How we got to €1.73bn for a children’s hospital — and how the cost may rise further

It is estimated that a further €293m will be needed for the National Children’s Hospital's completion, bringing the total cost to almost €1.73bn, with PwC saying that, unless a number of ‘risk areas’ are addressed, the price could shoot up further.

How the cost shot up by €450m

PwC identifies multiple failures which led to the cost of the new national children’s hospital shooting up. It was €790m in 2013, €983m in April 2017, and €1.43bn in December 2018. Now, it is estimated a further €293m will be needed.

PwC says significant failures occurred during the crucial planning and budgeting stages of the project.

“The basis of the original budget was flawed and risks were understated in the business case,” it says. “There was a lack of sufficiently comprehensive or robust planning for the process to establish a Guaranteed Maximum Price (GMP) for the construction of the New Children’s Hospital. This created a situation in which the approved project could never be delivered within the financial parameters agreed.”

PwC said that, once underway, the process by which the GMP was determined was poorly coordinated and controlled.

“The level of trust that the National Paediatric Hospital Development Board (NPHDB) placed on the National Paediatric Hospital (NPH) executive and design team gave rise to insufficient scepticism and challenge. The structures above the NPHDB became reactive, limited by their terms of reference.”

So, how did the €450m increase in projected costs in the NPH Project arise?

Well, according to PwC there were six reasons:

1. PwC said €294m (65%) of the cost increase can be attributed to issues that should have been identified prior to the approval of the definitive business case for the project. That includes, for example, the price of risk transferred to the subcontractors, which was insufficiently priced, as well as costs that would have been absorbed by the inclusion of an allowance for optimism bias and a more appropriate level of contingency;

2. Execution Issues: €56m (12%) of the cost increase can be attributed to issues that include delays to the guaranteed maximum price process and its coordination;

3. Consequential: €64m (14%) of the cost increase can be attributed to consequential costs, for example VAT or contingency increases arising from the overall rise in the construction estimates.

4. Uncontrollable: €16m (4%) of the increase are costs over which the NPHDB and NPH executive had no control, for example those arising from regulatory or legislative change.

5. Unclassified: €20.4m (5%) are costs that PwC has been unable to identify or allocate to a particular category.

6. CIR: Capital Investment requirement is the total estimated cost of the project

How the cost could yet rocket further

Among the most concerning findings from the PwC report are all the ways that, unless addressed, the price of the project could shoot up yet further. PwC breaks down the “risk areas” into:

1. Controllable risks: Those that the hospital executive can control or that could arise through the hospital’s actions or inaction.

2. Embedded issues: Issues that already exist, but for which the costs have still not become clear.

3. Uncontrollable risks: Factors beyond the hospital executive’s control which could drive up the cost.

There is a myriad of controllable risks which need to be monitored in order to avoid another huge hike in the cost. PwC warns that any change in the design at this stage will have a direct “and potentially material” impact on the programme and capital cost of the project.

It also points out that BAM has already noted the timeframe for completion is “ambitious”.

“Any slippage that is attributable to the client could result in claims from contractors for additional costs as a result of delays to the current agreed schedule,” the report advises. It also warns that contractors understand contractual relationships better than the NPHDB, “allowing them to exploit opportunities to increase prices”.

Furthermore, PwC says the project requires a significant level of core integration with ICT (behind the wall) equipment /laboratories, and more.

“If these programmes are not carefully aligned, there is a risk that unforeseen delays and/or design changes are encountered, impacting multiple stakeholders.

“Furthermore, there are wider integration requirements with the Electronic Health Record programme. Any delays or integration issues associated with that programme could cause delays to the NPH Project, with cost and claim implications.”

PwC said its review had also identified a number of issues with the governance and control of the project, including the extent of misalignment between design and cost elements.

“If this is not addressed there remains a risk that cost escalation issues may not be identified and addressed in a timely and controlled manner, with associated negative implications on the extent of risk exposure.”

PwC also says there are key personnel in the NPHDB and the hospital executive who cannot be let go, or there will be a loss of valuable insight and experience, which would mean a reduction in the board’s ability to resist future claims.

The embedded issues are twofold according to PwC

1. Provisional sums: Elements of the design and fit out remain to be fully quoted and costed. It said this was typically the case with specialist parts of the build or elements that are not due for completion until near the end of the project, such as theatre pendants and other fixed furniture.

“In total, a provisional sums amount of approximately €50m exists within the Guaranteed Maximum Price at this time.”

2. Contract exclusions: The contract allows for costs associated with tender inflation to be recovered under certain conditions. PwC said inflation above 4% from August 2019, as defined by the average of three defined tender price indices, can be claimed for annually on a compound basis, based upon the revised contract amount.

Uncontrollable risks

Brexit: The project is based upon the delivery of construction materials and equipment on a ‘just in time’ basis and it is estimated that approximately €50m of materials and equipment for the hospital are currently planned to be sourced from the UK. The ability to provide all necessary material and equipment to the anticipated timeline and cost could be significantly disrupted by a no-deal Brexit.

Statutory change

Changes to relevant building regulations or changes to the VAT rate can also be claimed for.

How to avoid making the same mistakes again

After probing the cost- overruns at the National Children’s Hospital and what has led to them, PwC has pinpointed where the failures arose and, more importantly how they can be avoided in future State projects.

It recommends that the rules that govern public sector spending on major capital projects should be strengthened and that the standards to which business cases should adhere should be more clearly defined and robustly enforced.

In this regard business cases should be required to:

1. Assess and quantify risk comprehensively, including risks that relate to the chosen procurement and contracting strategy;

2. Include rigorous scenario analysis that establishes the range of potential outturn positions based on the identified risks;

3. Provide much greater clarity as to the basis of capital budget estimates and their maturity/vulnerabilities;

4. Explicitly define the contingency that is included in capital budgets, its basis and intended use;

5. Include an expressly identified allowance for “optimism bias” in relation to time and cost with reference to a prescribed set of rules.

Furthermore, PwC says a “central assurance and challenge function” should be established within the Government to provide a consistent challenge to, and review of, major public sector infrastructure projects throughout their lifecycles.

“This should consider:

1. The development, implementation and enforcement of a standard gateway process. This should define the minimum levels of planning and organisational maturity that should be achieved at key lifecycle stages and the conditions that must be satisfied before projects are allowed to progress to successive stages;

2. An assurance regime that ensures that projects are subject to rigorous, objective scrutiny at periodic intervals and prior to major junctures and decision points.

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