Estimating and monitoring the costs of building roads in England

Transcription

1 departmet for trasport Estimatig ad moitorig the costs of buildig roads i Eglad REPORT BY THE COMPTROLLER AND AUDITOR GENERAL HC 321 Sessio March 27

2 The Natioal Audit Office scrutiises public spedig o behalf of Parliamet. The Comptroller ad Auditor Geeral, Sir Joh Bour, is a Officer of the House of Commos. He is the head of the Natioal Audit Office, which employs some 85 staff. He, ad the Natioal Audit Office, are totally idepedet of Govermet. He certifies the accouts of all Govermet departmets ad a wide rage of other public sector bodies; ad he has statutory authority to report to Parliamet o the ecoomy, efficiecy ad effectiveess with which departmets ad other bodies have used their resources. Our work saves the taxpayer millios of pouds every year. At least 8 for every 1 spet ruig the Office.

3 Layout ad productio by NAO Iformatio Cetre DG Ref: 7423VB This report has bee prited o Cosort Royal Silk ad is produced from a combiatio of ECF (Elemetal Chlorie Free) ad TCF (Totally Chlorie Free) wood pulp that is fully recyclable ad sourced from carefully maaged ad reewed commercial forests. The rage is maufactured withi a mill which is registered uder the BS EN ISO 91 accreditatio, which provides the highest stadard of quality assurace.

4 DEPARTMENT for trasport Estimatig ad moitorig the costs of buildig roads i Eglad LONDON: The Statioery Office 13.5 Ordered by the House of Commos to be prited o 13 March 27 REPORT BY THE COMPTROLLER AND AUDITOR GENERAL HC 321 Sessio March 27

5 This report has bee prepared uder Sectio 6 of the Natioal Audit Act 1983 for presetatio to the House of Commos i accordace with Sectio 9 of the Act. Joh Bour Comptroller ad Auditor Geeral Natioal Audit Office 9 March 27 The Natioal Audit Office study team cosisted of: Flo Ashley, Steve Bowstead, Jo Cable, Nicola Coy ad Emma Marshall, assisted by Emma Moorto, uder the directio of Geraldie Barker ad Jill Goldsmith This report ca be foud o the Natioal Audit Office web site at For further iformatio about the Natioal Audit Office please cotact: Natioal Audit Office Press Office Buckigham Palace Road Victoria Lodo SW1W 9SP Tel: equiries@ao.gsi.gov.uk Natioal Audit Office 27

6 CONTENTS summary 4 part oe The costs of buildig roads are sigificatly 1 higher tha iitial estimates idicated Targeted Programme of Improvemet schemes 1 are costig more tha forecast The Departmet s fudig of Local Trasport Pla 12 schemes has icreased part two Costs ca be greater tha estimated at 17 each stage of road schemes Some schemes approved for etry to the roads 18 programmes have ot bee sufficietly developed to allow accurate early cost estimates Higher tha expected costructio costs have 18 accouted for the largest share of the actual ad forecast icrease i costs The costs of preparatory work for costructio 19 have ofte bee uderstated The costs of lad ad liability for compesatio 19 have bee uderestimated i some cases The costs of re-routig utilities have bee 2 sigificatly uderestimated part three The Departmet ad Agecy are takig 21 steps to improve moitorig ad cotrol of costs The Departmet ad Agecy are workig to 21 improve iitial cost estimates The Departmet has stregtheed its appraisal 22 ad approval of schemes The Agecy is developig its procuremet 23 strategy but sigificat cost risks remai The Departmet ad Agecy are takig steps 25 to improve their programme maagemet The Departmet ad Agecy could do more 26 to share iformatio ad good practice with local authorities appedices 1 Study methods 28 2 Highways Agecy Targeted Programme 34 of Improvemet 3 Local Trasport Pla fuded major 4 road schemes 4 Schemes dropped or delayed through the 45 Regioal Fudig Allocatio process 5 Provisioal Regioal Fudig Allocatios 46 Photographs courtesy of The Highways Agecy

7 SummARy 1 This report examies how the costs of buildig ad improvig roads are estimated ad moitored from early forecasts through to the fial cost of schemes. The Departmet for Trasport (the Departmet) has approved expediture of over 11 billio betwee 1998 ad 221 for the developmet of ew ad existig truk roads ad motorways by the Highways Agecy (the Agecy) (Figure 1 o page 8), ad just uder 1.7 billio o major road schemes which are proposed ad developed by local authorities i five year Local Trasport Plas (Figure 2 o page 9). 1 This expediture cotributes to the Departmet s Public Service Agreemet Target to make joureys more reliable. 1 There are 13 schemes i the Highways Agecy s programme, seve of which are PFI projects let as Desig, Build, Fiace ad Operate cotracts. The Programme cotaied 113 schemes: six schemes have bee dropped, oe has bee trasferred to Trasport for Lodo ad i our aalysis we have couted the three A43 Silverstoe schemes as oe scheme ad the two A1 Dishforth to Barto schemes as oe scheme. There are 81 Local Trasport Pla schemes two of which are plaed to be PFI cotracts. 4 ESTImATING AND monitoring THE COSTS OF BuILDING ROADS IN ENGLAND

8 summary 2 Schemes have cost more tha iitial estimates idicated. For the Targeted Programme of Improvemet: By September 26, 36 schemes had bee completed ad, after adjustmets for chages i estimatig methodology, had cost six per cet more tha estimated; 2 The Departmet s latest approved estimates of the curret Agecy schemes are five per cet more tha estimated ad the latest forecast for the fial programme idicates a 27 per cet icrease above the iitial estimates. For the Local Trasport Pla: By July 26 the 2 schemes completed had cost 18 per cet more tha iitially estimated ad the Departmet s fudig cotributio had icreased by 14 per cet. The Departmet s latest approved estimates of the 61 schemes curretly i the pla show a overall icrease of 11 per cet above the iitial estimates. The Departmet s fudig cotributio has also icreased by 11 per cet. The latest local authority forecasts idicate that costs will icrease further with the fial cost likely to be 31 per cet more tha the iitial estimates. Ulike the Agecy s schemes local authority estimates were ot adjusted to compesate for the tedecy to uderestimate costs. The Departmet cosiders that if such adjustmets had bee made the icreases above would be substatially reduced. Overall Coclusio 3 Robust estimatig is a key factor i deliverig value for moey from road schemes but represets a difficult ad challegig task give the timescale of major road projects ad the umber of potetial variables, some of which are outside of the Agecy s ad local authorities direct cotrol such as Public Iquiry outcomes. The Agecy is takig actio to improve its estimatig processes, ad the Departmet to improve its review of proposals put forward by local authorities. There is scope to further tighte procedures by improvig itelliget buyer skills through better evaluatio of time ad cost variaces o completed schemes ad dissemiatio of lessos leared; developmet ad utilisatio by the Agecy of more uit cost data for compoets of schemes, labour ad materials; ad by maagig prudet cotigecy provisios so as ot to disicetivise project maagers from preparig realistic estimates ad maagig agaist them. Additioally the Departmet ad Agecy could improve programme moitorig by measurig progress o the Agecy s programme o a project by project basis rather tha a overall target for all schemes ad by comparig costs icurred ot oly to the overall project budget but also agaist those expected for the stage of completio. Key fidigs 1 Most schemes eter the roads programme at a early stage of their developmet ad oly have a idicative estimate of likely cost. Fial costs were 17 per cet more tha iitial estimates for the Agecy s schemes etered as outlie busiess cases, compared to seve per cet for schemes where the preferred route had bee idetified ad three per cet for cases approved before the mai works cotract is let. 2 The Public Iquiry stage for a road scheme may require sigificat additioal desig work ad major chages to desig which make it difficult to produce accurate cost estimates before a Public Iquiry. 3 The biggest icreases occur i the costructio costs due to: iflatio i costructio costs which is higher tha geeral iflatio across the ecoomy; desig chages (for example where additioal juctios are added to plas); costs of structures such as bridges ad tuels beig uderestimated; chages i itercoectig roads; meetig stakeholder requiremets such as those of adjoiig ladowers; isufficiet allowace beig made for third party ad other regulatory costs such as chages i safety stadards; 2 Estimates for 35 of the 36 completed Targeted Programme of Improvemet Schemes were prepared before 23 ad icluded a te per cet cotigecy for risk but excluded o recoverable value added tax ad iflatio. From this base lie, the actual costs were 4 per cet higher tha these iitial estimates. Sice 23 the Agecy s estimates have icluded both value added tax ad iflatio ad i accordace with Treasury guidace issued i 23 i The Gree Book, have also bee icreased by betwee 3 ad 45 per cet to compesate for the tedecy to uderestimate costs (kow as optimism bias ). The origial estimates have bee adjusted retrospectively, givig the icrease of six per cet rather tha 4 per cet. Estimatig ad moitorig the costs of buildig roads i Eglad 5

