, which was announced in 1997, identified the need for four new regional corrections facilities, comprising two regional prisons in addition to Spring Hill and Otago. Both of the other prisons are operational; they are located at Ngawha in Northland and in Manukau (the recently opened Auckland Women s facility). 3.4 In 1999, the prison population forecast for 2008 was 6,800. The current forecast for 2008 is 8,600; a 26% increase. These forecasts are prepared by the Ministry of Justice. The Ministry s forecast underpins the Department s modelling of future prisoner demand and the optimal build programme to provide additional capacity to meet that demand. The forecasts have a five year horizon which is significantly shorter than the lead time for completing a new prison. As a result of this, and reflecting the revised forecasts, the RPDP has required considerable flexibility to adapt to changing circumstances. In particular, there have been significant changes to the originally-planned bed numbers at three of the four regional prisons: Auckland Women s 150 to 286 Spring Hill 350 to 650 Otago 220 to Time pressure is a key issue affecting the RPDP because of the growth in the prison population. At the time decisions to proceed with the new prisons were taken, it was clear, and subsequently demonstrated, that new facilities had to be built in order to accommodate the increased numbers in the prison population. The timeline for completing the new prisons is tight and completion on time remains a high priority in order that the growing prison population can be appropriately housed. In recent years the Department has had to rely on police and court cells to manage the prison population overflow, a practice which is not desirable. Completing the construction of additional beds is therefore of utmost priority for the Department. 3.6 In this regard, and notwithstanding many of the points made later in this review, it needs to be acknowledged that the programme of new prison builds has delivered, and is delivering, the additional capacity that is needed to meet growth in the prison population. Moreover, the programme is adding the new capacity more or less within the very tight deadlines that had to be achieved in order to avoid a situation of demand for beds Background 9

16 exceeding available capacity. The significance of this achievement should not be underestimated. Long Lead Times 3.7 The need for new prisons was foreshadowed as part of the RPDP announcements in The Northland and Auckland Women s facilities were the first two of a four-prison build programme. The table below indicates some of the milestones associated with the Spring Hill and Otago projects. As can be seen, the lead times for getting to the point where prisoners can be accepted is long; in the order of six to seven years. Design contracts let and site selection Spring Hill Otago December May 2001 September June 2002 Construction RFP Issued September 2004 September 2004 CWA Partner Selection October 2004 October 2004 Environment Court Clearance June 2004 December 2004 Earthworks Start November 2004 January 2005 Construction Starts May 2005 April 2005 Planned Construction Completion July 2007 March 2007 Prisoner Induction Commences October 2007 June 2007 Planned prisoner Capacity September 2008 November As noted above, the Ministry of Justice provides a five-year forecast of the prison population. However, the typical consent and construction life-cycle for new facilities is significantly longer that this. The Department sees this lack of alignment of forecasting and construction lead-time periods as a constraint on its ability to appropriately plan, resource and schedule, and deliver capacity to meet demand. New Design 3.9 Prior to the construction of Northland (which was the first of the four new prisons to get underway), it had been a relatively long period since the Department has constructed a new non-remand prison. As alluded to above, growth in prison capacity over prior years had been achieved through addition to existing facilities rather than greenfields development. Only one new facility (Auckland Central Remand Prison commissioned in 1999) has been completed by the Department prior to the RPDP programme setup By implication, the Department did not have a recent history of deep involvement in construction and certainly not on the scale of the four prisons which cumulatively have a cost in the region of $900 million (excluding commissioning) Moreover, compared to existing prisons, the facilities proposed for Northland, Auckland Women s, Spring Hill and Otago reflected different design and operating philosophies. Although not part of the brief for this review to investigate these, the designs underpinning the four new facilities are quite different from what has gone before. The origins of the new design can be traced to facilities in Australia and Canada. The physical design of the new prisons in part reflects an intentional policy to promote greater self responsibility and, ultimately, reduce the incidence of recidivism. Background 10

17 3.12 While the merits of the new design are not part of the brief for this review, the new design is important for the reason that it represented a departure from what had gone before. Therefore, in terms of estimating the costs of the new prisons, the new design, coupled with the passage of time since the last major prison build, meant that benchmarking against the cost of earlier prisons was of limited assistance and relevance. Moreover, the new designs meant changes in operational policies and practices which, in turn, spurred considerable iteration between the requirements of the construction team and of the commissioning team within RPDP. It should be noted also that two main designs were developed for the four new prisons. In broad terms, the design for Northland and Spring Hill is comparable, as is that for Auckland Women s and Otago (although being a women s prison, some of the features of Auckland Women s are specific to it). Resource Constraints 3.13 By New Zealand standards, the RPDP projects are large construction projects. The sheer size of the RPDP project in relation to the New Zealand market has placed considerable demand on construction, design, and quantity surveyor capability and capacity. The lack of design capacity and costing capability and capacity had a direct impact on the timeframe for the development of early cost information in relation to Spring Hill and Otago. NIMBY 3.14 The not in my back yard phenomenon applies with some force in the context of prison builds. NIMBY has several implications. In the case of Northland, Spring Hill and Otago it has been a contributing factor to the remote location of the facilities. Remoteness, as will be discussed later, has had a significant influence on cost. NIMBY also means that consent and other approval processes (often involving legal challenges) can be long-term and result in costs that were not originally planned. This has also been a factor contributing to the cost increases associated with Spring Hill and Otago From a time perspective, uncertainty created by the NIMBY effect has also affected the speed with which projects have proceeded through the consenting and other approval processes. In turn, this has impacted upon the planning for, and management of, the projects. For example, the Otago project had an unexpectedly smooth run through the Environment Court which meant that construction was able to start eight months ahead of plan. While this outcome had several advantages, it also placed extra demands on the design team at a time when the design team was already stretched with other work. As discussed later, the time taken to complete detailed design work has important implications for the estimation of project costs and consequential implications for the actual cost of the project. Economic Conditions 3.16 A further factor that has had significant bearing on the projects is the state of the economy. At the time the four prisons were being built, including, in particular, Spring Hill and Otago, the construction market was heated in the sense of demand outstripping supply. Prices (rates and margins) were increasing accordingly. Escalation of construction prices is factored into the estimated costs for the project but, with the advantage of hindsight, it is clear that the extent of escalation was under-estimated Economic conditions, and the heated nature of the construction market in particular, have also influenced the procurement method used to construct the four prisons. Spring Hill and Otago have been constructed under what is referred to as a Background 11

18 Collaborative Working Arrangement (CWA) agreement. The CWA approach is discussed further in section 5.. Background 12

19 4 Key Drivers and Causes of Cost Escalation Key Findings: Since Budget 05, further appropriations totalling $ million have been approved in order to fund the completion of the Spring Hill and Otago projects. This reflected increased construction costs totalling $ million, together with the off-setting impact of lower that expected expenditure in other areas (e.g. earthworks and reclassification of some commissioning costs) totalling $ million. The drivers and causes of the construction cost increases include market conditions, the impact of consent and regulatory requirements and the impact of finalising design. Market influences accounted for about 57% of the increase and reflected: o the heated nature of the construction market which affected labour rates and margins; and o substantial increases in key commodities including, in particular, steel which increased in price by over 26% between June 2003 and June 2005; and o increased travel and accommodation allowances as a result of having to attract labour from areas located well away from the construction sites. The outcome of the consents process and regulatory changes contributed to higher costs although the overall impact of these was relatively small (about 6% of the overall cost increase). Design changes following the completion of Northland and additional work on a range of infrastructure services (drainage, water, roads etc) contributed to the balance of the cost increase (i.e. approximately 37%). Lessons Learned: The estimates included as part of Budget 05 (and earlier in Budget 04) set expectations regarding the costs to construct Spring Hill and Otago. The estimates at that time were, however, based on relatively high-level assessments of possible construction costs given that detailed designs had not yet been completed. Furthermore, the cost indices relied upon to escalate costs between Budget 04 and Budget 05, while the best available, had several limitations. These factors meant that the cost estimates had significant risks and uncertainties attaching to them. It is important that the risks and uncertainties be emphasised and clearly communicated so as to avoid creating unrealistic expectations. The remote location of the sites (especially Otago) put substantial pressure on local labour markets. Spring Hill and Otago are major projects. For projects of this size, there is a need to consider fully the impact on local markets and the upward pressure on resource costs that is likely to occur. Projects of this size also put considerable pressure on local infrastructure which gives rise to the need for upgrades. These impacts need to be fully assessed and anticipated as part of initial cost estimates. The form of procurement has implications for the Crown in terms of information regarding fiscal risks. Traditional fixed price forms of contract mean that the Crown is provided with a quoted price at the start of a project (although the eventual price paid depends on the extent, if any, of contract variations). In contrast, under the CWA methodology, the expected cost is not known until the Target Outturn Cost (TOC) is completed. The actual costs are not known until the project is completed, and any pain-share or gain share payments have been settled. Until the TOC is in place, there is risk of being exposed to cost increases relative to preliminary estimates. This highlights the need for timely completion of the TOC, particularly in a public sector setting where the Crown places a high premium on cost certainty. Key Drivers and Causes of Cost Escalation 13

20 Overview of Cost Increases 4.1 Initial estimates for the cost of constructing Spring Hill and Otago were made as early as May However, substantive estimates were not made until late These estimates were included as part of the reporting to Ministers in the context of Budget 04. At that time, the costs associated with Spring Hill and Otago were expected to be approximately $248 million and $161 million respectively. The estimates indicated as part of Budget 04 were informed by the tenders submitted for the Northland project. 4.2 The estimates were updated as part of Budget 05 and took account of escalation since the previous estimates made in The costs for Spring Hill and Otago reported as part of Budget 05 were revised upwards to $283 million and $175 million respectively. 4.3 Since Budget 05, costs have risen further. In December 2005, approval was sought for additional appropriations totalling $ million. This reflected the net effect of increased construction costs totalling $ million, together with the off-setting impact of lower than expected expenditure in other areas (e.g. earthworks and reclassification of some commissioning costs) which totalled $ million (giving a net increase of $ million). 4.4 The table below summarises the reasons provided to Ministers, as part of the December 2005 reporting package, behind the significant construction cost increases between Budget 05 and the numbers reported in December Spring Hill Cost Contributors ($ million) Market Influences Consents and Regulatory Changes Escalation Labour rates and location Margins and overhead On-site construction cost increases Consents Holidays Act, Building Act Design Finalisation Changes arising from Northland Site works requirements Drainage $11.3 Ducting $4.6 Water reticulation $2.9 Gas reticulation $0.6 Roading $6.0 Finishing works & landscaping $10.1 Total Increase Key Drivers and Causes of Cost Escalation 14

