Finance Committee, 18 Dec 2001

Meeting date: Tuesday, December 18, 2001

Official Report 391KB pdf

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Holyrood Project

We move to our final item for today. I welcome the three witnesses, Paul Grice, Robert Brown and Sarah Davidson. All committee members should have copies of the letter to the Finance Committee from Sir David Steel on the changes to the Holyrood project.

I invite Robert Brown, or one of his colleagues, to make an opening statement if they have anything they want to say about the letter to the committee. The committee can then ask appropriate questions.

Thank you deputy convener. I know you have had a long meeting.

We gave evidence to the committee a few weeks ago on the principal report. We promised to send further information once the report was available, which it now is. The essential difference between then and now is the increase of £18.5 million, which relates to the various items laid out in the letter and the explanations for that. I imagine that the committee will be interested primarily in addressing that aspect.

Of course, the project is very complex. That has always been the case, as it is with many public or private sector contracts. There are a range of risks that develop along the line. We went through that matter at the previous meeting.

The issue is the extent to which there will be an impact on the matters that the Finance Committee is interested in. We believe that the impact will come in the financial year 2003-04 rather than 2002-03 although there will be a small impact in that year. It is too early to be absolutely certain on the precise figures, but they are relatively small when set against the overall context of the Finance Committee's budgetary interests.

I want to speak about the figure of £18.5 million that is in the letter. The figure of £13.5 million relates to the points that you flagged up in the note that we had at the meeting in November. However, the wording in the note did not lead us to think that the sums involved would be anything like £13.5 million.

Two points were raised: the Flour City Architectural Metals (UK) Ltd insolvency; and the design issues. How does the £13.5 million split between those two factors?

We have yet to receive the final figures for Flour City. We have already explained that there is a lot of pressure on Flour City to deal with the consequences of the insolvency on the staff. The direct impact of the insolvency, however, is about £2 million.

The design issues are a bit more important. Perhaps Sarah Davidson could talk about them.

At the moment, we are conducting a desk exercise to examine a number of issues, including delays, the insolvency of Flour City and acceleration measures that might result in our having to work in a slightly different sequence than had been planned. We have breakdowns of the figures for all those elements, but I am sure that the committee will appreciate that, for obvious commercial reasons, we are unable to indicate the exact breakdown at the moment because we still have to negotiate with people who are looking for payment. We hope that the additional cost arising from the insolvency of Flour City will be around £2 million. It may well be less and we hope that it will not be more.

That means that a risk of about £11.5 million is associated with design delay.

You are talking about a figure of £13.5 million, but the letter uses a figure of £18.5 million.

I arrived at the figure of £13.5 million by taking away the £5 million that you have allowed for acceleration. The figure of £11.5 million—presumably for design delays—comes from the further subtraction of the cost of the Flour City insolvency. Presumably, that £11.5 million is to do with the issues that were dealt with in the note that we had in the meeting in November—which is to say design delays.

The figure arises as a result of design delays rather than the—

Which design delays have resulted in that cost? £11.5 million is a lot of money.

Paragraph 3 of the current letter details a number of causal consequences:

"contractors will have to be on the site at different times or else for longer than originally envisaged; some off-site storage of materials may be required; additional cranes may be required on certain parts of the site at the same time; scaffolding may have to be erected and dismantled to a revised programme etc".

All those factors are indications of the pressure on the programme. The issue of how we arrived at that situation relates to the design problem.

At the time of the Spencely report, the overall design was in place. Since then, we have seen the detailed designs for many parts of the building, not least the chamber, which has been the main issue in a number of respects throughout the project. There are a number of respects in which that has caused pressure and delay. The chamber is technically complicated and the time that has had to be devoted to it has led to pressures on other parts of the project.

Is any of the £11.5 million specific to the target date in May 2003?

It is linked to the target date. May 2003 is the target date towards which we are aiming and which we hope to meet. In a sense, the programme is always being adjusted against contingencies that arise in areas such as design and construction and factors such as the insolvency of Flour City.

Have you calculated what the net reduction in risk would be if we scrapped the target date?

That issue is complicated. The pressures on the programme and the delays that are caused by them result in factors such as extra costs for scaffolding, which are already in the programme regardless of what we do. There are things that we can do to make the target date more acceptable, but we do not have to make choices on that yet. That issue relates to the £5 million that is referred to in the letter.