9 summary complexity of the scheme beig uderestimated such as where surveys carried out after preparatio of iitial estimates show groud coditios to be worse tha expected; ad uforesee work such as discovery of archaeological remais. 4 There are other major factors behid differeces betwee roads costs estimates ad outtur icludig: costs of preparatory work for costructio (site set up, erectio of temporary offices, site trasport etc) have bee uderestimated; the costs of lad ad liabilities for compesatio have bee uderestimated, for example because more lad is required tha origially aticipated, there is greater tha aticipated lad ad property value iflatio, ad delays i scheme progress ca add to iflatioary pressures; ad costs of re-routig utilities (gas, water ad electricity) have bee sigificatly uderestimated. 5 The Departmet ad the Agecy are takig steps to improve estimatig, for example of iflatio ad lad costs but it is too early to judge the success of such measures. Steps are also beig take to improve the uderstadig ad accuracy of cost estimates. 3 Additioally, the Departmet commissioed the Nichols Group to review the Agecy s approach to cost estimatig ad project maagemet. 6 Estimatig could be further ehaced by: Better evaluatio of completed schemes. Util recetly the Agecy s evaluatios of roads after they ope did ot examie costs agaist budget or the scheme s progress agaist timetable. The Agecy itroduced ew procedures i December 26. The Departmet has required evaluatios by local authorities o schemes approved sice early 26 ad has recetly issued guidace o evaluatig major local authority trasport schemes. Neither the Agecy or the Departmet formally dissemiates the lessos leared from scheme evaluatios with each other or with local authorities. The Departmet has supported the establishmet of a iteret based etwork for sharig good practice betwee local authorities. Further work to develop ad utilise uit costs for schemes. The Agecy has made some progress o idetifyig the uit costs of the mai compoets of schemes ad the costs of labour ad materials so that it ca maage estimates ad cotracts more effectively. The Departmet has ot udertake ay work to idetify the uit costs of Local Trasport pla schemes as it does ot have access to the detailed breakdow of costs from cotracts let by local authorities. Istead it ow esures that cost estimates are exterally reviewed by techical experts. Reviewig the way provisios for cotigecies are made. The Agecy icludes a cotigecy to compesate for uderestimates i its budgets for idividual schemes which whilst prudet may reduce the icetive for project leaders to provide realistic estimates. The Departmet seeks to mitigate this risk for local authority schemes by sharig ay costs icurred above budget with the Local Authority. 7 The Departmet ad the Agecy have bee able to absorb the icreases i costs to date because of delays o some schemes ad chages to the roads programmes but this may chage. 4 8 Moitorig of road schemes requires more rigour: The Departmet has moitored its ad the Agecy s spedig agaist aual expediture limits withi three year Govermet expediture review periods. The Agecy is resposible for developig ad deliverig schemes i accordace with budgets ad the scope approved by Miisters. Improved processes have bee put i place by the Agecy sice 24, whereby expediture is moitored mothly agaist budget o idividual schemes ad sice August 26, it has started to discuss this with the Departmet. The Agecy is ot required, however, to report o what proportio of a scheme has bee delivered for the expediture icurred. The Departmet has reviewed the progress of idividual Local Trasport Pla schemes at least aually ad reviews scheme costs at each key decisio stage. It is ow itroducig improved moitorig arragemets for local authority schemes as part of the process of itroducig the regioal fudig allocatios for trasport schemes. 3 For example, the Departmet ow requires a more comprehesive busiess case from local authorities, employs cosultats to review cost estimates i ew busiess cases, has itroduced aother approval stage for all projects to cotrol costs durig procuremet ad has itroduced greater sharig of cost risks with local authorities. The Agecy has itroduced cotracts which allow cotractors to become ivolved earlier i schemes with the aim of reducig cost, promotig iovatio ad speedig up delivery. 4 For example of the 58 Targeted Programme of Improvemet schemes forecast to have started costructio before the ed of 25-6, 15 had ot doe so. 6 Estimatig ad moitorig the costs of buildig roads i Eglad

10 summary Recommedatios To build o recet improvemets to the estimatig ad maagemet of scheme costs 1 The Departmet should cosider defiig more clearly the time at which schemes are formally regarded as i its roads programmes which should reflect a time whe the scheme developmet is sufficietly far advaced to allow costs to be estimated with reasoable certaity. 2 The Agecy ad the Departmet should examie critically scheme outtur costs agaist estimates to establish the reasos for the differeces ad use this iformatio to produce a more iformed rage of cotigecy factors to compesate for uder estimates ad use the data i future appraisals. The cotigecy factors should be reviewed ad updated as ad whe a sigificat umber of ew projects are completed to keep them timely. 3 To emphasise to project maagers the importace of realistic ad robust cost estimatig, the Agecy should retai cetrally the cotigecy for uderestimates ad oly allocate fuds from this source to idividual projects for project accoutability purposes where they are satisfied cost variaces could ot have bee foresee. To build o recet improvemets i the moitorig ad maagemet of road schemes 6 From 27-8 owards, the Agecy should publish a aual aalysis of iitial ad updated cost estimates, outtur costs, ad progress agaist target dates, for all road schemes withi the Targeted Programme of Improvemet. 7 The Agecy s post road opeig evaluatios should by Jue 27, icorporate reviews of the scheme s costs ad progress agaist timetable compared to plas, idetifyig the reasos for variaces, to esure lessos are leart to iform the plaig, maagemet ad delivery of future schemes. To ehace capability 8 By the ed of 27, the Agecy should coduct a skills audit of its staff ad based o the results take actio to improve project ad cotract maagemet skills. 9 The Departmet ad the Agecy should share more iformatio betwee themselves ad with local authorities to ecourage best practice. This iformatio should iclude idetifyig the factors that cotribute to the successful delivery of schemes ad improve the maagemet of costs. 4 The Agecy should complete its work o establishig uit costs for all key schemes by the ed of 27, so that the Agecy ca set more realistic iitial cost estimates ad bechmark its performace agaist that of other orgaisatios. 5 The Agecy should moitor the market rates for key materials ad pay rates used i roads costructio to eable it to egotiate more competitive cotracts with cotractors or directly with suppliers. Estimatig ad moitorig the costs of buildig roads i Eglad 7