21 Otago Cost Contributors ($ million) Market Influences Consents and Regulatory Changes Escalation Labour rates and location Margins and overhead On-site construction cost increases Consents Holidays Act, Building Act Design Finalisation Changes arising from Northland Total Increase General Comments Regarding Cost Increases 4.5 Several general comments regarding the cost increases can be made. Later in this section, we comment further on each of the cost contributors. Supporting Information 4.6 As part of this review, we have sought to assess the data and calculations underpinning the cost analysis included in the tables above (and which was reported to cabinet in December 2005). The assessment has been only partially completed. We have obtained, and been provided with, information that assists in explaining some aspects of the cost contributors outlined in the tables. This includes some high-level analysis developed in late November 2005 as retrospective explanation of cost movements. However, the information provided does not amount to an integrated set of working papers that assist in verifying the explanation of cost increases provided to Ministers. For example, while we have information relating to general construction cost inflation and inflation associated with some specific commodities (e.g. steel) used in the construction of the facilities, the Department has not been able to provide detailed working papers which show how the inflation data has been used to calculate the amount of escalation. Similarly, we have not seen detailed calculations underpinning the estimates of additional costs attributed to consents and regulatory changes or design finalisation. Accordingly, we have not been able to independently verify the information provided to Ministers. The analysis of the factors contributing to cost increases needs, therefore, to be treated with a reasonable degree of caution and should be regarded as indicative, rather than definitive. 4.7 Notwithstanding the limited information to enable an assessment of the cost increases, this should not be interpreted as saying that the total estimated costs reported in December 2005 are inaccurate. As will be discussed more fully in section 6, the Key Drivers and Causes of Cost Escalation 15

22 Department has in place processes for reviewing the cost estimates prepared for each of the projects. This has involved use of external professional/expert advisers. Uncertainties With the Earlier Cost Estimates 4.8 The information presented to Cabinet in December 2005 was intended to provide a link back to earlier cost estimates provided in the context of Budget 05 (and before that, Budget 04). It is important to appreciate that the earlier estimates were indicative only. 4.9 The Budget 05 (and Budget 04) estimates were based on high-level assessments of construction cost. At the time of the earlier estimates, detailed designs had yet to be completed. Accordingly, the earlier estimates had high degrees of risk and uncertainty attaching to them. The initial estimates were also based on a traditional quantity surveyor approach to cost estimation which involves assessing the scope of work (e.g. m 2 of floor space) and attaching a generic rate ($/m 2 ). In contrast, the latest cost estimates reflect the outcome of applying the CWA methodology. This involves a detailed line by line assessment of all inputs and processes involved in constructing the facilities. This is a fundamentally different approach to estimating cost and, accordingly, there is an element of attempting to compare apples with oranges when comparing latest with earlier estimates. Market Influences 4.10 Under the heading of market influences, the Department has apportioned the cost increases under four headings; escalation, labour rates and location, margins and overhead and on-site construction costs. Escalation 4.11 The construction market has been heated over the time period during which Spring Hill and Otago have been being constructed. Estimated construction costs have been escalated with reference to the Capital Goods Price Index for Non-Residential Building (CGPI-NRB). Forecasts of the CGPI-NRB are prepared by the New Zealand Institute of Economic Research (NZIER) and, as far as we are aware, the NZIER forecasts are the only ones that are widely available and published quarterly. The CGPI-NRB is produced by Statistics New Zealand (SNZ) and is based on a basket of model buildings determined by SNZ. The prices associated with each model building are updated by SNZ from the New Zealand Building Economist (NZBE) publication There are several limitations and caveats around the CGPI-NRB index that need to be taken into account. There is considerable uncertainty regarding the degree to which margins and discounts are incorporated into the NZBE prices. SNZ seeks to adjust its index numbers to strip out the effect of quality changes. For example, if the quality of a new building is enhanced and costs are increased accordingly, the SNZ approach will attempt to strip out the quality dimension and lower the prices accordingly. The models being used by SNZ were last revised in 2000 and are viewed as being out-of-date. Key Drivers and Causes of Cost Escalation 16

23 The types of building included in the category of NRB are wide ranging and not necessarily comparable with penal institutions. Differences in cost escalation between building types is averaged out. The data is not published on a regional basis. The data is heavily influenced by trends in the Auckland market which accounts for 35-40% of all building activity NZIER produces forecasts of the CGPI-NRB index using econometric techniques. The main drivers in their model are the level of non-residential building activity, wages, employment and producers input prices. Based on forecasts issued in December 2004, the rate of growth in the CGPI-NRB was forecast to be: 6.1% for the year ending September 2005; 3.2% for the year ending September 2006; and 2.5% for the year ending September The forecasts issued in December 04 have, however, generally overstated the actual increase in CGPI-NRB as shown in the table below. Date Forecast Quarterly Change (issued December 2004) Actual Quarterly Change December % 1.8% March % 0.2% June % 1.2% September % 1.2% December % 0.4% March % 1.7% 4.15 Notwithstanding that the CGPI-NRB forecasts over-estimated the actual change in the index at the aggregate level, there is some evidence to suggest that the increase in construction costs for the Spring Hill and Otago projects were well above the levels of increase recorded by the CGPI-NRB index. Over the period June 2003 to June 2005, the CGPI-NRB increased by 13.8%. However, independent advice 1 received by the Department in relation to Spring Hill indicated that over the period June 2003 to June 2005: rates per tonne of steel increased by 26.4%; PVC products increased by up to 30%; and 1 Peter Waterhouse - Report to RPDP on Construction Costs and Alternative Procurement Strategies 31 October 2005 Key Drivers and Causes of Cost Escalation 17

24 the cost of construction in the hospitals and health categories increased by between 16.9% and 18.5% However, the same advice noted that concrete supply and concrete products generally increased by only 4% - 8% and timber framing by 4% - 5% In addition to increases in commodity prices, there were also significant increases in labour costs (which are another component of the CGPI-NRB). Labour Rates and Location 4.18 Advice received from Peter Waterhouse (an independent construction cost consultant) provided evidence of increased labour rates: rates for carpenters in Auckland region increased by up to 35%; rates for concrete workers increased by up to 29%; and rates for labourers increased by up to 25% The remoteness of the Spring Hill and Otago sites also contributed to increased direct costs. In the case of Otago, up to a third of the workforce at peak levels has had to be imported from outside of the coastal Otago region. This increased the level of travel and accommodation allowances. Additional travel costs added the equivalent of approximately one hour per person per day to labour costs on the Spring Hill project. We understand that the normal level of construction activity in the coastal Otago area is around $90 million per annum. Clearly, therefore, the Otago project represents a substantial increase over and above this figure. It is not too surprising, therefore, that the Otago project has put considerable upward pressure on costs There is scope for some overlap and, hence, double counting across the various factors. In particular, the escalation factor measures increases in the costs of completing buildings. Implicit within the escalation is increases in labour rates, margins, overheads, materials costs and so on. In theory, therefore, the increases attributed to labour rates, margins and overheads (and possibly on-site construction costs) in the context of Spring Hill should be over and above the increases captured by the escalation. We are not convinced that this is strictly the case, but have no way of verifying it because of the lack of detailed workings. Margins and Overhead 4.21 In addition to upward pressure on direct costs, there have also been increases in margins (which leads to a compounding effect when applied to increased direct costs). CMS reported to the Department 2 that: 2 Assessment of Profit and Overheads margins for CWA Members dated 4 November 2005 Key Drivers and Causes of Cost Escalation 18

25 sub-contractors margins have trended upwards by between 3% and 10% in the years ; and sub-contractors margins in the concrete, carpentry, roofing, painting, tiling and similar trends have increased by between 2% and 7% over the same period It was also noted, however, that main contractors margins had remained relatively constant or fallen during this period. On-Site Construction Cost Increases 4.23 This element of cost increase comprises two parts: on-site management costs; and the outcome of the first-principles approach to building up the TOC Increased on-site management costs have stemmed from requirements to maintain standards in effectiveness and quality. The projects have involved large numbers of contractors and this has increased the amount of on-site management required accordingly. In the case of Otago, more so than Spring Hill, the net for contractors has had to be cast more widely than was originally anticipated. These costs have been offset in some measure through efficiency gains including economies gained through procurement on a whole-of-site, rather than individual contractor, basis (e.g. sitewide cranes and scaffolding) The second, and more general aspect to cost increases reflects the approach to determining the TOC and the fact that it is fundamentally different to that used in a traditional NZS 3910 approach to procurement. The determination of the TOC is a bottom-up, line by line, build up of all the costs involved in the project. In our view, there is an inherent risk in this form of costing toward overstatement of costs compared to a more traditional fixed price approach which focuses on tendering a price that the supplier believes will be price competitive (notwithstanding any loading for a risk premium). In a sense, therefore, the increased cost attributed to on-site construction is a reflection of the inherent difference between CWA and traditional fixed price contracts. While the magnitude of this might not be known ahead of the TOC s development, the risk of increased cost due to the different approach should be acknowledged. In this context, we note that the Treasury received advice in March 2004 from Opus which, among other matters, noted that CWA involves a new (compared to traditional fixed price contracts) risk assessment and cost estimate framework and that this needed to be allowed for in reporting and funding approvals The risks associated with the bottom-up approach to costing are managed, however, through the process of exposing the cost estimates to review by all CWA members, including the Department and its advisers. In our view, while such processes can go a long way to mitigating the inherent risks associated with bottom-up approaches to costing, there is there is the potential for a residual element of cost bias compared to the situation of a competitive fixed price contract. Consents and Regulatory Changes 4.27 Much of the cost associated with consent requirements involved additional investment in water and wastewater services. In general, the existing infrastructure of the relevant local authorities did not have the capacity to deal with the additional demands created by the new prison facilities. The level of investment required reflected the Key Drivers and Causes of Cost Escalation 19