I asked whether anything in the £11.5 million was specific to the target date, and I think that you said yes. That is why I am asking what we could save, or not incur a potential risk for, if we decided not to set a target date, or at least not that target date.

No. I am saying that the £11.5 million is not related to the target date. It is related to the fact that contractors are on site with time scales set against them. If those time scales extend, extra costs can be incurred.

Subject to their finalisation, those costs and risks may already have been incurred at this point in the programme. It is not a matter of deciding whether to pull it back towards a target date and save some of those costs. They are probably not now savable. We may save the extra £5 million if we decide not to incur it to accelerate the programme to meet the target date.

You said that something was not now savable. How much of the £11.5 million is probably not now savable?

The figures are in the risk register, so to that extent they are not finalised. Sarah Davidson will clarify the details.

Most of the figures that relate to that part of the work—in other words not the extra, last-minute acceleration measures—will be greater the longer the programme lasts, because they mostly relate to matters such as having off-site storage for stone longer than would otherwise be the case and having to use cranes longer than would otherwise be the case. Therefore, whatever the costs are, the earlier we finish the less they will be. They are currently estimates, but the advice from our cost consultants—who estimated them for us—is that those are all reasonable costs that we would expect to incur. We have no reason to expect that that component will be much less than that. Until people put in their bills to us, we do not know exactly what they will be.

The committee has a substantial number of questions for the witnesses. I ask members to keep their questions sharp and to the point.

I will follow up on the comment about design.

I thank Ms Davidson for the clarification on a matter that we raised about landscaping at a previous committee meeting. When we discussed the matter then, I asked about the building design, which is set—if you will pardon the pun—in tablets of stone. Therefore, one assumes that the progress group has a handle on the costs. In response to Alasdair Morgan's question you commented on what in the risk register is likely to cost from the £11.5 million. In the light of that comment, can we now say that the costs that you have put in the public domain are the final costs? If not, what else is likely to come out as a risk?

The risk register is broken down into several categories. There is a category for design risk—which we spoke about the last time I attended the committee—a category for construction risk and a category for force majeure, or what you might call act-of-God risk.

The way in which the risk register works is that a likelihood is put against the potential risks and a calculation is done that gives a sum of money, which means that the risk register can be used as a working tool. We are confident that a wide range of potential risks have been assessed by our advisers. They have brought to bear their professional expertise in determining the likelihood of those risks and the extent to which we would be exposed if they happened. We are happy that the figures that we have given to the committee—in the current report and the previous one—represent the best possible information that is available on risks that might materialise.

We are more confident about the design than we are about anything else, because we are far advanced on the detailed design. On some especially complex elements—such as the design of the debating chamber, the foyer roof and the specialist glazing in the debating chamber—we have reached the point at which our specialist contractors are happy that they understand the design and are firming up the prices of components. When we report to the committee again early in the new year, I expect that we will be very confident about the design risk.

Inevitably, we cannot be as confident in relation to force-majeure risk and construction risk, which is the risk that something will happen between now and the completion of the building, over which we have limited control. We discussed Flour City Architectural Metals (UK) Ltd when we gave evidence previously. We said that the liquidation of that company had had an impact on the project, but that the impact was not huge because it was not a major contract.

We have no reason to suspect that any of our other contractors will get into trouble. However, it is not beyond the realms of possibility that that might happen. If it did, there would be a big financial impact. At the moment, that cannot be quantified, but it would have to be taken on board. We have no way of knowing whether things such as that might happen. We have no way of knowing whether there will be massive snowfalls throughout February and March. We must just deal with those situations if they arise. In the risk register, we have not quantified the total nor have we included in the bottom line the cost of everything that might happen to the project.

I accept that. However, you have just said that you are almost at the total design position and that your contractors are coming to a view about the final details of the design. Will you confirm whether the building is totally designed out?

There are many design stages. Back in June 2000, at stage D, the scheme design reached completion. However, at the stage at which we are now, every different component of the building is taken on by the contractors who, in the process of doing their work, do the final detailed design. With Flour City, we paid the contractor for the design of working out how the concrete was to be put next to windows, stainless steel and so forth. The process goes on right until the thing is built. At the moment, the process is in most cases being finely tuned. It is unlikely that that will have a significant impact on the budget.

Can you put a figure on the potential risk for that element of the design work?

The figure that we published against design and construction risk in the risk register in our last report, before we put in money for acceleration, was £21.67 million. Of that figure—I will need to clarify it afterwards, as I do not have the figures to hand—£9 million was construction risk. In other words, the balance of the £21.67 million was design risk. By the time we report next to the Finance Committee at the end of January, we should know exactly how that has materialised.