11 summary 1 Locatio of curret schemes i the Targeted Programme of Improvemet as at July 26 North East & Yorkshire M1 J39 to J42 Wideig M1 J37 to J39 Wideig M1 J34N to J37 Wideig M1 J32 to J34S Wideig M1 J31 to J32 Wideig M1 J31 to J32 Northboud Collector/Distributor M1 J3 to J31 Wideig M62 J27 to J28 Wideig M62 J25 to J27 Wideig A63 Melto Grade Separated Juctio A57/A628 Mottram Titwistle Bypass A1 Bramham Wetherby (Icludig Wetherby Bypass) A69 Haydo Bridge Bypass A66 Log Newto Juctio A66 Greta Bridge to Stephe Bak Improvemet A66 Carki Moor to Scotch Corer Improvemet A19/A184 Testos Juctio Improvemet A1/A19/A168 Seato Bur Juctio Improvemet A1 Dishforth to Barto North West M62 Juctio 6 Improvemet M6 Carlisle to Guardsmill Extesio A66 Temple Sowerby & Improvemet at Widerwath A595 Parto Lillyhall Improvemet A59 High & Low Newto Bypass A5117/A55 Deeside Park Juctios Improvemet East M1 Juctio 6a 1 Wideig M1 Juctio 1 13 Wideig A55 Dustable Norther Bypass (A5 to M1 Lik) A47 Blofield to North Burligham Duallig A428 Caxto Commo to Hardwick Improvemet A421 Great Barford Bypass A421 Bedford to M1 Juctio 13 A14 Haughley New St Stowmarket Improvemet A14 Elligto Fe Ditto Improvemet A11 Fiveways Thetford Improvemet A11 Attleborough Bypass South West A419 Blusdo Bypass A38 Dobwalls Bypass A33 Stoehege A3/A382 Merrymeet Juctio A3 Bodmi Idia Quees A419 Commohead Juctio Source: Natioal Audit Office Midlads M4 Juctio 15 (Logbridge) M1 J21-3 M1 J19 Improvemet A5 City Road & Stoke A46 Newark Widmerpool Improvemet A453 Wideig (M1 J24 to A52 Nottigham) A45/A46 Tollbar Ed Improvemet A1 Peterborough Blyth Grade Separated Juctios Lodo & South East M4/A44 Hady Cross Juctio Improvemet M27 J3 to J4 Wideig M27 J11 to J12 Climbig Laes M25 Juctio 28/A12 Brook Street Iterchage M25 J5-7 Wideig M25 J27-3 Wideig M25 J23-27 Wideig M25 J16-23 M25 J1b-3 Wideig M2 Juctio 1A A3 Hidhead Improvemet A27 Southerham to Beddigham Improvemet A23 Hadcross to Wariglid Wideig A21 Tobridge to Pembury A21 Kippigs Cross to Lamberhurst Bypass A2/A282 Dartford Improvemet A2 Bea Cobham Phase 2 8 Estimatig ad moitorig the costs of buildig roads i Eglad

12 summary 2 Locatio of curret Local Trasport Pla major road schemes as at July 26 North West A58 Blackbrook Diversio A34 Alderley Edge Bypass A57 Glossop Spur Hall Lae Area Improvemet Scheme Carlisle Norther Developmet Route New Mersey Gateway Liverpool Edge Lae West Ashto Norther Bypass Stage 2 West Midlads Selly Oak Relief Road A38 - Northfield Regeeratio A429 - Barford Bypass Rugeley Easter Bypass Stage 2 Tustall Norther Bypass Cradley Heath Tow Cetre Strategy Owe Street Level Crossig Relief Road Rugby Wester Relief Road A 4123/A641 Juctio Improvemet Burt Tree Brierley Hill Access Network Darlasto Strategic Developmet Area South West Barstaple Wester Bypass Poole Bridge Regeeratio Iitiative Scheme Tauto Third Way ad Norther Ier ad Distributor Road A353/A354 Weymouth Relief Road North East Pegswood Bypass Suderlad Souther Radial Route Darligto Easter Trasport Corridor A688 Weatley Hill to Bowbur Lik A156 Norther Gateway Stage 2 North Middlesborough Accessibility Improvemets South East A228 Leyboure & West Mallig Corridor Improvemet Scheme A4146 Stoke Hammod/Lislade Wester Bypass East Ket Access Phase 1 East Ket Access Phase 2 M4 Juctio 11 (Gree Park Improvemets) ad Mereoak Roudabout Thames Gateway A13/A13 Bexhill to Hastigs Lik Road Sittigboure Norther Relief Road Yorkshire & Humberside Sheffield Norther Ier Relief Road East Leeds Lik Road Leeds Ier Rig Road Stage 7 A165 Reighto Bypass A631 West Bawtry Road Improvemets A628 Cudworth ad West Gree Lik Road A57 M1 to Todwick Crossroads Hemsworth to A1 Lik Glasshoughto Coalfields Lik Road Waverley Lik Road Beverley Itegrated Trasport Scheme East Midlads A696 Ilkesto-Awsworth Lik A612 Gedlig Itegrated Trasport Scheme Oakham Bypass Markham Employmet Growth Zoe A47 Earl Shilto Bypass A59 Isham Bypass A173 Spaldig to Eye A43 Corby Lik Road East A1198 Papworth Bypass B1115 Stowmarket Relief Road A127/A1159 Priory Crescet, Southed o Sea Ridgmot Bypass ad Wobur Lik Road A6 Bedford Wester Bypass Source: Natioal Audit Office Estimatig ad moitorig the costs of buildig roads i Eglad 9