26 outcome of negotiations with relevant local authorities. There were also some changes in Ministry of Health standards relating to water treatment and waste-water discharge Other regulatory changes related to the Holidays Act. These changes resulted in additional labour costs. We note that the additional costs stemming from the Holidays Act should be reflected in the CGPI-NRB and so there is some risk that this element of the overall cost increase is being captured twice. Design Finalisation 4.29 According to the advice presented to Cabinet in December 2005, completion of detailed design works at Spring Hill (which occurred subsequent to the reporting in April 2005) identified a number of additional items, the total cost of which amounted to $ million or roughly 10% of the total project cost. These included: site drainage ($11.3 million); underground ducting and future proofing ($4.6 million); water reticulation and management ($2.9 million); gas reticulation ($0.6 million); access roads and car parking ($6 million); and finishing works and landscaping ($10.1 million) This is a significant amount. Although the reason behind these changes is referred to as being a function of completing detailed design work, we understand that some of the changes are also a function of the outcome of the consents process. In particular, the consent process lead to some significant design changes, including moving building platforms. This had flow-on consequences for infrastructural services such as drainage and utilities reticulation. A general difficulty facing the Department is that when such changes are being discussed/negotiated as part of the consents process, the cost impact is not necessarily known with any degree of precision As far as we are aware, Ministers were not advised of these additional costs until the December 2005 report to Cabinet. In our view, the prospect of additional costs in these areas would have been known at the time of Budget 05 even though the scale of cost would not have been known at that stage. Given the scale of the additional cost, more forewarning of Ministers could have occurred. Summary 4.32 Many factors have contributed to the increase in costs over and above those reported as part of Budget 05. The underlying drivers of these can be summarised as follows: the heated nature of the construction market which resulted in higher input costs (materials and labour); international trends for the price of steel; the remote location of the sites which has given rise to additional allowances; Key Drivers and Causes of Cost Escalation 20

27 the impact of the projects on local infrastructure; the outcome of consent hearings and negotiations; and the impact of various regulatory changes. Lessons Learned 4.33 The Spring Hill and Otago projects have experienced substantial cost increases. Approximately 57% of the increase in costs since those reported in Budget 05 stems from the heated nature of the construction market; something that the Department had no control over Notwithstanding this, there are several steps that can be taken to minimise large fiscal surprises. The first of these steps is to be clear as to the risk and uncertainty attaching to early cost estimates. The estimates included as part of Budget 05 (and earlier in Budget 04) set expectations regarding the costs to construct Spring Hill and Otago. The estimates at that time were, however, based on relatively high-level assessments of possible construction costs, given that detailed designs had not yet been completed. Furthermore, the cost indices relied upon to escalate costs between Budget 04 and 05, while the best available, had several limitations. These factors meant that the cost estimates had significant risks and uncertainties attaching to them. There is a need to ensure that the risks and uncertainties involved are clearly identified and communicated, especially to Ministers who might otherwise think that the estimates are relatively certain The remote location of the sites (especially Otago) put substantial pressure on local labour markets. This has added to cost in terms of having to pay more to attract labour and the cost of upgrading local infrastructure. In developing initial estimates of cost, there is a need to take into account, as far as possible, local impacts and conditions and assess the implications for high-level estimates of cost. Spring Hill and Otago are major projects. For projects of this size, there is a need to consider fully the impact on local markets and the upward pressure on resource costs that is likely to occur Projects of this size also put considerable pressure on local infrastructure which gives rise to the need for upgrades. These impacts need to be fully assessed and anticipated as part of initial cost estimates The form of procurement has implications for the Crown in terms of information regarding fiscal risks. Traditional fixed price forms of contract mean that the Crown is provided with a quoted price at the start of a project (although the eventual price paid depends on the extent, if any, of contract variations). In contrast, under the CWA methodology, the expected cost is not known until the Target Outturn Cost (TOC) is completed. The actual costs are not known until the project is completed, and any painshare or gain share payments have been settled. Until the TOC is in place, there is risk of being exposed to cost increases. This highlights the need for timely completion of the TOC, particularly in a public sector setting where the Crown places a high premium on cost certainty Overall, the magnitude of the increases signals that large projects of this type involve significant levels of fiscal risk. In turn, this emphasises the need for robust procurement strategies and tight project governance, management and reporting. These requirements are assessed further in the following two sections of this report. Key Drivers and Causes of Cost Escalation 21

28 5 Methodology and Processes: Design, Costing, Procurement and Scheduling Key Findings: A key feature of the Spring Hill and Otago projects is that they have involved the use of the Collaborative Working Approach (CWA) methodology. This methodology is relatively new to New Zealand, although it is used by Transit for some road projects. A hybrid form of CWA was used for the Northland project and it was key to overcoming some issues that were threatening to disrupt progress with that project. The collaborative approach implied by the CWA methodology, the advantages offered by CWA and the positive experience with CWA in the context of Northland led the Department to use CWA for the other regional prisons, including Spring Hill and Otago. The way in which the Department has applied the CWA methodology has enabled it to benefit from many of the advantages inherent in the CWA approach. In particular: there has been close integration of design, construction and commissioning teams which assists in achieving an optimal balance between design, construction and operational requirements; several value management reviews have been undertaken to further optimise designs and take out unnecessary costs; at a site level, resources have been mobilised to deal with day-to-day issues, thereby increasing the efficiency of on-site resource utilisation; the collaborative approach to dealing with issues has helped to maintain momentum with the projects, thereby enabling the timing of projects to be completed on, or near to, expectations; high levels of transparency in relation to costs have been achieved at the project level consistent with the open-book philosophy that underpins CWA (with some opportunity for more transparency over margins see below); and costs have been exposed to extensive third party scrutiny and review. Overlaying all of these benefits, the methodology chosen by the Department means that it is on track to deliver Spring Hill and Otago in time to meet expected prison population requirements. There were sufficient indications to suggest that, had the Department elected to follow a traditional procurement method, timeframes for completing the projects would probably not have been met. Notwithstanding these benefits, there are aspects of the way in which methodology and supporting processes have been applied that can be improved. In particular: analysis of the reasons for preferring CWA ahead of other procurement options was not sufficiently documented; the timing for completing the TOC has not conformed with good practice. However, key reasons behind this were delays in completing designs caused by changes in the scope of facilities, lack of design resource and shortage of experienced costing resources. To avoid delays to the projects (and the problems this would cause in terms of accommodating the increasing prison population), the Department decided to proceed with the projects; and while there is good transparency over costs at the project level, the Department does not have visibility over margins. As a result, it is dependent on the advice of third parties. Methodology and Processes: Design, Costing, Procurement and Scheduling 22

29 Lessons Learned: Notwithstanding the advantages offered by the CWA methodology, there are also some risks involved and the methodology requires considerable management resource. CWA will not be suited to all projects. There is a need to identify the conditions under which CWA is likely to be preferred ahead of more traditional fixed price contracts. Factors to take into account include the size and complexity of project, the level of uncertainty (e.g. technological change and design requirements), and the timeframes for project completion. Projects should be evaluated against these, and other, factors before the choice of procurement method is made. The decision and underlying reasons should then be documented. The CWA methodology requires careful and experienced management to protect the Crown s interests. A blend of competencies and experience (commercial, construction and public sector management) are required for effective management. For future projects of this size and complexity, sponsoring agencies need to be confident that they have the appropriate mix of competencies and these are represented within the CWA Principal s Group. The way in which the Department has implemented CWA means that there has not been the usual market testing of prices through obtaining competitive quotes. The CWA methodology can be modified, however, by seeking indicative target costs as part of the CWA member selection process. This can go some way toward providing more information on likely costs. However, this modification to the selection process requires extra time and resources to complete the tender evaluation. Given the extra costs and time involved, it may not be appropriate in all circumstances to modify the selection process in this way, but at the least, consideration should be given to this option. The development of the TOC is a central part of the CWA methodology. It needs to be finalised sooner than has been the case with respect to Spring Hill and Otago. Specifically, the TOC should ideally be completed at, or about, the time construction commences. In order to achieve this, there needs to be: o as much flexibility as possible over the lead time for constructing a prison; o appropriate levels of capacity to undertake detailed design work once CWA members have been agreed; o agreed standards against which to base designs; and o continual pressure on the commercial CWA members from the Department to achieve timely completion of the TOC. Until the draft TOC is well developed, estimates of construction cost should be seen as indicative only. Pre-TOC estimates of cost involve significant levels of risk and uncertainty and this needs to be made clear. Once TOC estimates begin to emerge, there should be transparent reporting of these to provide the Department and, as appropriate, Ministers with opportunities to explore options for saving cost if budgets are under pressure. Methodology and Processes: Design, Costing, Procurement and Scheduling 23

30 Introduction 5.1 In this section, the methodology and processes employed by the Department to design, cost, procure and schedule the projects is reviewed. Relatively more emphasis is given to procurement. This is because the Department chose to use the CWA methodology for the procurement of Spring Hill and Otago. CWA is not a common form of procurement in New Zealand, although it is used by Transit on some road projects. Reflecting the relative newness of the CWA methodology in the New Zealand context, the Department s experiences with it provide some valuable insights as to its advantages and disadvantages compared to more traditional forms of procurement. Design 5.2 The origins of the design for the Spring Hill and Otago facilities have linkages with designs in Australia and Canada. As noted in section three, the design for Spring Hill was broadly aligned with that for Northland and the design for Otago was broadly based around that for Auckland Women s. That said, however, there are significant differences. For example, Otago involves differences in heating, ventilation and insulation reflecting the cooler climate. Otago also has other design differences compared to Auckland Women s which is a women s prison. Similarly, the different scale of Spring Hill and Northland led to some design differences. 5.3 We have not reviewed in any detail the approach to the development of the designs used for Spring Hill and Otago given that the origins of the designs pre-date both of these projects. Notwithstanding this, several points can be noted. The CWA methodology has the advantage of promoting close interaction between the construction contractors, the design teams and the client in the development of detailed designs. In contrast, under traditional forms of procurement, it is not unusual for design contracts to be let, followed by construction contracts once designs are largely completed. The advantage of the more integrated approach under CWA is that there is greater scope for assessing the implications of design on construction and on operations and, hence, greater scope to adjust designs to achieve the optimal balance between design, construction and operational considerations. The Northland project was the first of the prisons to use the new style of facility. Several lessons were learned from the construction of Northland that assisted in refining the design to achieve better outcomes from an operational viewpoint. Reflecting the relative newness of the design, the Department developed standards through the design process for Northland. It was only following the completion of Northland that standards were finalised and documented. The Department took advantage of these lessons by incorporating them into the Spring Hill and Otago projects. The relative newness of the prison design also placed added pressure on design resources. These resources were, at times, stretched. In the case of Otago, pressure was incurred through the reallocation of design resources from Otago to Auckland Women s (approx June December 2004) to address the capacity increase from 150 beds to 286 beds. Although outside the scope of this review, we note that there were issues around design in the case of the Northland project. As discussed later in this section, the Methodology and Processes: Design, Costing, Procurement and Scheduling 24

