PUBLIC INQUIRY DOCUMENT

Transcription

1 M4 Corridor around Newport PUBLIC INQUIRY DOCUMENT REFERENCE NO. : ID/184 RAISED BY: The Inspectors DATE: 17/01/2018 RESPONDED BY: Matthew Jones DATE: 02/02/2018 SUBJECT: Project Costs, Risk and Optimism Bias Allowances The Inspectors have requested further detail be provided in respect of the risk and optimism bias allowances within the latest Scheme Cost estimate. This note sets out the costs in more detail. Cost Estimate The cost estimate for the Scheme has been updated to take account of the costs of works required to mitigate the impact of the proposed Scheme on Newport Docks. The cost estimate is published in the Revised Economic Appraisal Report Supplement No. 2 (WG 2.8.7). Table 1 provides a more detailed breakdown of the risk and optimism bias allowances within the Scheme Budget. It includes additional allowances that sit outside the scheme cost estimate, most notably the additional costs of the Newport Docks mitigation works. Appendix A shows the equivalent costs at Draft Orders stage in March As indicated in Table 1, the total cost of the Scheme before risk and optimism bias are taken into account is 1,164.3m. Whilst this amount excludes risk and optimism bias, it should be considered that contingencies will be built into the cost estimates for specific components of the cost estimate, for example, land and compensation costs. Specific risk and optimism bias allowances total 156.5m which represents 12% of the total estimated cost of 1,320.8m. The risk allowances for the Scheme derive from a Quantified Cost Risk Assessment (QCRA). Specific risk items have been identified by the Welsh Government and the Contractor. For each risk item, an assessment is made of the impact on the Scheme cost should the risk be realised. An assessment is also made as to the likelihood of the risk being realised and a probability is attached to the risk. The amount included in the risk allowances is the product of the impact and probability of each risk and therefore represents the expected value of risk for the Scheme. Risks are allocated to either the Employer (Welsh Government) or the Contractor in accordance with the Construction Contract. Risks relating to delays to the statutory process or changes in scope rest with the Employer. Land and compensation costs and works by other authorities sit outside the Construction Contract and therefore risks related to these elements also rest with the Welsh Government. The main Scheme budget includes 71.3m for risks, of which Contractor s risks comprises 41.8m and Employer s Risks 30.4m. Additional risk allowance of 31.3m relates to the additional Newport Docks mitigation works. This brings the total amount of risk to 103.4m. Risks relating to the Newport Docks mitigation works lie with the Welsh Government.

2 Adjustments for optimism bias are applied to the risk adjusted cost estimate for a scheme. Optimism bias is required to be applied to public sector project scheme estimates to adjust for a systematic historical tendency to underestimate project costs. Optimism bias can be interpreted as an allowance for risks that cannot be reasonably predicted and are therefore not necessarily captured by the QCRA. For the Scheme as a whole, a 4% uplift in costs has been included to account for optimism bias. Specific additional allowances for optimism bias have been included in relation the Eastbound Offslip at Junction 23a, Bridge Protection Works at Newport Docks and the reconfiguration of Caerleon Junction. This brings the total amout of optimism bias to 53.2m For the avoidance of doubt, the Scheme Cost including both risk and optimism bias represents the Welsh Government s best estimate of what the Scheme will cost in practice or the most likely cost. In accordance with WebTAG guidance, the economic appraisal of the Scheme (as set out in the December 2017 Revised Economic Appraisal Report Supplement No.2) has been undertaken based on the total cost of 1,320.8m which includes both risk and optimism bias. The cost estimate includes 44m of preparation costs incurred during the current design stage (Key Stage 4). As of December 2017, the Welsh Government had spent 31m with an additional 13m forecast to be spent. This expenditure include the cost of the Public Local Inquiry proceedings, payment of objectors legal and other costs, further design development, ground investigations, and collation of works information. A further 4.5m has been spent on land and compensation costs and on design and preparation undertaken by Statutory Undertakers (works by other authorities). A strict interpretation of guidance would suggest that costs spent to date are sunk costs which would be excluded from the appraisal. However, these costs are included in order to retain consistency with previous versions of the appraisal.

3 Table 1 Scheme Costs (Q prices, m) Component Updated Scheme Costs (December 2017 Revised Economic Appraisal Report Supplement No.2) Base Costs Risk and Optimism Bias Allowances Total Costs Of which spent (as of December 2017) Preliminaries including traffic management Roadworks Structures Landscaping and environmental works Contractor s Risk Sub Total Contracted Works Works by other authorities Land and compensation costs Employer s Risk Sub Total Construction Costs Optimism Eastbound Off Slip OB Bias Allowance Bridge Protection Works OB Allowance Scheme wide OB Total Optimism Bias Project Estimate Excluding VAT and ,093.2 Inflation Key Stage 4 Costs Reclassification and reconfiguration of Caerleon Junction Additional Newport Docks Works Total Cost 1, ,

4 Contractual Arrangements and the Treatment of Risk The particular form of contract being used for the M4CaN Scheme is NEC3: Option C Target Contract with Activity Schedule (New Engineering and Construction Contract). Under this contract, outturn financial risks are shared between the Employer and the Contractor under a pain gain mechanism. This mechanism is designed to encourage efficiency and to align the Contractor s interests with those of the Employer more closely. In accordance with the contract, a Target Cost is agreed between the two parties. As an ECI (Early Contractor Involvement) contract, the target cost derives directly from the Contractor s tendered price, including the Contractor s risk allowance. The target cost relates to a defined scope of works or activity schedule. The target cost can be adjusted (upwards or downwards) to reflect changes in scope instructed by the Welsh Government during the design and construction of the Scheme. If the target cost is exceeded, the additional cost will be shared between the Welsh Government and the Contractor. Conversely, if the outturn costs are lower than the target then the benefit is also shared. The pain gain mechanism uses a sliding scale. This means that the larger the gap between the outturn cost and the target cost the greater the share of the risk that is borne by the private sector. If savings are achieved against the target then situation is reversed so that the larger the cost saving the greater the share that is allocated to the Welsh Government.

5 APPENDIX A Scheme Costs at Draft Orders Table 2 Scheme Costs at March 2016 (Q prices, m) Component Scheme Costs (March 2016 Economic Appraisal Report) Base Costs Risk and Optimism Total Costs Bias Allowances Preliminaries including traffic management Roadworks Structures Landscaping and environmental works Contractor s Risk Sub Total Contracted Works Works by other authorities Land and compensation costs Employer s Risk Sub Total Construction Costs ,041.4 Optimism Bias Project Estimate Excluding VAT ,093.2 and Inflation Key Stage 4 Costs Reclassification and reconfiguration of Caerleon Junction Total Cost ,131.3