13 PART ONE The costs of buildig roads are sigificatly higher tha iitial estimates idicated 1.1 The Departmet for Trasport (the Departmet) has to date give approval to 13 billio of expediture betwee 1998 ad 221, o buildig ad wideig roads i Eglad. This cotributes to the Departmet s Public Service Agreemet target to make joureys more reliable. The ivestmet i roads is maaged through: the Targeted Programme of Improvemet (the Programme), which covers motorways ad truk roads ad is delivered by the Highways Agecy (the Agecy) (Figure 1). It has approved costs, as at July 26, of over 11 billio; ad Local Trasport Plas (Figure 2) for road schemes proposed, developed ad maaged by Local Authorities, which has approved costs, as at July 26, of just uder 1.7 billio. Sice 26, all Local Trasport Pla schemes over 5 millio ad some Targeted Programme of Improvemet Schemes are maaged through Regioal Fudig Allocatios. This has bee doe so that regios ca prioritise schemes ad has resulted i all routes apart from most motorways ad some high volume truk roads beig desigated as beig of regioal rather tha atioal sigificace. This part of our report examies how the costs of Targeted Programme of Improvemet schemes ad Local Trasport Pla schemes were estimated ad how these estimates compare with actual costs of completed schemes ad with recet forecasts for those schemes still to be completed. Targeted Programme of Improvemet schemes are costig more tha forecast The cost of schemes listed o the Programme prior to 23 were uderestimated 1.2 The Targeted Programme of Improvemet is a list of schemes to build ew or wide existig truk roads ad motorways, which the Departmet idetifies through regioal plaig processes. The Programme bega i 1998 ad curretly covers schemes with a delivery date of up to 221. There are 13 5 schemes i the Programme, of which 36 had bee completed by September Prior to 23 the Departmet submitted schemes to Miisters for approval for etry to the Programme, with estimates developed by the Agecy which were based o curret prices ad icluded a te per cet risk allowace but excluded Value Added Tax ad iflatio over the life of the project. We examied the fial cost of all 36 completed Targeted Programme of Improvemet schemes 6 compared to these iitial estimates ad foud that the outtur cost was 4 per cet higher. Five of the 36 schemes accouted for almost 4 per cet of the icreases agaist iitial estimates 7 while oe scheme had a large cost reductio followig a decrease i scope (Appedix 2, Figure 9). 5 The Programme cotaied 113 schemes: six schemes have bee dropped, oe has bee trasferred to Trasport for Lodo ad i our aalysis we have couted the three A43 Silverstoe schemes as oe scheme ad the two A1 Dishforth to Barto schemes as oe scheme. 6 All but oe of these schemes had received approval prior to A5 Basford, Hough, Shavigto Bypass, A41 Asto Clito Bypass, A34 Chieveley/M4 J13 Improvemet, A43 Silverstoe Bypass/A43 Whitfield Tur Brackley Hatch Improvemet/A43 M4 B431 Duallig, ad A1 (M) Wetherby Walshford schemes accout for almost 4 per cet of the total cost icrease. 1 ESTImATING AND monitoring THE COSTS OF BuILDING ROADS IN ENGLAND

14 part oe 1.4 I 23, the Treasury issued The Gree Book which provides guidace o adjustig estimates for bias ad risks. I accordace with this guidace, sice 23 the Departmet has submitted estimates to Miisters which iclude o-recoverable value added tax, iflatio iitially at a rate of two ad a half per cet but more recetly at a higher rate to reflect recet iflatio i costructio costs ad a variable percetage icrease to compesate for the tedecy for project appraisers to be overly optimistic ad to uder-estimate costs (optimism bias). The Agecy revised the iitial estimates for the 36 completed schemes retrospectively so that they were calculated i accordace with The Gree Book guidace, icludig a cotigecy for uderestimatig costs ragig from three per cet to 45 per cet depedig o each scheme s stage of developmet o etry to the Programme (see Appedix 1 for further detail o the level of adjustmet). O this basis the cost of the 36 schemes was six per cet more tha the Agecy s revised estimates (Figure 3). Latest approved estimates for curret schemes are seve per cet higher tha iitial estimates ad further icreases are likely 1.5 The iitial estimates for the 67 schemes i the Targeted Programme of Improvemet which are still to be completed total 8,952 millio whe adjusted for iflatio, VAT ad a cotigecy to correct uderestimatio (35 of these schemes were approved before 23, if their iitial estimates are used, the total cost would have bee 8,43 millio). The latest approved estimate for the 67 schemes is 9,356 millio, a icrease of five per cet. I July 26, there was a further revisio of the estimates for 43 of these schemes, which if cofirmed ad approved by Miisters would mea forecast costs of 11,41 millio, a icrease of 27 per cet above the iitial estimates (Figure 4 overleaf) 8. The Departmet told us that i may cases there is still ucertaity about these July 26 estimates. 9 The Agecy will oly seek Miisterial approval of these icreases whe it has reviewed them to idetify efficiecies, is satisfied that the latest estimate is accurate ad caot be reduced further ad that i the view of the Departmet ad the Agecy the scheme still offers good value for moey. The Agecy is urgetly reviewig its approach to estimatig ad will produce revised estimates for all curret schemes later i Cost ( millio) 1,8 1,6 1,4 1,2 1, TPI Chage i cost explaied by other factors Source: Natioal Audit Office aalysis of Highways Agecy data NOTE Completed schemes cost six per cet more tha early estimates idicated eve whe a cotigecy is added to compesate for uderestimates ,225 Cotigecy for uderestimates No-recoverable VAT + iflatio o iitial estimate Iitial programme etry estimate To determie the extet of cost icreases explaied by the historical approach to estimatig, cost estimates o etry to the programme were adjusted to iclude o-recoverable VAT ad iflatio ad cotigecy for uderestimates. For a full explaatio of the adjustmets see otes to Figure 9 at Appedix The Departmet told us that the July 26 forecast costs have sice icreased further. Our aalysis foud that 35 of the 67 curret schemes etered the Programme after 23 ad are still at a early stage, for example, the preferred route has ot yet bee decided for 14 schemes. To date, revised estimates have oly bee approved for three of these 35 early schemes ad these showed a icrease of 22 per cet over iitial estimates. This cotrasts with estimates for 25 of the 32 more advaced schemes, which have a average icrease of 37 per cet. Most of these schemes have progressed through the detailed desig ad plaig stages; ie have bee through public iquiry ad 12 are i costructio. The five largest schemes accout for over half of the latest Miisterially approved budget ad have a average icrease i estimate of 3 per cet. 8 If the origial estimates were used for schemes approved before 23, this figure would icrease to 42 per cet. 9 Because of the ucertaity about these estimates we have ot icluded these figures i Figures 1 ad 11 of Appedix 1. Estimatig ad moitorig the costs of buildig roads i Eglad 11