31 Costing CWA methodology provided a mechanism for addressing these issues and for ensuring those difficulties were not repeated for Spring Hill and Otago. 5.4 The approach to costing has several phases: various initial cost estimates, based on high level $/bed comparisons were made in 2000 for Spring Hill and Otago. These were updated at various points over the period 2001 to 2003; more substantive estimates were made as part of Budget 04. These were subsequently updated as part of Budget 05 to take into account construction price increases over the intervening period; and the latest cost estimates were reported to Cabinet in December These estimates incorporate the outcome of the detailed work that has been undertaken as part of the development of the TOC for both projects. 5.5 We focus on the second and third of these phases. The initial phase of cost estimates in should be seen as preliminary only. They did not have any material bearing on whether or not to proceed with the Spring Hill and Otago projects (or to what specification) as the key funding decisions were taken as part of Budget 04 and Budget 05. Budget 04 Estimates 5.6 The majority of the funding for Otago was approved as part of Budget 04 (and significant funding decisions were also taken with respect to Spring Hill). Accordingly, the estimated completion costs provided as part of Budget 04 took on considerable significance. At that time, the costs for Spring Hill and Otago were signalled to be $248 million and $161 million respectively. 5.7 Because of the importance attaching to the estimates provided at that time, it is important to understand the context within which the estimates were provided and the basis upon which they had been developed. The outcome of the Northland tender was taken into account in developing the estimates of cost for Spring Hill and Otago. The tender was analysed and the rates were applied to an area schedule for Spring Hill and Otago. The significance of this is that the prices tendered for Northland were approximately $12 million above the estimates for Northland pre-tender. In the case of Otago, estimates developed in connection with Auckland Women s were also used to inform the rates for Otago. Auckland Women s was, at that time, at the developed design stage with several detailed estimates having been completed. Northland was tendered as a traditional NZS 3910 form of contract (only later did the procurement method for Northland modify into a hybrid form of CWA). By implication, while the tender prices for Northland were visible to the Department, the actual costs associated with the project were not transparent (as is always the case with NZS 3910 contracts). The estimates were made by the Department with input from its independent quantity surveyors Rider Hunt. At the time of Budget 04, the RFP for the Spring Methodology and Processes: Design, Costing, Procurement and Scheduling 25

32 Hill and Otago projects had yet to be issued, so the estimates were made well in advance of the CWAs being formed. The estimates made as part of Budget 04 were based on concept designs. Detailed design work had yet to occur. By implication, the Budget 04 estimates could only be indicative at best. The approach to estimating costs at that time rested on applying $ rates per M 2 of gross floor area (taking into account the Northland tender prices). However, benchmarking the rates applied to Spring Hill and Otago with other projects, including Northland, was problematic because of the greenfield nature of the Spring Hill and Otago sites. With the advantage of hindsight, it is also apparent that the remoteness of the Spring Hill and Otago sites has played a significant part in explaining the differences between the latest estimates of cost and the estimates communicated in Budget In short, the basis upon which the Budget 04 estimates rested were, at best, indicative only. Reflecting the basis upon which they had been developed, the estimates provided as part of Budget 04 had quite high levels of risk and uncertainty attaching to them. However, the indicative status of the cost estimates could have been made clearer in the business cases submitted to Cabinet as part of Budget 04. Because the cost estimates were presented to three decimal places consistent with Budget process requirements, there is a risk that Ministers would have interpreted the estimates as conveying a high degree of certainty. Any such perception needed to be corrected. 5.9 The business cases submitted as part of Budget 04 noted that escalation was a significant risk for the Department (and, by implication, the Crown). However, the magnitude of the risk was not quantified. Ministers could not have gauged from the business case whether the risk amounted to a small amount or, as it turned out, tens of millions of dollars. In our view, there was a need to indicate more clearly the status of the cost estimates including, in particular, the level of certainty attaching to the estimates We note that contingency funding was also provided for, but the interpretation of what the contingency represented was not made clear in the business case presented to Ministers. Budget 05 Estimates 5.11 The next major reporting milestone to Cabinet was in April 2005 as part of Budget 05. At that time, the costs associated with Spring Hill and Otago had been revised upwards to $283 million and $175 million respectively. In the case of Spring Hill, the explanation provided to Cabinet for the increase of approximately $34.5 million since Budget 04 was not particularly clear but appeared to be a function of adjustment for further escalation. With respect to Otago, the total estimated cost increased by approximately $13.8 million compared to Budget 04. Almost all of the increase was attributed to escalation (there was a further small amount relating to commissioning) At the time of Budget 05, work on Northland and Auckland Women s was underway. However, both projects were of limited usefulness in terms of informing cost estimates for Spring Hill and Otago. Northland has a hybrid form of CWA. As such, the project was being completed under fixed price conditions and the Department did not have visibility over the actual costs being incurred by the project. Methodology and Processes: Design, Costing, Procurement and Scheduling 26

33 Auckland Women s was a full CWA approach and progress reports indicated that costs were tracking according to plan and, accordingly, did not provide any earlywarning signals of impending cost issues that were to affect the Spring Hill and Otago projects. The Auckland Women s would not have provided detailed insights regarding Spring Hill in any event given the different designs between the two facilities (and to some extent the same point applied with respect to Otago which is a men s prison). December 2005 Estimates 5.13 During the period from April 2005 to October 2005, work on the TOC for Spring Hill and Otago proceeded (at the same time that construction was also proceeding) The TOC is, in effect, the agreed budget for the project. It is intended to include all project costs except those specifically defined and agreed as being excluded and, hence, the responsibility of others. The TOC is, in theory, a pre-construction estimate of the efficient level of cost to complete the project. It has the following components: Direct costs. These comprise labour, materials and plant. Labour rates are burdened to reflect personnel-related costs such as ACC, sick leave, annual leave and, if appropriate, allowance for travel time, protective clothing and so on. In the context of the RPDP, the process of calculating burdened labour rates has been undertaken by CMS and reviewed by Sherwin, Chan & Walshe. There is also a burdened rate for plant that includes depreciation, repairs and maintenance and consumables (e.g. fuel). Normalised Profit Margins. Each contractor (and sub-contractor) that is part of the CWA can expect to earn their normalised profit margins in addition to recovering their actual costs and overheads contribution. In the case of the RPDP projects, normalised profit margins have typically been established with reference to the previous three years financial accounts of the contractor. Adjustments have been made to smooth out unusual/abnormal profit results (either good or bad), the current state of the construction market and levels of risk involved. This work has also been performed by CMS and reviewed by Sherwin, Chan & Walshe. Once margins are determined, they are ring-fenced ; that is, the dollar value assigned to margins does not change unless there is a substantial change to the scope of work involved. On-site overheads (also referred to as Preliminary and General or P&G). This includes, for example, the costs associated with on-site project managers and management team, project offices, site stores, administration staff and so on. Off-site overheads. This recognises that an element of the off-site corporate (e.g. head office) overhead is needed in order to support the project. As with the margins calculation, a normalisation process is involved with off-site overheads and once the level of off-site overhead is determined, it is ring-fenced It is important to emphasise that the TOC focuses on cost. In contrast, under a traditional NZS 3910 form of contract, the tender quoted is a price; that is, it is the amount the client pays for the project as distinct from what it actually costs to complete the project (subject to any agreed variations). Because the TOC focuses on cost as distinct from price, it implies a fundamentally different basis for the allocation of financial risk. Under a Methodology and Processes: Design, Costing, Procurement and Scheduling 27

34 strict fixed price contract, financial risk is substantially borne by the provider (although provisions relating to contract variations can result in sharing of financial risk). In contrast, under a CWA as adopted by the Department, it is not until the project has been completed and the final costs accounted for, that the client has certainty over the total amount payable for the project Although not accepted by the Department at the time of preparing the report that went to Cabinet in December 2005, the TOCs were at an advanced stage. The draft TOCs indicated that costs had increased to $381 million and $218 million for Spring Hill and Otago respectively The December 05 report to Cabinet included a description of the factors leading to the cost increases compared to the Budget 05 estimates. In brief, the contributing factors were grouped under the headings of market influences, regulatory and consent changes and omissions from earlier estimates (items seen by the Department as not previously included rather than items inadvertently overlooked). While the increases and underlying causes are site-specific, in the case of escalation, there is considerable overlap between the two sites and this issue is considered first From the Crown s perspective, it has a keen interest in achieving project completion on time, within budget and to specification. In normal fixed price contracts, price is established up front as part of the tender process (although actual price outturn is often the subject of contract variations). The way in which CWA has been used by the Department means that there is no price information arising from the selection process. Development of the TOC (and related QRA and gain/pain share arrangements) is, therefore, of critical importance, particularly from a fiscal management perspective Building the TOC is not a straightforward process. In very general terms, the processes around its development are illustrated below. er Pre-tend phase Concept Scheme Design Detailed Design Negotiating Framework Agreement Phase Risk Identification Quantified Risk Assessment Direct Costs Margins Overheads Independent QS review Labour & Plant Burdening Independent Normalisation Audit Normalisation Draft Total Outturn Cost Value Management CWA Agreement Phase Agree TOC, QRA and Gain / Pain Share Agree CWA Agreement Methodology and Processes: Design, Costing, Procurement and Scheduling 28

35 5.20 Several points should be noted. Detailed designs need to be in place before any serious attempt can be made at determining the TOC. The time taken to develop the TOC once detailed designs are completed will depend on the size and complexity of the project. However, as a guide to good practice, a time frame of 2-4 months should be expected. The process of determining the TOC is heavily dependent on transparency of financial and other data and on independent scrutiny of the numbers, assumptions and calculations. In general, CWA involves an open book approach to the determination of costs. Transparency and independent scrutiny are the mechanisms through which assurance is gained that costs are efficient (on the assumption that there is no market testing of the cost estimates through a tender). estimates of the TOC may exceed this expectation in which case a process of The process is very iterative. The client will (should) have a budget in mind. Initial value engineering is used to strip out unnecessary expenditure and explore more cost effective ways of achieving the client s requirements and budget expectations. A lot hinges on getting the TOC in place as soon as possible. Until the TOC is agreed, the commercial CWA partners are remunerated according to the actual costs they incur. Until the process of independent scrutiny of direct costs, audit of margin, overhead and burdening calculations and value management is completed, the client does not have final assurance that the estimated costs represent an efficient level of costs. Moreover, until the TOC is in place, the gain and pain share arrangements cannot be finalised. The gain/pain share provide an important and further spur to efficiency and delivery of the project within, or in excess of, client expectations In relation to this last point, a key point to understand with alliancing is that while it offers benefits over traditional contracting methodology, it raises new and different risks that have to be managed. In particular, there is a balance to be struck between having faith in the collaborative nature of alliancing and the need to protect the client s financial interests. CWA does not involve a fixed price from the client s perspective. TOC Development Timing 5.22 The TOC plays a pivotal role in CWA agreements. At the time that the Spring Hill and Otago tenders were awarded (to Mainzeal and Hawkins respectively), there was an expectation that the CWA Agreement and TOC would be finalised within a matter of months. Negotiation Framework Agreements 3 (NFAs) were entered into with the CWA partners at both Spring Hill and Otago. In both cases, the NFA was agreed through to 15 January 2005 during which the parties would work together to develop an accurate TOC. It is worth noting that, in the context of the Auckland Women s project, it was expected that approximately nine weeks would be required to finalise the CWA (including TOC). 4 3 NFAs are interim arrangement pending formalisation of the CWA Agreement. They do not represent the award of any contract, but signal the intention to enter into a CWA Agreement. NFAs set out various matters governing the negotiations leading toward a CWA Agreement. 4 RPDP Steering Group meeting of 30 March 2004 Methodology and Processes: Design, Costing, Procurement and Scheduling 29