Finally, what are the total costings at this moment in time and what sum of money might yet have to be paid out to finish the programme?

The committee is getting our best estimate at the moment with the figure that has been put forward. When the additional figure is included, the total is £261 million. That figure includes the £211 million that was budgeted, the future risk and the future inflation element.

As has been indicated, the contract does not have a fixed price. That means that, although the figures are becoming firmer all the time, a total and absolute guarantee cannot be given to the Finance Committee that that is the end of the story. We hope and believe that the final figure will be something in that range. However, the figure will become firmer when the work has got a little bit further down the line.

Is it appropriate to compare the figure of £261.67 million with the previous figure of £195 million which—it is right to say—was a post-Spencely arrangement?

Yes and no. The Spencely figure did not take account of the inflationary element. As Brian Adam knows, that is a substantial matter, given Edinburgh building inflation.

Yes, but given that the Spencely report was published less than a year ago—

No, it was published two years ago.

It was nearly two years ago.

Even if it was published two years ago, we are talking about a 33 per cent increase in costs during that time. With the best will in the world, I do not think that that increase is just down to inflation.

It is not being said that it is.

We have an additional £18.5 million, a substantial element of which might well be the costs of renting storage for stones. How long are we going to store them and how much are the stones costing in the first place? There is also the cost of crane hire. For how much longer will we hire them? I find it hard to comprehend that we are talking about millions of pounds of a difference. We are getting special stone in for the building, but why is the Parliament taking the risk and paying the additional costs of renting space to store the stone? Why is not that a matter for the suppliers?

We have reported on the construction method previously to the Finance Committee. As it happens, the Parliament did not have control over that because we inherited it from the Scottish Office. Nevertheless, it is the method that we understand is used for major public sector contracts throughout the United Kingdom. The basic point is that the method leaves the risk with the client; that is, the Parliament. By the same token, the advantage is that we are not paying the risk plus to contractors to take that risk on board. All the advice that we have had from the beginning—I have been involved since the Parliament took over the project—has been that it is the most cost-effective method. It is a good debating point, Brian, but it is not just a matter of storage for stone; it is a whole series of things—

To be fair, Robert, I did not choose that example. In your letter you gave two specific examples of costs that are beyond the additional rescheduled costs. One of those costs was for the storage of materials, which Sarah Davidson pointed out was storage of stone, and which I presume is primarily the stone cladding for the building. The other example was rental costs for cranes. Are there costs beyond those? The implication of what you are saying is that it is costing millions of pounds to store the materials and/or rent the cranes.

The letter details a number of implications that arise from pressures on the programme. For example, contractors will be on site longer or at different times. That is not just a matter of scaffolding or stone storage. The fact is that contractors have contracts that require them to do jobs within certain times. There are implications for what they are entitled to be paid for the job, which we will have to examine. The detail of that—

Have not you costed that at £5 million?

No, that is a different issue. That issue is, if we took additional steps beyond where we are at the moment—

Can you give us an idea of the balance between how much you are projecting for storage and rental costs of scaffolding and cranes, and the additional costs that are associated with rescheduling the work, which will have to happen anyway?

There are limits to what we can say because of commercial confidentiality. Sarah Davidson may be able to give a broad breakdown.

I do not have those figures broken down in front of me, but we could give an indication in writing to the committee of the balance of the different elements.

You have indicated to us that there are further risks, and the letter spells out what some of them are. When are you likely to be able to tell us that there will be no additional risks? Has any risk been put on the risk register and then taken off without being realised? All that seems to happen is that items are added to the risk register—which are all realised—then more items come along that had not been considered.

A series of things have been done. For example, we had a cost exercise at one point, when we looked in some detail at a number of potential savings, some of which were achieved. It has worked both ways. It is not just a simple matter of adding on bits and saying, "That is that." the situation has been examined rigorously from an early stage with a view to getting value for money. Brian Adam will recall that there have been a number of developments. If we are talking about the £18.5 million, £5 million is for possible acceleration costs—which we will require if we decide, perhaps in September next year, to do things to pull the programme forward. That is thought to be a good use of money. The other £13.5 million is the result of certain issues that have arisen during the continuing tendering process, ranging from the chamber to the Flour City matter.