15 part oe 4 The July 26 estimates for schemes are 27 per cet higher tha iitial estimates whe adjusted to iclude allowace for iflatio, VAT ad uderestimatio Cost ( millio) 12, 1, 8, 6, 4, 2, Schemes that etered TPI before April 23 1,213 Schemes that etered TPI after April 23 1, ,83 Total 2, ,43 Latest estimate of outtur Latest approved estimate Iitial estimate adjusted for o-recoverable VAT, iflatio ad uderestimatio Iitial programme etry estimate Source: Natioal Audit Office aalysis of Highways Agecy data NOTE 1 To determie the extet of cost icreases explaied by differeces i the approach to estimatig, cost estimates o etry to the programme were adjusted to iclude o-recoverable VAT, iflatio ad a adjustmet for uder-estimatio i accordace with revised Treasury guidace o ivestmet appraisal issued i April 23. For a full explaatio of the adjustmets see otes to Figures 9 ad 1 at Appedix This idicates that several curret road schemes are likely to cost more tha their iitial estimates by a greater margi tha those schemes which have bee completed. Possible reasos for this may iclude that the earlier schemes were more straightforward or at a later stage whe eterig the Programme ad so subject to fewer chages or they were subject to a lower rate of iflatio tha more recet schemes. The curret programme also icludes some particularly complex schemes, such as the A33 at Stoehege ad the Hidhead Improvemets that have bee i the programme for several years ad where sigificat chages i scope have arise. The Departmet s fudig of Local Trasport Pla schemes has icreased The Departmet icreased its fudig by 14 per cet for completed schemes 1.8 Local Trasport Plas which cover five year periods, are produced by all Couty Coucils, Uitary Authorities ad Metropolita Authorities i Eglad. Major schemes promoted through Local Trasport Plas embrace a rage of trasport projects icludig the buildig ad developig of ew roads, improvemets to existig roads ad proposals for other trasport schemes such as buses. Miisters ultimately decide what package of schemes represets the best use of the available budget i the light of local, regioal ad atioal objectives. The Departmet scrutiises busiess cases for major schemes, icludig cost estimates, ad approves the fudig at the Programme Etry stage. It also scrutiises the costs at a later stage before teders are sought ad whe schemes are ready to start costructio. Local authorities are resposible for desigig the schemes, preparig cost estimates, takig them through cosultatio ad the statutory processes such as Compulsory Purchase Orders, ad for their procuremet ad delivery. The Departmet has o direct resposibility for estimatig costs or for the maagemet ad delivery of schemes although it has a iterest i the accuracy of estimates ad subjects schemes to a full appraisal ad value for moey assessmet based o busiess cases provided by local authorities at each approval stage. 1.9 Local Trasport Pla road schemes have rise i cost compared with iitial estimates as has the Departmet s cotributio. We foud that the total cost of the 2 schemes completed by July 26, icreased by 18 per cet from whe Miisters had approved them to eter the programme ad that the Departmet s cotributio had icreased by 14 per cet. The Departmet met 75 per cet of the total icrease, with the remaiig 12 Estimatig ad moitorig the costs of buildig roads i Eglad

16 part oe icreases beig met by local authorities ad developers (Figure 5). Nietee of the 2 schemes showed icreases i total costs, with the Departmet s cotributios for these schemes icreasig by betwee less tha oe per cet ad 4 per cet. (Appedix 3, Figure 12). 1.1 Local Authority estimates were ot made o a stadard basis; we foud, for example, evidece of differet assumptios beig used about iflatio. These schemes were also approved before the itroductio of the Treasury s Gree Book guidace i 23 ad so the estimates were ot icreased to compesate for the tedecy to uderestimate costs (optimism bias). As stated i paragraph 1.4, uder Treasury guidace after 23, such scheme estimates could have bee icreased by betwee three ad 45 per cet depedig o their stage of developmet. Had these icreases bee applied retrospectively as they were for the Agecy schemes, the revised estimates would have bee very close to the actual cost. Sice 23, the Departmet has required Local Authorities to iclude a allowace for uderestimatio i their estimates for appraisal purposes but this is ot icluded i the approved budgets to maitai the icetive to cotrol costs. The Departmet has icreased its fudig for curret schemes by 11 per cet ad costs are forecast to icrease further 1.11 Iitial estimates were that the 61 road schemes curretly i the Local Trasport Plas ad still to be completed would cost just over 1.4 billio, ad that the Departmet s approved fudig cotributio would be just over 1.2 billio (86 per cet). The Departmet has ow give approval to obtai teders to 26 of these schemes, with latest approved estimates which are 38 per cet higher tha iitial estimates ad which icrease the Departmet s cotributio by 44 per cet. Eve if the estimates for the other schemes do ot icrease, this would give a total approved cost of the programme of just uder 1.6 billio ad the Departmet s cotributio will have icreased by 11 per cet (Figure 6 overleaf). Costs are likely to rise further though as the latest forecasts provided by local authorities to the Departmet suggest that the total cost of the curret Local Trasport Pla schemes would be just uder 1.9 billio, 1 31 per cet more tha the iitial estimate. As stated i paragraph 1.1, these iitial estimates were ot icreased to compesate for the tedecy to uderestimate costs. The Departmet cosiders that such a adjustmet would materially reduce the size of the idetified cost icreases. 5 Cost ( millio) LTP Source: Natioal Audit Office aalysis of DfT, Govermet Office for the Regios ad local authority data NOTE The 2 completed Local Trasport Pla major road schemes cost 18 per cet more tha idicated by iitial estimates Local authority/developers (additioal cotributio) DfT (additioal cotributio) Local authority/developers cotributio (iitial estimate) DfT cotributio (iitial estimate) The total of 345 differs from the total fial cost figure i Appedix 3, Figure 12 because of roudig. Moitorig delivery of the Targeted Programme of Improvemet to cost ad time has bee limited 1.12 Forward fudig plas were iitially established i 1998 for the Targeted Programme of Improvemet ad i 2 for Local Trasport Pla major schemes. Further idicative fudig projectios were made i the Govermet s 1 Year Trasport Pla issued i 2 ad i the Govermet Spedig Reviews of 22 ad 24. These Spedig Reviews set idicative budgets for the ext three years ad, subject to agreed chages, it is agaist these budgets ad withi this three year time period that the Agecy moitors its expediture as does the Departmet. The Departmet also moitors the loger term costs of deliverig schemes i the Targeted Programme of Improvemet agaist idicative loger term fudig profiles, curretly up to 215. The Agecy is also accoutable for deliverig objectives agreed with the Departmet withi the three year spedig periods, for example, objectives to reduce cogestio ad improve jourey reliability. 1 The icrease of 31 per cet to 1,874 millio is lower tha the 48 per cet icrease that the Departmet reported to Parliamet i May 26 because of the chages to the programme aouced i July 26 (paragraph 1.2). Estimatig ad moitorig the costs of buildig roads i Eglad 13

17 part oe 6 Cost ( millio) 2, 1,8 1,6 1,4 1,2 1, Curret LTP schemes Source: Aalysis of Govermet Office for the Regios ad local authority data NOTE The 61 curret Local Trasport Pla major road schemes have approved cost estimates 11 per cet higher tha their iitial estimates ,237 Latest estimate of outtur Local authority/developers (additioal cotributio) DfT (additioal cotributio) Local authority/developers cotributio (iitial estimate) DfT cotributio (iitial estimate) Local Authorities latest cost estimates for the schemes were provided i May 26 ad, for schemes that etered the programme followig Regioal prioritisatio, i July 26. Most of these estimates have ot yet bee approved by Miisters The Agecy is resposible for developig ad deliverig schemes i accordace with budgets ad the scope approved by Miisters whe the scheme etered the Programme ad withi Spedig Review periods it is required to deliver a programme of schemes approved by Miisters withi a agreed budget. It is accoutable to Miisters for all cost icreases above the Agecy s delegated fiacial limits. I recet years it has improved its fiacial systems so that it ca moitor costs more effectively. Sice 24, it has kept ad reviewed mothly records of actual costs ad it has produced a detailed mothly report of expediture agaist budget. Sice August 26, the Departmet has regularly discussed the estimated cost of schemes with the Agecy. I additio all schemes which experiece cost icreases i excess of the Agecy s delegated fiacial limits are subject to a re-appraisal by the Departmet before beig submitted to Miisters for a decisio o whether to approve the icrease. The Agecy is ot required, however, to report o what proportio of a scheme it has delivered for the expediture it has icurred ad does ot moitor this The Agecy has maitaied a spreadsheet which it shares with the Departmet ad updates regularly that shows the progress of schemes through the key stages of the delivery process. A progress poits system is used to moitor delivery of the overall Targeted Programme of Improvemet. Each scheme uder developmet ca ear a maximum of 1 poits, with poits awarded for achievig key evets such as the start of costructio. The Departmet sets a overall target for the umber of poits the Agecy must ear withi a three year period to provide the Agecy with some flexibility i its programme maagemet. Measurig achievemet agaist this target does ot idetify which schemes are ruig late or which are o time I 2, the Agecy stated that it was a priority to deliver projects more quickly ad set a target i 22 to reduce the time take to deliver ew road schemes to betwee five ad seve years. The Agecy does ot moitor whether it is achievig this target. We aalysed data for completed schemes that etered the Targeted Programme of Improvemet before the public iquiry stage ad foud that they took six years o average to complete the various stages from programme etry (Figure 7). Some schemes have progressed more slowly. 7 The Agecy aims to complete the various stages of a road scheme i a average of seve years Target time take to reach each stage (cumulative) Idetify possible routes Public cosultatio ad preferred route aoucemet Programme etry ad cotract award (ECI) Further desig of preferred route 1 moths 1 year, 5 moths 2 years, 3 moths 2 years, 1 moths Source: Natioal Audit Office aalysis of Highways Agecy data 14 Estimatig ad moitorig the costs of buildig roads i Eglad