36 5.23 In the event, the development of the TOC has taken considerably longer than the initial expectation. In respect of Spring Hill, the Steering Group accepted the TOC as presented on 21 June 2006 and the CWA Agreement is being finalised for execution. In the case of Otago, the TOC was approved by the CWA commercial members and the Department on 25 May The CWA Agreement is currently with the CWA members for execution The NFAs for Spring Hill and Otago have been rolled over multiple times (at least 7 times in the case of Spring Hill since October 2004). On several occasions, the roll-over of the NFA took place after the expiry of the preceding agreement. It is not clear what the legal position of the parties was on such occasions. At several points during 2005, revised timetables for completing the TOC were advised to the Steering Group. For example, in May 2005, it was expected that 30% of the Spring Hill project would be scoped into a TOC by mid-july 2005 with 80% scoped by mid-august. By implication, there was clear expectation that elements of the Spring Hill TOC would be progressively known through the middle of calendar-2005, but we note that the numbers around the TOC were not being communicated to the Steering Group during this time In the case of Spring Hill, the Department considered in mid-may 2005 whether to delay construction work until the TOC was in place or to proceed on a fast-track basis. The latter option was taken on the understanding that the first TOC would be available in mid-july In the event, this deadline was not met. It was not until around late- September that the TOC for Spring Hill was beginning to be disclosed and slightly earlier in the case of Otago The long period over which the TOC was developed created financial risk for the Department. During the period prior to completion of the TOC, the commercial CWA members are effectively reimbursed according to cost. While such costs are transparent and subject to review by the Department and independent advisers, the fact that critical TOC information did not emerge sooner meant that the Department (and Government more generally), was denied opportunities to consider options for reducing cost in light of the higher than expected cost. Moreover, prior to agreeing the TOC, it was not possible to agree the gain and pain share arrangements. As a result, the added incentives that these arrangements bring were missing. In the case of Otago and, to a somewhat lesser extent Spring Hill, the timing of the TOC meant that the projects were well underway before the TOC was agreed. This situation is not consistent with best practice CWA methodology The fact of the substantial delay in getting the TOC in place obviously raises the question as to why the delay occurred. In this respect, we consider that there is a combination of factors. The Department had no experience in CWA methodology. Experience in CWA was being gained as work on the RPDP projects progressed. Pressure on design teams meant detailed designs took longer to finalise than was expected (detailed designs are a necessary prerequisite for TOC development). We understand that the issue around design related more to building services than to the buildings themselves (for example, designs for underfloor heating for Otago were not complete until August 2005). The sheer volume of work involved in reviewing and independently verifying TOC estimates is considerable. We consider this was under-scoped by the Department and its advisers. Methodology and Processes: Design, Costing, Procurement and Scheduling 30

37 The CWA methodology has been pushed down the supply chain to a very considerable extent. We understand that at the time of this review, approximately 95% by value of the cost incurred and committed on Spring Hill was captured by the CWA methodology (i.e. only 5% or work was being performed under standard NZS 3910 procurement). We question whether it is sensible to drive the level of CWA as far as this. A consequence of this approach is that it adds significantly to the workload involved in developing a TOC. Our understanding is that the successful Auckland Women s project had around 60% of cost under a CWA arrangement. There is a large number of partners involved in the CWA (there are 17 CWA members on the Otago project). The remoteness of the sites, particularly in Otago, has meant that the net for contractors has had to be cast widely so much so that, at the peak, approximately a third of the workforce on the Otago site is imported from outside of the coastal Otago area. Increasing the number of contractors increases the number of margins and overheads that have to be calculated. More fundamentally, the larger the number of CWA members, the more training in CWA that needed to be undertaken. There was generally insufficient experienced estimation and cost planning expertise available in the market and who were capable of undertaking the first principles approach to cost determination that is characteristics of CWA. Moreover, the expertise that did exist was more used to short-term projects rather than the major and long-term nature of the prisons project. Governance and project management arrangements prior to changes in mid late 2005 have not, in our view, been as tight as they needed to be. This point is discussed further in the next section. However, issues regarding project management meant that the range of factors that were impacting on the timeliness of the TOC were not being managed as closely as they warranted. The commercial CWA members, who were being reimbursed for costs incurred, did not necessarily face strong incentives to expedite the development of the TOC. That said, however, we note that incentives can change. For example, we understand some of the CWA principals involved in the Otago project entered into an arrangement to underwrite risks faced by some of the sub-contractors, stemming from potential time delays. This may well have contributed to the more timely completion of the proposed TOC for the Otago project (taking into account the design issues noted above) In summary, several resource constraints impacted on the timeliness of the TOC. These included pressures on scarce design resources and a relative lack of experienced estimation and cost planning expertise. The timeliness of the TOC was also influenced by the hea vy demands being placed on management of the CWA in part reflecting the extent to which the CWA has been driven down the supply chain. The resource constraints and demand pressures are, however, matters that are capable of being anticipated and managed Notwithstanding these points, the Department faced a difficult set of circumstances. The need to maintain progress with the projects so as to ensure their completion in time to meet expected prison population growth meant that the option of delaying the project pending completion of the TOC was not a realistic option. Methodology and Processes: Design, Costing, Procurement and Scheduling 31

38 5.30 In short, from a best practices perspective, it is not desirable to have the TOC being developed so far into the construction phase. A key lesson arising from the Spring Hill and Otago projects is the need to ensure that the TOC is developed much sooner in the process so as to minimise the amount of construction undertaken without there being an agreed TOC. TOC Development Independent Assurance 5.31 One of the guiding principles governing CWA is the need to ensure that costs are efficient and represent value for money. The Department is part of the TOC development process and, as part of this, it reviews and assesses the TOC with the objective of ensuring that it is receiving value for money and, consistent with this, that the TOC is based on an efficient level of prices To assist in achieving these objectives, the Department obtains advice from a wide range of third parties as shown below. CMS Burdened rates SCW Independent review Direct Costs Labour costs Plant/eq uipment costs Materials costs Rider Hunt independent review CMS Margins SCW Independent review Overheads 5.33 While use of outside expertise is desirable, several points can be made. There is a very heavy dependence on CMS. From a risk management perspective, having such a high proportion of the overall knowledge of the projects in one (small) firm needs careful management. The Department has sought to manage this through the roles performed by Sherwin, Chan & Walshe (a chartered accountancy firm). Their roles include review of margin calculations performed by, and the methodologies used by, CMS. There is a need for high degree of independence because of the need to challenge the draft TOC numbers being prepared by the commercial CWA partners. The Methodology and Processes: Design, Costing, Procurement and Scheduling 32

39 Department engaged CMS in respect of this. CMS has a key role in facilitating the CWAs and, as part of its brief, takes responsibility for the quality of work going into the development of the TOC and plays a key role in determining margins and overheads which are key inputs to the overall determination of the TOC. In this regard we view CMS role as being very much on behalf of the CWA; not the Department. However, it is clear that the Department has placed considerable reliance on the advice of CMS. Notwithstanding the role performed by Sherwin, Chan & Walshe, we consider that the Department should seek to supplement CMS role with another adviser expert in CWA methodology in order to ensure the level of independence needed in order to effectively counter-balance and challenge the TOC estimates being submitted by the commercial CWA members. Rider Hunt has responsibility for reviewing the direct costs (labour, materials and plant). To undertake this role, Rider Hunt compares the quantities and values in the TOC against a database of information built up from many other projects. A difficulty that Rider Hunt faces is that it is being asked to review labour rates that do not include any element of profit or overhead. In traditional forms of contracting, labour rates do include profit and/or overhead (i.e. a builder s hourly rate will normally include profit and a contribution to overhead). Rider Hunt does not, however, have access to margin or overhead data. While noting that there are commercial sensitivities around profit/overhead information, we consider that would be better to provide Rider Hunt with access to this information as it would provide a better basis for cost comparisons. More generally, the Department, as well as Rider Hunt, did not have full transparency over margins and, in this respect, the way in which CWA was implemented did not fully accord with the open book requirements of the CWA methodology. Only CMS had full transparency over margins The process for determining margins and overheads involves extensive detailed unbundling of contractors accounts. There is potential for costs to be double counted. Considerable judgement needs to be applied by CMS in the process of trying to normalise the accounts and ensure that costs are counted only once. Sherwin, Chan & Walshe are retained by the Department as an independent check on the margin and overhead calculations performed by CMS. However, because the Department does not of itself have visibility over margins, it is totally reliant on the advice of third parties. Consistent with the open book principle upon which CWA is based, and recognising that the margin calculations are an important part of overall cost determination, we consider that the Department should have greater direct visibility over margins and their calculation. Development of the TOC Lessons Learned 5.35 Given the pivotal role played by the TOC, its development needs to be concluded much sooner in the overall process than has been the case for the regional prisons. Several factors need to combine in order for this to occur. First and foremost, there needs to be more flexibility over the lead time for constructing the prison. A key issue affecting the regional prisons was the need to adhere to specified completion dates in order to accommodate the growing prison population. Realistically, the Department did not have the choice of deferring construction of Spring Hill and Otago to allow for the development of the TOC prior to starting construction. it Methodology and Processes: Design, Costing, Procurement and Scheduling 33

40 Related to this last point, the Department needs to take steps to ensure that appropriate levels of design capability are available to take designs from concept status through to detailed plans status so as to provide the basis for detailed TOC development work. Design was a bottleneck in the prisons development. Timely completion of the TOC depends on there being completed and agreed designs. In part, delays in completing designs were a function of scarce design resources but, in part, there were design changes late in the process (e.g. in relation to site services at Otago). Pressure has to be maintained on the commercial CWA partners to ensure early development of the TOC. Under cost plus margins arrangements there is an inherent risk that the commercial partners do not necessarily have strong incentives to conclude early agreement on the TOC. The TOC is an iterative process and requires the client to be in a position to challenge elements of the TOC from an informed position. This requires appropriate levels of resource and flexibility and nimbleness in decision making. Structures and processes need to support this The corollary of ensuring the early completion of the TOC is that the amount of work that is undertaken on fast-track basis should be minimised. Getting the TOC determined before work starts maximises the opportunity for Government to make changes if costs turn out higher than expected. Procurement and Scheduling 5.37 The method under which the prisons have been constructed is a major part of this review. As will be discussed below, a hybrid form of CWA was adopted for the Northland project. A key reason behind this was the need to address some issues with that project that had the potential to adversely affect the timing of that project Prior to the Northland project, prison construction in New Zealand had been procured by a fixed price form of contracting (more formally, procurement had been undertaken pursuant to the NZ standard NZS 3910). This form of procurement is commonplace across a wide range of construction activity. In a sense, it is the traditional form of procurement In contrast, Spring Hill and Otago have been procured using the CWA, or alliancing, form of procurement. There are major differences between the two forms of procurement. It has not been within the brief of this review to assess the merits or otherwise of the CWA versus more traditional forms of contracting. However, it is useful to have an appreciation of the differences involved and the key features of CWA methodology. Key Features of CWA Methodology 5.40 CWA is one form of a more general form of procurement referred to as alliancing. Alliancing can take many forms, examples of which include: Traditional joint ventures - until recently, the joint venture, in which two or more parent organisations join forces to create a separate legal entity, has been one of the most common type of alliance. In the traditional joint venture, organisations unite to obtain economies of scale and scope. Methodology and Processes: Design, Costing, Procurement and Scheduling 34

41 Outsourcing arrangements - these are partnerships in which an organisation outsources a business process or function (e.g., human resources or information technology) that is not central to its business mission. This allows the organisation to concentrate on its primary business objectives. Marketing alliances - marketing alliances bring together organisations that market different products or services to the same group of consumers. They can take many forms, including co-packing alliances and co-operative advertising. Under a co-packing alliance, an organisation licenses the use of its brand name and product formula to organisations that have production, packaging and distribution capabilities. Supplier/vendor alliances - closely related to outsourcing arrangements are supplier (or vendor) alliances in which organisations partner with suppliers to enhance the service, each bringing its specific area of expertise to bear on the project or service The CWA is closely related to the last of these forms A key feature of CWA (and alliancing more generally) is that all parties in the alliance have a shared interest in overall project outcomes. Alliancing approaches share a number of distinct features that set them apart from more traditional forms of procurement. Included among these are: alignment of the business goals of all parties; selection of parties in the CWA agreement is based on capability, approaches and systems (as in traditional evaluation processes) and more subjective assessment around the level of project commitment, the composition and nature of the sponsor team, the likelihood of the combined team delivering outstanding results; a selection process that may not include price; joint risk allocation and management; joint and integrated project governance and management; fully open book among the parties implying very high levels of financial and other disclosure; a principles-based collaborative form of contract that seeks to avoid adversarial conduct. This means, for examples, that there are no disputes resolution processes in CWA agreements. Where problems arise, the parties work collaboratively to identify solutions rather than seeking to point the finger of blame ; a cost reimbursement process that is open and pays actual costs and agreed margins (profits and overheads); an equitable and appropriate risk and reward scheme (referred to as pain share and gain share arrangements); an active relationship development and maintenance regime; and Methodology and Processes: Design, Costing, Procurement and Scheduling 35

42 high levels of support from parent companies in support of the contracting arrangement (as reflected by senior representation on what is referred to as the Principals Group) The CWA approach is aimed at fostering a best-for-project approach through a no-blame-no-claim culture where all parties have a unity of purpose to achieve a successful outcome. Decision making in regard to the project is conducted through a Principals Group. Decisions by the Principals Group are made on a unanimous basis; that is, all parties have to agree In traditional fixed price contracts, the principal point of focus is the price that is paid for the services. Under the CWA approach, the focus is on the efficient level of costs because this is the amount that the client, in theory, pays for the services. Background To CWA for Prison Construction 5.45 The CWA methodology has been used in the context of the Northland (albeit in hybrid form) and the recently opened Auckland Women s prison. The Northland prison commenced as a traditional NZS 3910 contract. However, by August 2003, several factors pointed toward the need to modify the contractual approach to construction: financial pressure on one critical consultant was such that it was doubtful if they would continue; there was evidence of on-site man-marking where significant effort was being directed toward allocating blame rather than resolving issues; and the construction programme was not universally agreed among the parties involved In considering the options open to the Department, CWA was raised as a potential way forward. Several points are worth noting in this regard. We understand that Mainzeal had for some time been considering alternative forms of procurement including alliancing. Stewart Rix (of CMS) had considerable experience of CWA from previous roles in the United Kingdom (where CWA and alliancing generally is more commonplace). A meeting between CMS and the RPDP Project Director (John Hamilton) to present on CWA was arranged at the instigation of the Chair of the Inmate Employment Advisory Committee. CMS also presented to Hawkins Construction Ltd (the main contractor on the Auckland Women s and Otago projects). When difficulties with Northland emerged, the RPDP Project Director approached CMS out of which came a suggestion to convert the contractual framework for Northland to a CWA agreement (the Northland project had been running on-site for approximately six months). Mainzeal were the prime contractors for the Northland project At the August 2003 meeting of the RPDP Steering Group, the Project Director provided an oral briefing on the proposal to enter into a hybrid form of CWA (the hybrid arrangements retained an element of the former NZS 3910 contract including, in particular, a cap on construction costs). The meeting approved in principle the change to Methodology and Processes: Design, Costing, Procurement and Scheduling 36

43 the hyb rid CWA subject to the condition that a formal paper for approval be tabled with the Steering Group Following the decisions to adopt the hybrid methodology, the Department decided to retain CMS to assist with training and to provide advice on managing the transition to the new arrangements. Both aspects of CMS role were vital: the Department had no prior experience of CWA. Choice of Procurement Methodology 5.49 Subsequent to the decisions taken with respect to Northland, the Department has moved to adopt CWA for the Spring Hill and Otago projects (as well as Auckland Women s) CWA represents a fundamental shift in procurement method. Accordingly, we would have expected a first-principles analysis of this, and other, procurement options to have been considered and debated at length before moving toward its adoption across the other projects in the RPDP. As part of this review, we have not, however, sighted papers provided to, or minutes of, the Steering Group that explicitly affirm the choice of CWA ahead of NZS 3910 (or any other form of contracting method) for either Spring Hill or Otago In the context of the Northland project, the lack of in-depth analysis and consideration could perhaps be explained by the immediate and significant set of problems that needed to be addressed. CWA provided a framework to make progress with the project and avoid the time delay and cost implications that could have eventuated had the project either remained as a NZS 3910 or been re-tendered Notwithstanding these circumstances, however, the decision to adopt CWA for the Spring Hill and Otago projects should have been justified on a project by project basis. The analysis should have extended not just to the traditional NZS 3910 contract but to the various forms of alliance arrangements and other options beyond alliancing such as: reimbursable contracts under which the client pays for all of the work plus a margin to the supplier; a construction management approach under which the client employs a construction manager who works for a fee which is applied to the value of the work; design and build, and design, build and operate contracts; and design, build, operate and finance contracts. profit 5.53 It is not the purpose of this review to advocate these, or any other, forms of procurement. The point is that the Department chose to move away from NZS 3910 to a fundamentally different form of procurement. This decision should have been based on detailed first principles analysis of CWA and other forms of procurement. 5 5 This form of procurement is increasingly common in Australia under the banner of pubic-private partnerships and in the United Kingdom under the banner of private finance initiatives (PFI). In New Zealand, such forms of contract would require, under the Public Finance Act, approval from the Minister of Finance. Methodology and Processes: Design, Costing, Procurement and Scheduling 37

44 5.54 This issue is not just a matter of good process for two main reasons. The first of these is that CWA potentially exposes the client to financial risk unless the CWA approach is well managed. To the extent that CWA was discussed with the Steering Group in the context of Northland, it is clear that the potential benefits of CWA were described. What is less clear is whether the risks and costs around CWA were explained along with the critical factors that must be achieved in order for a CWA to work well and in the client s interests. The lack of paper trail makes this difficult to evaluate but our impression is that the benefits of CWA were emphasised to a much greater extent than the potential risks and costs involved The second reason why the relative lack of consideration of procurement options is an issue is because prior to Northland, the Department had no knowledge or experience of alliancing. The need for rigorous consideration of this and other procurement options is even greater, the lesser is the knowledge and understanding of something new These comments should not be interpreted as a criticism of the CWA methodology. Indeed, we note advice from the UK National Audit Office (NAO) recommending that departments not use traditional forms of procurement for construction projects unless it can be demonstrated that this form of procurement will provide better value for money ahead of design and build, or alliancing (the closest form of which is 6 described as prime contracting by the NAO) or PFI. Moreover, the comments should not be interpreted as saying that CWA was the wrong choice. In this regard, we note that the Auckland Women s project appears to have been delivered on time and within budget. In the case of the Spring Hill and Otago projects, independent advice provided to the Department in October 2005 advised that the Department should not depart from the CWA path to another form of procurement unless as an absolute last resort (although this advice was tendered at the time when construction of Spring Hill and Otago was well underway) Notwithstanding these points, we consider that the choice of procurement approach for any given project should be made on a case-by-case basis. In this regard, there are several factors that need to be considered before choices regarding procurement method are made. Below, we set out some high-level characteristics that would tend to favour use of CWA in preference to traditional NZS 3910 forms of procurement. CWA is more likely to be preferred when the following conditions are characteristics are present. The best way of achieving desired outcomes, in terms of the choice of technologies and processes, is uncertain. In the context of the regional prisons, their design was markedly different to that which had gone before and reflected a desire for a different approach to the management of inmates. By implication, however, there was uncertainty around the details of design and how this would interface with operational requirements. There is a high degree of complexity in design, construction, technology and/or development which cannot be satisfactorily scoped at project commencement. Complexity per se does not favour CWA over other forms of procurement, but 6 National Audit Office (2005) Improving Public Services Through Better Construction, London, p23. 7 Peter Waterhouse 31 October 2005 Report to RPDP on Construction Costs and Alternative Procurement Strategies Methodology and Processes: Design, Costing, Procurement and Scheduling 38