18 part oe For example, the A2 Bea to Cobham Phase 2 ad the A2/A282 Dartford Improvemet schemes both etered the Programme i July 1998 but costructio oly started at the ed of 26. The curret forecast date for these schemes opeig to traffic is early 28, almost 1 years after etry to the programme. The Agecy has bee able to absorb cost icreases because of delays o some schemes ad chages to the roads programmes 1.16 Despite the icreases i costs of completed schemes ad risig forecast costs the Agecy has bee able to absorb these icreases as some schemes have slipped agaist their origial timetable. For example, of the 58 schemes forecast to have started costructio before the ed of 25-6 as of 31 March 26, 15 had yet to start. Of these 15, oe has bee dropped from the Programme ad four still do ot have cofirmed dates for costructio. The level of fudig for the Targeted Programme of Improvemet is set i each spedig review 1.17 Fudig for the Targeted Programme of Improvemet up to 27-8 was agreed i the 24 Spedig Review ad the Agecy aouced the programme of schemes it plaed to take forward. I July 26, as a result of decidig priorities for Regioal Fudig Allocatios it was decided that six regioal schemes i the Programme would ot be fuded before ad timetables for a further seve schemes would be altered. Whe the Agecy reviewed the programme s fudig i July 26 it cocluded that after these chages had take place, its programme could, if all the remaiig schemes wet ahead, result i expediture from 25-6 to of 13.4 billio. Fudig beyod 27-8 will be cosidered withi the 27 Comprehesive Spedig Review. The Departmet does ot moitor delivery of Local Trasport Pla road schemes i detail agaist origial timetables 1.18 Uder the Local Trasport Pla local authorities are resposible for the delivery of approved road schemes. There is o separate budget for roads withi the overall budget for Local Trasport Pla major schemes which also cover other schemes such as public trasport. To date the Departmet has had sufficiet fudig available to fud the road schemes uder developmet. We aalysed the Departmet s data ad foud that betwee 21-2 ad 24-5 the Departmet spet 43 millio o major road schemes which was 134 millio less tha the allocated fudig of 564 millio for that period because of slippage i Local Authorities plaed delivery timetables while i 25-6 there was a further udersped. The Departmet told us that with the itroductio of Regioal Fudig Allocatios (paragraph 1.2) it will obtai cost iformatio from local authorities o a quarterly basis ad has set out a process for holdig six mothly meetigs with each regio to moitor progress The Departmet s pricipal resposibility is for the allocatio ad maagemet of fudig for the local authority major schemes ad therefore does ot moitor i detail or maitai data aalysig whether schemes are beig completed i accordace with local authorities origial timetables. Our work idicates that local authorities are takig loger to deliver some schemes tha they origially expected. For example, we examied four completed schemes i more detail ad foud that they had a average delay of four moths while the seve curret schemes we examied are due to ope to traffic early four years later tha the origial expected date. Such delays have helped to reduce cost pressures o the Departmet s budget for major schemes. Publish draft Orders ad Evirometal Statemet Public iquiry Serve Orders ad approve fial desig Costructio Road ope to traffic 3 years, 3 moths 4 years 6 moths 5 years, 1 moth 7 years 1 moth Estimatig ad moitorig the costs of buildig roads i Eglad 15

19 part oe The itroductio of the Regioal Fudig Allocatios has chaged the compositio of the roads programmes 1.2 Followig a aoucemet i 25 that regios would have a role i decidig priorities for regioal ad local trasport schemes, i July 26 chages were made to the roads programmes. Uder the terms of the ew Regioal Fudig Allocatios seve ew local road schemes, as well as 1 other local trasport schemes, have bee approved for etry ito the regioal programme. I tur, as stated i paragraph 1.17, six regioal road schemes i the Agecy s Targeted Programme of Improvemet ad eight road schemes (ad oe other trasport project) previously i Local Trasport Plas will ot ow be fuded durig the period to while a further seve Agecy schemes will ow proceed to a sigificatly differet timetable to that previously plaed. 11 I additio to the schemes that have already bee approved the Departmet expects there to be further headroom i the Programmes i future years. The Secretary of State aouced i July 26 that he expected at least a further 9 trasport schemes would be added to the programmes over the ext te years There is curretly sigificat over-programmig betwee 26-7 ad , of up to 21 per cet each year ad uder-programmig i later years, which the Departmet told us, was i expectatio of scheme slippage. Four of the eight regios are over-programmed while two regios, the South East ad West Midlads curretly have substatially less schemes allocated tha fudig provisioally allocated i the later years (Appedix 5). 12 The Departmet has idicated to the regios that it is retaiig the authority to maage budgets across the Regioal Fudig Allocatio programmes to esure that spedig is i balace across the total programme, takig accout of regioal views o the sequecig ad timig of schemes. The Departmet told us that the itroductio of Regioal Fudig Allocatios i 26 has sigificatly ehaced its capacity to moitor cost icreases o Local Trasport Pla schemes ad it will be more able to idetify slippage o schemes ad the implicatios that this may have for scheme budgets. 11 These schemes are listed i Appedix The South East oly prioritised its schemes for the first five years. The Departmet tells us that it has received their advice for the secod five years recetly. Note: Appedix 5 icludes expediture o all Local Trasport Pla trasport schemes icludig roads. 16 Estimatig ad moitorig the costs of buildig roads i Eglad