45 where complexity gives rise to risk and uncertainty CWA may provide a more flexible contracting methodology. In the context of the Spring Hill and Otago projects, it is generally the case that the construction techniques are not new or overly complex. While there is a considerable amount of technology that goes into prison buildings (security related), this is separable from overall construction (as indeed was the case with a separate CWA for security systems). Of themselves, the building designs do not appear to be overly complex although, as noted above, there was uncertainty around aspects of design. project (at development and design stages). This is another way of saying that there is uncertainty over the optimal design approach and, further, that the client wants to explore rather than getting locked into a particular approach under traditional NZS 3910 procurement. There is a necessity for innovation and step-change developments in design, technology and construction methodology. CWAs create a better framework than traditional forms of contracting for such developments to take place. Arguably, elements of this requirement existed for the regional prisons in respect of design, but less so with respect to technology and construction methodology. As experience with the regional prisons design grows, this characteristic may become less relevant. The projects are large. CWA has a significant management overlay because 5.58 In addition to these points, comments by various Department and contractor personnel have suggested that CWA might be better suited to projects being undertaken in a heated construction market, but less appropriate when market conditions are benign or declining. Various reasons support this view: Technology is rapidly evolving. This does not appear to be a characteristic relevant to prison buildings. Timeframes for completion of the project are tight and, accordingly, the project demands innovative and flexible approaches to ensure project completion. This clearly is a feature of the Spring Hill and Otago projects and, arguably, is the strongest reason for preferring a CWA methodology for these facilities. There is considerable scope for value engineering into the early stages of the many checks and balances have to be built into the procurement process to compensate for the lack of market testing of prices through competitive tender. Various people interviewed during the review have suggested that the minimum size of project that can support CWA is probably in the order of at least $100 million. Clearly, the Spring Hill and Otago projects meet this condition. The CWA methodology provides transparency over margins and seeks to normalise margins. The process of agreeing margins under CWA therefore enables adjustments to be made to margins such that abnormally high margins experienced at the peak of the market are adjusted downwards. Because the CWA methodology allows for the pass through of direct costs, suppliers are not as exposed as they would be to unexpected cost increases. This can also be advantageous from a client perspective in that in a heated market, fixed price contracts are likely to seek to guard against unexpected price increases by quoting higher prices to start with. Methodology and Processes: Design, Costing, Procurement and Scheduling 39

46 From a practical perspective, and in the specific context of Spring Hill and Otago, the comment has been made to us by Department and contractor personnel that as the construction market grew tighter, there was less willingness on the part of the construction industry to enter into traditional fixed price contracts. The market was becoming a sellers market. Those in the market were increasingly being able to dictate their own terms and prices and this included, as noted earlier, a trend toward preferring CWA In contrast to CWA, traditional NZS 3910 approaches to procurement are suitable for projects where the scope and requirements of the project are well defined and where the risks are known, understood and capable of being appropriately factored into tender pric es. In our view, these characteristics are present across elements of the prisons construction programme and, accordingly, we do not consider that traditional forms of procurement should be automatically ruled out. Each project should be considered in its own rig ht and the business case made for preferring one form of procurement over others On a related point, we consider that there are lessons arising from the Spring Hill and Otago projects in terms of how far down the supply chain to carry the CWA approach. As noted earlier, 95% of cost at Spring Hill is being incurred by CWA members. This is a very high ratio CWA is management intensive. For those CWA members who are new to CWA, there is also a considerable learning curve and associated training requirements. The deeper CWA penetrates through the supply chain, the greater are the administrative and management overheads and at some point, the additional costs involved exceed the benefits that CWA might bring. In the case of Otago, we note that there are 17 CWA members. This is a large number of firms to manage. Where CWA is implemented, it makes sense to include the primary contractors as CWA members. However, application of CWA becomes increasingly questionable the further below this level the CWA seeks to probe. In our view, there may not be sufficient benefits over cost to drive down as far as the small and even medium sized businesses that supply trade services to the project. Selection Process 5.62 Although not part of the original brief for this review, the Commission has requested that comment be made on the process for the selection and appointment of the main contractors involved with Spring Hill and Otago and the appointment of the Project Director and CMS (reflecting the key role that CMS has played in facilitating the CWA) In the case of Spring Hill, a Request for Proposal (RFP) for provider of building works was issued in September 2004 and Mainzeal was the preferred respondent. The Department and Mainzeal entered into a CWA Negotiation Framework Agreement (NFA) on 26 October Also in September 2004, the Department issued a RFP for building works in respect of Otago and Hawkins Construction was selected. A NFA with Hawkins was entered into also on 26 October The evaluation of the tenders was undertaken with particular focus on performance, culture and capability. Cost was not part of the evaluation criteria The Department has documented procurement processes and tender procedures. The latest version of these is based on an original document prepared in 2002 and which, in turn, is based on the framework contained in the Statement of Good Practice issued by the Office of the Auditor General (that framework remains at the core of the current processes). Methodology and Processes: Design, Costing, Procurement and Scheduling 40

47 5.65 A probity audit of the selection processes for the construction contractors for Spring Hill and Otago was undertaken by Audit NZ in October Those reports concluded that: generally, the RFP documentation and the processes surrounding its issue, the receipt, opening and evaluation of responses conform to good practice; the evaluations were conducted fairly and impartially and in accordance with the documented process plan; and Audit New Zealand was unaware of any probity issues outstanding We also note that Sherwin, Chan & Walshe were engaged to undertake a financial due diligence of the main contractors Notwithstanding the positive outcome of the review undertaken by Audit New Zealand, we note that there is an issue as to whether or not the evaluation criteria should include cost. We are aware that some CWA tenders do not include cost (as was the case for the RFPs issued by the Department), but equally it is possible to include cost as part of the evaluation process. However, in order to do this, a number of steps have to be completed. In particular, the client has to have undertaken some work to take design to a sta ge that can be used for costing purposes As part of the tender process, the client can invite contractors to submit bids based on a reimbursable target-cost contracting basis. The benefits to the client are that contractors submit indicative target costs in a competitive environment. It is important to note, however, that where the scope of work is imprecisely defined, or there are particular features of the operating environment that create significant uncertainty, then assumptions need to be developed by the client regarding scope, specification and schedule. This enables bidders to submit indicative target costs based on shared and common understandings. We are unaware as to whether or not the Department considered approaching the tender on this basis. We note, however, that by late September 2004 when the RFP s were issued, the construction market was already heated. Based on discussions with industry and Department personnel, there is a view that the market would not have reacted favourably to such a tender approach given the amount of additional work involved in preparing a bid. Moreover, the time available to the Department to issue the RFP and then make a selection was very tight (a point noted by Audit New Zealand in its probity reviews). We doubt that the timeframes available would have allowed for indicative costs to be added into the tender process The re-appointment of the Project Director position occurred in Prior to the re-appointment, the Project Director had been fulfilling project management and other roles within the Department and, accordingly, had acquired considerable institutional knowledge. A tender process for the Project Director position was initiated and managed by the then Chief Financial Officer. The CFO, together with two members of the Steering Group, formed the interview panel. We understand that four or five possible candidates were considered and this was refined to a short-list of two In July 2004, Audit New Zealand provided some informal advice on an early draft of the Request for Proposal for the Project Director position. The appointment process had commenced in May 2004 and the appointment was made in October The review by Audit New Zealand raised a concern that the Project Director and the Manager, Administration and Contracting were involved in the renewal process for each other s contracts. The Manager, Administration and Contracting had been involved in preparing the RFP for the Project Director position and the evaluation plan. We understand from Methodology and Processes: Design, Costing, Procurement and Scheduling 41

48 Audit New Zealand that there were also some minor issues around documentation. We agree with the comment by Audit New Zealand that the engagement of key personnel for RPDP should be managed by the Department alone as far as possible, or by using a completely independent recruitment specialist. Contracting Expertise 5.71 At the time of entering into CWA for the construction of the regional prisons, the Department had very little knowledge and understanding of CWA. It was heavily dependent on a small number of key individuals including, in particular, Stewart Rix of CMS and John Hamilton (the Project Director). Neither are employees of the Department. As a general point, it is preferable, particularly on projects of the size, complexity and risk (financial, operational and reputation) of the RPDP projects, to avoid being too reliant on a small number of external advisers. That said, however, it is acknowledged that expertise, particularly in relation to the CWA methodology, was relatively scarce (in part, reflecting its limited use in New Zealand) Through the projects completed to date (and nearing completion), the Department has built significant organisational capability within the RPDP team. For future projects, the Department needs to ensure that it retains people who are able to advise, from a first principles perspective, on the choice of optimal procurement methodology and then, once the decision is taken, lead and advise on the implementation of the chosen procurement method. This includes the role of being a member on the Principal s Group A blend of competencies and experiences are required to undertake these tasks; commercial, construction as well as understanding of Government machinery and decision making processes. The range of competencies is unlikely to be found in one individual. We note, and support, the decision by the Department to add a department employee to the Principal s Group at both Spring Hill and Otago. This initiative usefully supplemented the commercial and construction background and expertise of the Project Director notwithstanding his previous involvement with the Department since 1997 (as employee and as contractor) We note that the issue of having the right mix and level of expertise might apply more widely than just the Department of Corrections. For example, a unit has been established within the State Services Commission to assist with and advise on aspects of major IT investments. Although well beyond the scope of this review, it is worth considering whether there is a need for an equivalent group in respect of major building construction or even procurement more generally for the public sector. Although not appropriate for New Zealand given the much smaller size of our economy, we note the example from the United Kingdom which has established the Office of Government Commerce (OGC) which is an independent Office of the Treasury. The OGC is responsible for a wide ranging programme which focuses on improving the efficiency and effectiveness of procurement within central government. Market Testing of Costs 5.75 The Department and Government more generally, needs assurance that the amounts being paid for the regional prisons are based on efficient levels of cost. The way in which CWA has been implemented by the Department means that such assurance is sought through a process of subjecting the development of the TOC to extensive independent review and audit. Under traditional NZS 3910 contracts, prices are market tested through the competitive tendering process. As applied to Spring Hill and Otago, the CWA methodology has not provided this same market testing. Accordingly, under CWA, there needs to be exceptionally robust and transparent processes around Methodology and Processes: Design, Costing, Procurement and Scheduling 42

49 determination of TOC/QRA and the inputs to these direct costs, margins, off-site and onsite overheads Notwithstanding these processes, however, we consider that the option of providing further assurance by requesting potential CWA members to submit bids based on reimbursable target-cost contracts should be considered for future projects. Such a process would involve submitting indicative target costs in a competitive environment before the selection of CWA members is made (but would also require more time and resource to implement than was available in the context of Spring Hill and Otago) In the context of the regional prisons completed, or under construction, we doubt that there was the time to undertake this process. However, for future prison builds, we see no reason why consideration should not at least be given to modifying the tendering process in this manner. The key advantages are that this approach comes closer to providing a market test of likely cost, creates the opportunity to consider options if indicative costs exceed available funding and provides an improved ability to give Ministers a realistic view of potential costs. Summary 5.78 A key feature of the methodology and processes employed in relation to Spring Hill and Otago is the adoption of the CWA approach to procurement. A hybrid form of this methodology was successfully utilised on the Northland project. In that particular case, use of CWA assisted in overcoming some issues that were threatening to disrupt progress with the facility The CWA methodology has many potential advantages compared to traditional fixed price forms of contracting. The Department has captured many of these including: close integration of design, construction and operational perspectives; cost savings and other benefits through undertaking several value management reviews; efficient use of resources at site-level; collaborative approaches to resolving issues as they arise at a day-to-day level; and high levels of transparency around project costs at the project level (although as discussed in the next section, this transparency did not always percolate up to the Steering Group to the extent needed) Overarching these benefits, there are sufficient indications to suggest that had the Department elected to follow a more traditional procurement method, timeframes for completing the projects may not have been met. Had that been the case, this review wo uld have had a fundamentally different focus and set of drivers Notwithstanding the benefits that have arisen through the use of CWA, there are some lessons that can be learned in terms of design, costing, procurement and scheduling. Specifically: CWA is not necessarily suited to all projects. There is a need to identify the conditions under which CWA is likely to be preferred ahead of other forms of Methodology and Processes: Design, Costing, Procurement and Scheduling 43

50 procurement. These considerations need to applied on a project-by-project basis and decisions documented. The CWA methodology requires careful management and sound contracting experience. The Department entered the RPDP without recent major construction project experience. It is building that capability. This needs to continue if further new prisons are proposed. At a wider level, consideration may need to be given as to whether the public sector generally needs to build its contracting expertise for major projects (although this would depend on there being a sufficiently large scope of future projects). CWA, along with any form of procurement, needs to be based on sound facility designs. In turn, this requires agreed standards and adequate design capacity. As part of the CWA member selection process, it may be possible in some circumstances to seek indicative target costs. This would help to provide a degree of market testing of costs. However, to do this requires that the following conditions be met which, in the situation of Spring Hill and Otago, was not the case: there be sufficient contractors prepared to engage in this process; designs be developed to a stage sufficient to support estimation of costs the Department have the resources to support the process; and sufficient time be available for the process to work through. The development of the TOC is a fundamental part of the CWA methodology and needs to be completed sooner than has been the case in the Spring Hill and Otago projects. This emphasises further the need for timely completion of designs and appropriate levels of project management resource. Until the TOC is underway, cost estimates are indicative only. This needs to be made clear to decision makers. Once TOC estimates begin to emerge, they should be reported regularly so as to provide maximum opportunity to modify requirements if budgets are under pressure. Methodology and Processes: Design, Costing, Procurement and Scheduling 44

51 6 Governance and Project Management Key Findings: Achievements New Zealand will have four regional prison projects completed in time to meet the growth in the prison population. The Steering Group comprised senior management in the Department and this group recognised gaps in knowledge and expertise that needed to be filled, namely: experienced Project Director, Audit and Independent Review processes, acquisition of external large scale project management expertise, and Treasury representation. Changes to project governance and management structures from late-2005 have greatly increased the quality of review, reporting and decision-making on the projects. This includes the establishment of a Programme Management Office (PMO) in February 2006 to assist with the project and risk management dimensions at governance and project management levels. Formation of the Construction Sub-committee comprising appropriate expertise and with responsibility for decision-making advice to the wider group on complex technical matters. These arrangements and changes have made significant improvements to the quality of reporting, decision-making and potential for risk management. We note that the PMO has potential to significantly assist the programme governance, but that this is still early days for this role. Mid-2005, a senior Department manager was appointed to each of the CWA Principals Groups at Otago and Spring Hill sites. This has provided opportunity for the Department to be represented on the Principals Group by one of its senior managers and to more directly support the role of the Project Director. This arrangement has also provided for a more direct link between the senior management team and the Principals Group. At site project management level, the departmental interest has been represented by appointment of permanent departmental staff as CWA Manager at Otago and Auckland Women s. While it is outside of the scope of this review to assess the specific project management methodologies at respective sites, we observe that the project management approaches of the main CWA partners do employ expected tools for project management of planning, project risks, costing, progress monitoring, resource management. We also note that RPDP played a role in developing planning and reporting tools for the programme. Challenges The Steering Group composition did not include personnel with strong large scale project management experience (mainly line managers) until January 2004 with the appointment of the independent project consultant to the Group. Prior to review in 2005, the role of the Steering Group was not consistently clear to all members in terms of the Group s advisory and/or governance responsibilities. Prior to review in 2005, there was insufficient formal reporting to the Steering Group to support key decisions and to signal project risks adequately. Formal reporting tended to Governance and Project Management 45

52 be historical in nature, with little (or no) indication of future estimations of costs to completion. Prior to 2005, the Department s representation on the Principals Group did not include any of the Department s senior employees. The challenge for the Department was to maintain the close link that is needed between the senior management team and the Principals Group. Throughout the progress of the RPDP the risk of not having adequate capacity to meet the rapidly growing demand for prison accommodation, and the implications of this was a major imperative and driving factor behind governance and management decisions. Lessons Learned: Ensure that the project goals and objectives are agreed and clearly communicated to all parties at the commencement of the project, and that they encompass all three key elements of time, costs and quality, even in cases of fast-tracking. Ensure that the Steering Group has the appropriate mix of knowledge and skills to be able to represent the Department and the wider Government interests, and govern a large scale project. Ensure that the roles and accountabilities of the respective governance and management groups and individuals are clearly specified and communicated from the commencement of project planning. Ensure that the Department is represented on the Principals Group by a senior manager in any future CWA arrangement to complement the commercial skills of any contractors. Ensure that there are independent quality assurance processes in place for oversight of governance and project management approaches (including decision-making and risk management), as well as for oversight of the lower level project management processes for cost calculation, and quantitative risk assessment. This will ensure independent reporting of any governance issues/ risks at various stages, including concerns re information provision. Ensure that the Steering Group is provided with adequate information in a timely fashion to assess and manage risks, support effective decision-making, and reporting to Ministers. Ensure project reporting not only assesses historical progress but also estimates future issues and progress remaining against all project objectives. Introduction 6.1 Underpinning the method of construction of the prisons are the overall governance and project management arrangements for the programme. Effective governance and project management is required to ensure that goals are achieved, on time, to quality and to agreed budgets. This section revisits the context for governance and management of the RPDP programme, and assesses governance and project management arrangements in this context. Governance and Project Management 46

53 Public Sector Project Governance and Management 6.2 In respect of public sector projects, there are specific requirements for transparency, accountability for decision-making in a broader public sector context, probity and independence. The interests of the Government, as stakeholder, must be recognised and managed through appropriate structures, planning, reporting and review processes. 6.3 There is always a challenge when a public sector project is undertaken in a commercial environment, and when agents are themselves commercially focused. Project governance and management structures must be organised so as to ensure that commercial imperatives are balanced by the interests of the public sector agency and the wider public sector (particularly for projects involving large Government expenditure). 6.4 This means clear definitions of roles and accountabilities, the early use of audit and review mechanisms, robust risk management, and effective reporting to support risk management and decision-making. Due attention must be given to project controlling and monitoring processes throughout. 6.5 Ideal best practice for governance and project management is further outlined in Appendix C. Clearly the specific context for the RPDP project has meant challenges for achieving the ideal, and the discussion below recognises the Department s successes and assesses issues in meeting these challenges. Context 6.6 The context for the development of new prison facilities and the establishment of RPDP to implement the design, construction and commissioning of these facilities has been outlined in Section 3 of this report. 6.7 The discussion of governance and management arrangements needs to recognise the specific nature of the environment within which the Department was operating. The projected dramatic increase in the prison population according to Ministry of Justice forecasts, and the inability of existing facilities to cope. Clearly substantial new facilities had to be built, and in a timely manner in order to house the growing prison population. The RPDP project, encompassing often simultaneous design, construction and commissioning of four regional prisons, is a huge project by New Zealand and international standards ( around $900 million). This project size means a significant challenge to manage the pressures on New Zealand s construction, design and quantity surveyors capability and capacity. The New Zealand Government had little recent experience in construction, particularly in projects of the scale of the RPDP project. Prior to the RPDP project, the Department had managed the growth in prison population through addition to existing facilities, overseen by the Assets and Property Division. The most significant construction project overseen by this division was the successful completion of the Auckland Central Remand Prison (ACRP) in Governance and Project Management 47

54 Current RPDP Arrangements RPDP Programme Governance and Project Management Structure 6.8 At a high level, the current governance and management structure for RPDP consists of: a steering group, comprising Matrix Manager (Chief Finance Officer) supported by a Programme Steering Group. Steering Group members are senior line managers from the Department (GM Public Prison Service, GM Probation and Offender Services, GM Corporate Management, GM Strategic Services) and an independent external expert with large-scale construction project management experience. A Treasury Vote Manager attends the Steering Group as an observer. The governance group also has a Construction Sub Committee reporting to the steering committee. This committee comprises the Chief Financial Officer, independent Steering Group consultant, Construction Project Director, Department s Manager Construction Management, and the Department s National Property Manager. Internal Audit also attend sub-committee meetings. a management team, comprising Construction Project Director, Commissioning Manager, and Programme Manager. 6.9 According to the RPDP terms of reference, the Steering Group has key responsibilities including: provision of advice and support to the Matrix Manager and the RPDP Management Team; overall decision-making, including approval of scope, budgets, plans and delivery mechanisms; monitoring of programme progress issues and risks; ensuring integration with wider organisational activities; and ensuring appropriate expertise and business as usual resources are available to the project The Management Team has responsibilities including: planning and management of day-to-day activity within their respective projects; ensuring that their respective areas of responsibility produce agreed deliverables within approved timeframes, budget and specification; and accountability for the management of risks and issues within their respective function and ensuring programme-wide risks and issues are managed in an integrated way This programme structure, together with detailed statements of roles and responsibilities across key groups and management positions, is clearly documented in a detailed RPDP Charter and Terms of Reference. The Charter also contains key processes for financial and risk management. Governance and Project Management 48

55 6.12 It is noted that these arrangements also ensure Departmental representation on each of the Principals Groups at Spring Hill and Otago (through a senior management representative). This provides opportunity for Departmental staff to support the Construction Project Director in representing the Department s interests at senior construction management level This structure is illustrated below: Independent Advice 6.14 There are a number of mechanisms for the RPDP programme to receive independent advice. Review of project management processes for cost and margin development (Sherwin, Chan and Walshe, Rider Hunt). Review of CWA methodology application (CMS). Review of governance and management arrangements (Internal Audit unit, Audit New Zealand). Reviews of TOC development (across a range of areas). Governance and Project Management 49