20 PART TWO Costs ca be greater tha estimated at each stage of road schemes 2.1 Costs ca be higher tha estimated at each stage of the developmet ad delivery of road schemes although estimates should become more robust as schemes go through the various stages of the developmet process. The Departmet ad the Agecy have ivestigated the reasos for cost icreases o idividual schemes but util 26 the Departmet ad the Agecy had ot collected aggregated data o the reasos for cost icreases. We examied 13 schemes (seve from the Targeted Programme of Improvemet ad six Local Trasport Pla schemes) 13, reviewed the results of exercises the Agecy has udertake 14 ad iformatio from stakeholders, to idetify the factors drivig actual ad forecast cost icreases compared to the iitial estimates. We foud that the cost of costructio work accouted for early 5 per cet of total cost icreases while the cost of buyig lad ad payig compesatio to ladowers cotributed over a quarter of the overall icrease o schemes (Figure 8). 2.2 I August 26, the Agecy employed cosultats to idetify the uderlyig reasos for cost icreases compared with the estimates made whe schemes were approved ito the Targeted Programme of Improvemet. The cosultats were able to obtai sufficiet data to aalyse 35 of the Programme s 13 schemes. I cotrast to the approach adopted by ourselves ad the Agecy i their submissio to the Trasport Select Committee, the cosultats stripped out the effects of past ad likely future iflatio which they calculated accouted for 45 per cet of the icreases. Of the remaiig 55 per cet they foud that the biggest icreases were caused by chages i the scope of the project ad weakesses i estimates. The cosultats examied these two factors i more detail ad foud that withi these headigs the five biggest icreases were i preparatory work before costructio, desig ad supervisio, earthworks, draiage ad structures. These factors i total accouted for over 27 per cet of cost icreases while the effects of time delays accouted for a further 14 per cet. 8 Works costs are the largest cotributor to cost icreases for major ad local road schemes Cost elemet Breakdow of average costs by cost percetage elemets for a of cost typical tpi icreases o tpi road scheme ad Ltp road schemes by cost elemet Works costs Costs of preparatory 23 1 work before costructio Desig ad supervisio 9 9 Cost of lad ad 7 26 payig compesatio Statutory udertakers 7 7 total 1 1 Source: Natioal Audit Office aalysis of Highways Agecy ad Departmet for Trasport data 13 Iitially we selected four completed ad eight curret schemes from both the Targeted Programme of Improvemet ad the Local Trasport Pla programme but were oly able to fid sufficiet data for 13 schemes to eable us to calculate the cost icreases attributable to each elemet. 14 The Agecy reviewed seve schemes i the curret Targeted Programme of Improvemet to examie the mai reasos for the latest cost estimates beig greater tha the estimates o etry to the programme, other tha the differeces explaied by the revised approach to estimatig, ad reported the results to the Trasport Committee for its report i July 26. The Agecy also egaged cosultats i February 26 to carry out a i-depth cost audit ad ivestigatio of three projects i the curret Targeted Programme of Improvemet (A2 Bea to Cobham improvemet, A2/A282 Dartford Improvemet, M6 Carlisle to Guardsmill Extesio) ad that the Agecy is deliverig uder the Early Cotractor Ivolvemet form of cotract. ESTImATING AND monitoring THE COSTS OF BuILDING ROADS IN ENGLAND 17

21 part two Some schemes approved for etry to the roads programmes have ot bee sufficietly developed to allow accurate early cost estimates 2.3 The level of developmet of a scheme at the poit of etry to the roads programmes has varied, ad the earlier the schemes have bee icluded the more likely it has bee that further chages are eeded to the schemes desig ad desig costs have icreased. We aalysed of the 36 completed Targeted Programme of Improvemet schemes ad foud that outtur costs icreased from the estimate at programme etry 16 by 17 per cet for schemes that etered at the earliest stage (outlie busiess case), by seve per cet for schemes where the preferred route had bee idetified ad by three per cet for schemes that etered before the lettig of the mai works cotract (Appedix 2, Figure 1). 2.4 All roads schemes iitial appraisals examie the expected evirometal impact of the scheme, to idetify potetial difficulties from the outset. The Departmet s guidace requires the Agecy ad local authorities to cosult statutory evirometal bodies (Natural Eglad, Eglish Heritage ad the Eviromet Agecy) throughout the desig process of all schemes. The Agecy does this before schemes eter the Targeted Programme of Improvemet; the Departmet also cosults these bodies ad other o govermetal evirometal orgaisatios o the evirometal appraisals for proposed Local Trasport Pla major road schemes. Despite these procedures the risk remais that the Public Iquiry stage for a road scheme will require sigificat additioal desig work, ad major chages to the desig, which makes it difficult to produce accurate costs estimates before a Public Iquiry. I some of the cases we reviewed, the Public Iquiry stage had a very sigificat impact o the desig costs of the schemes. For example, o the A173 Spaldig to Eye scheme the Ispector required the local authority to ivestigate ad cost seve alterative routes provided by objectors at the 24 Public Iquiry. Higher tha expected costructio costs have accouted for the largest share of the actual ad forecast icrease i costs 2.5 The biggest icreases occurred i costructio costs. I 25, cosultats reported to the Agecy that iflatio i the highways sector has bee ad will cotiue to be above the geeral rate of iflatio ad has bee a sigificat factor i icreases i costructio costs. Other factors which have led to icreased actual ad forecast costs are: Desig chages: to achieve the iitial or revised objectives. For example, costs icreased by 4.3 millio (five per cet) o the A46 Newark to Widmerpool Improvemet scheme to icorporate a upgrade of three juctios ot cosidered ecessary whe the iitial estimate was made. The Agecy s cosultats also foud that the cost of structures such as bridges ad tuels were ofte uderestimated. For example, the origial estimate for the M6 Carlisle to Guardsmill extesio assumed a sigle spa bridge. Scheme costs icreased by 7.9 millio (17 per cet) whe, durig detailed desig, the Agecy decided a three spa bridge was eeded. Delays ca icrease the risk of chages to desigs, for example, to take accout of revised traffic projectios or other trasport eeds; to address chages i itercoectig roads. I two of our Local Trasport Pla case examples, costs icreased because the Agecy required additioal work. For example, the Darligto Easter Trasport Corridor scheme estimate icreased by 1.8 millio after the Agecy requested juctio improvemets ad localised wideig of the A66; ad to meet stakeholder requiremets. For example, the iclusio of a bridge across the Lamberhurst Bypass to reduce the impact o Natioal Trust lad icreased costs by 2 millio. I aother case study costs had icreased because of a chage i Network Rail s requiremets relatig to a bridge. 15 We did ot iclude the completed A1(M) Ferrybridge-Hook Moor Desig Build Fiace ad Operate scheme i the aalysis as this scheme was fuded o a differet basis. 16 These figures are based o scheme costs whe they etered the Programme adjusted for iflatio, o recoverable VAT ad optimism bias. 18 Estimatig ad moitorig the costs of buildig roads i Eglad

22 part two Regulatory requiremets: iitial estimates made isufficiet allowace for third party ad other regulatory costs. For example, chages i safety stadards added.7 millio to the cost estimate for the A1 Peterborough to Blyth Grade Separated Juctios for wider slip roads. Other factors: the complexity of the work was uderestimated. I some cases, surveys carried out after the preparatio of iitial estimates sometimes show the groud coditios are worse tha expected requirig further work to prepare the site for costructio. For example, complicatios i draiage works icreased the cost of the M1 Juctio 6a 1 wideig scheme by 11 millio. uforesee work. For example, o the Barstaple Wester ad Papworth Everard Bypasses the costs of archaeology work were uderestimated. The costs of preparatory work for costructio have ofte bee uderstated 2.6 Local authorities typically add betwee 12 ad 2 per cet of the costructio work costs to cover the preparatory work for costructio (prelimiaries), icludig site set up, erectio of temporary offices, site trasport, temporary works, traffic maagemet, large plat ad isurace. Historically, the Agecy has estimated these costs at a stadard 16 per cet of the costructio cost for Targeted Programme of Improvemet schemes although this figure ca vary cosiderably. For example, the Agecy s cosultats foud o three schemes that such costs raged betwee 28 to 3 per cet of the costructio cost. The costs of lad ad liability for compesatio have bee uderestimated i some cases 2.7 For the costructio of ew roads ad some road wideig schemes the Agecy ad local authorities eed to purchase lad ad compesate the owers of lad compulsorily purchased ad others affected by the scheme. The Agecy ad local authorities ofte iclude specific estimates for lad ad compesatio claims but these have ot always bee sufficiet to cover actual costs. The Agecy obtais estimates of the cost of lad at curret market values ad six mothly revaluatios from the Valuatio Office 17 ad its cosultat surveyors. The Valuatio Office s estimates take accout of factors that could impact o lad ad property values durig the scheme s developmet. The Agecy s lad teams check these estimates for reasoableess. They the add a set percetage of 2.5 per cet per year to the base compesatio to allow for risks such as movemets i iterest rates ad housig market iflatio rates beig above the geeral iflatio rate. They also make a further additio which is a percetage of the iterest bearig elemet of the compesatio. The Agecy s lads teams do ot hold professioal qualificatios ad a iteral Departmetal review i August 24 oted that the teams capacity to support project teams varied betwee regios. Some local authorities also rely o exteral valuatios of lad for their schemes although others are large eough to have their ow teams of chartered surveyors to perform the lad valuatios. 2.8 Estimates for lad ad compesatio ca be exceeded because: more lad is required tha origially aticipated, because the scope of a scheme is chaged, or the road eeds to take a differet route owig to adverse groud coditios, or followig a public iquiry; there is greater tha aticipated lad ad property value iflatio. This also affects the level of compesatio payable for disruptio ad loss of property values. As claims caot be submitted util a year after a road has opeed to traffic the Agecy ad local authorities have to estimate the fial level of claims some years i advace; ad delays o schemes add to the impact of iflatio o lad costs ad compesatio, as the Agecy ad local authorities have to pay iterest o the compesatio calculated from the date of the first claim to the date of the award (statutory iterest). 17 The Valuatio Office Agecy is a executive Agecy of HM Reveue ad Customs. Oe of its mai fuctios is to provide statutory ad o-statutory property valuatio services i Eglad, Wales ad Scotlad. Estimatig ad moitorig the costs of buildig roads i Eglad 19

23 part two The costs of re-routig utilities have bee sigificatly uderestimated 2.9 Both the Agecy ad local authorities have ofte uderestimated the costs associated with routig or re-routig essetial services, such as gas, water ad electricity. The Agecy s ad local authorities desig cosultats liaise with utility compaies to iform iitial scheme cost estimates but the Agecy ad authorities told us that despite this they ofte have isufficiet iformatio o which to make soud estimates. At the detailed desig stage, oce the route for the road has bee cofirmed, the Agecy ad authorities pay the utility compaies for a detailed cost estimate, which geerally exceeds the estimates. For example, o the A421 Great Barford scheme the Agecy s cost estimate icreased by 3.2 millio followig the receipt of revised estimates for work from gas ad water suppliers, accoutig for 15 per cet of the approved icrease i the scheme s cost, ad brigig the cost of the utilities work to 12 per cet of the total scheme cost. 2.1 The utility compaies geerally udertake the reroutig work ad recharge it to the Agecy or local authority. The Comptroller ad Auditor Geeral reported i 24, i relatio to cost icreases o light rail schemes 18, that there may be little icetive for utility compaies to progress work quickly or cotrol costs, ad recommeded that the Departmet should require promoters of light rail schemes to more actively maage the risk ad that it should itself re-assess whether the trasport schemes are payig a fair proportio of the cost of the diversio (92.5 per cet). The Departmet has asked UKTram to develop better guidace o the maagemet of utilities costs for promoters of tram schemes. It has ot, however, addressed the issue s impact o road scheme costs. 18 Improvig public trasport i Eglad through light rail, HC 518, Sessio Estimatig ad moitorig the costs of buildig roads i Eglad

24 PART THREE The Departmet ad Agecy are takig steps to improve moitorig ad cotrol of costs 3.1 I March 26, the Agecy reported to the Trasport Select Committee that it was seekig to improve its maagemet of roads schemes by developig a costs database together with guidace o improvig scheme estimates. I July 26, the Secretary of State aouced that he had asked the Nichols Group to review the Agecy s approach to cost estimatig ad project maagemet ad make recommedatios o how the Agecy should assess, moitor ad report o risks to its cost estimates. This part of the report examies the Departmet s ad Agecy s work to improve: the estimatio of road scheme costs; the approval of schemes; procuremet; programme maagemet; ad the evaluatio of lessos leared from road schemes. The Departmet ad Agecy are workig to improve iitial cost estimates I August 26 the Agecy itroduced revised iflatio assumptios 3.2 It is importat for the Agecy to use the most accurate forecasts of iflatio i scheme estimates ad to revise those estimates i accordace with the latest market itelligece. As early as September 23, the Agecy recogised that the Treasury estimates of iflatio that it had used from Jue 23 (of 2.5 per cet from 23 ad 2.7 per cet from 27-8) did ot reflect actual iflatio i the costructio sector. I 25, cosultats reported to the Agecy that the aualised rate of iflatio for a typical motorway wideig project had bee 6.6 per cet betwee 21 ad 25 with the mai drivers beig price rises for labour, bitume, plat, steel ad fuel. Other cosultats also reported i 25 that cotiuig global rises i the prices of oil ad steel ad the 212 Lodo Olympics would mea that iflatio i the highways sector would approach five per cet betwee 26 ad 29, ad fall to 3.8 per cet i 21. The Agecy revised its cost estimates i August 26 to iclude these latter iflatio rates. 3.3 Ulike other major developers, such as Network Rail, the Agecy has ot idetified whether it could obtai better value tha its cotractors by cetralisig its purchase of key raw materials. The Agecy has recetly begu discussios with major suppliers of, for example, oil ad steel, to idetify whether it could take better advatage of its market positio. I 26, the Departmet examied how exteral factors cotribute to risk i costructio budgets, icludig those for roads. The review idetified the reasos for, ad estimated future cost icreases i the costituet parts of costructio expediture such as materials (for example, steel ad cocrete) ad specialist labour. The Departmet plas to use the fidigs to determie the likely impact of future cost icreases ad the extet to which it ca maage the impact of exteral price movemets. The Departmet has issued guidace o iflatio to local authorities but has ot bee prescriptive 3.4 I October 26, the Departmet issued revised guidace o cost estimatig which stated that the iflatio rates used to form cost estimates should be higher tha the Retail Price Idex ad givig a rage withi which iflatio might be expected to fall but without beig prescriptive about the rate to be used. The guidace suggests that the same iflatio rates are ulikely to apply to all schemes ad does ot therefore prescribe the actual iflatio rates to be used, but idicates that wage rate iflatio has bee i the regio of four per cet ad costructio cost iflatio has raged betwee five ad seve per cet. Leavig it to local authorities to determie ESTImATING AND monitoring THE COSTS OF BuILDING ROADS IN ENGLAND 21