Does the City of Edinburgh Council know something that this committee and others in the Parliament do not know? You have just told Brian Adam that you cannot put a final figure on the cost, but, in "Edinburgh Outlook", which is published by the council, the cost for the Scottish Parliament's building at Holyrood is put at £300 million. Does the council know something that we do not?

I suspect that the council got that figure from Margo. As Sarah Davidson said during her previous appearance before the committee, the figure of £300 million bears no relation to the figures that we give to the committee, which we have calculated to the best of our ability. Edinburgh City Council has nothing to do with the contract. If its reporter put that figure on the project, that is up to the council. We have no responsibility for that.

Can we go back to the design delays, which you indicated had brought you to the position in which you are now? How do you quantify those delays? How are they represented in the increase in the risk register? You mentioned only the chamber, but will you say what percentage of the chamber redesign was caused by design delays? Why should there have been such design delays?

I will take the questions about design first. The most significant issue—it is a big bit of the critical path—is the design of the chamber frame. That work has been very complex and has involved the architect and the structural engineer in a much longer iterative process of checking each other's interpretation of the design than had been expected. In particular, the steel nodes, which hold parts of the roof together, turned out to be much more complex to design than had been anticipated. As the letter to the committee says, we are taking a close internal look at what happened during that design process. It caused a significant delay in the critical path and although it is not the only factor, it is the most significant.

At the same time, two other complex pieces of work were going on. Those were the design of the foyer roof in front of Queensberry House and the finalisation of the specialist glazing on the roof and exterior of the debating chamber. Those two pieces of work were undertaken in two-stage tenders, which means that the preferred contractors were involved in the second part of the tender process, so that they could bring their expertise in design to the process. The benefit of that approach is that we know that the final design is something that the contractor can build, because they have been involved in finalising the design.

However, that approach has a downside, because it is a huge use of the resources of the same architects and engineers who ought at the same time to be getting on with the east frame. In the past few months that has compounded the problem of people being tied up at critical times. The same applies to Flour City. That company's work did not involve the critical path, but it did involve the MSP block, which was always due to be finished much earlier. Again, the same people were devoting a lot of time and energy to that issue.

Those issues have stacked up one on top of another. Across the piece, when the strategic programme is reviewed, the only way in which everything can be sequenced so that bits of the building are finished at the right time in relation to one another is to take the sort of measures that are referred to in the letter. Those measures have costs attached to them.

I return to the designers and structural engineers, whom you said were having difficulties. Were the architects based in Edinburgh? Was there an issue about the function that was split between the Barcelona office and the Edinburgh office in the architectural side of the contract? Is that why the Barcelona office is no longer the lead office?

It is less a question of the Barcelona-Edinburgh split than a question of the relationship between the architects and the structural engineers. There has been a lengthy and continuing dialogue between them to try to work out the technical issues around the frame of the chamber. The exchanges have been much more to do with EMBT/RMJM and the structural engineers, Ove Arup. They have not been so much about discussions within the design team.

You touched on the question of who is leading the project, which is a separate issue. The design team, EMBT/RMJM, remains a single company. We have clarified that Brian Stewart, the chief executive of RMJM, which is the Edinburgh end of the company, is our point of contact. He takes responsibility on behalf of the design team for ensuring that the information flow is quick and appropriate between the two ends of the company. That does not mean to say that EMBT—the Spanish end—does not play a continuing role, because it does. That situation was always envisaged for the implementation phase, because RMJM has by far the largest resource on the job; that is RMJM's strength. That decision was taken quite recently.

My final question relates to the professional fees. Put bluntly, are RMJM's and Bovis's fees being increased over the period of design delays because of poor management, difficult design, or something that falls between the two?

There are limits to what we can say about that. Fees are related to the costs of the contract. At the same time, there are issues to pursue, as there always are on such matters. I do not think that we are able to say much more than that to the committee.

You should say more than that, given how much is being paid out and given the risk register. With all due respect, you must indicate whether the people who have not been able to deliver on time and on cost are going to profit from that.

It is becoming evident, if I may say so, that we are straying into areas of commercial confidentiality. Those matters will become evident in due course and will, no doubt, enter the public domain eventually. At this moment, it is not appropriate for the SPCB to say any more about fees than we have said so far.

I am sure that the Finance Committee accepts that. I will take one final short question from David Davidson and one from Alasdair Morgan.

At the top of page 2 of the letter from the Presiding Officer there is a reference to the risk register figure of £40.58 million and there is a reference next to that. At the bottom of the page, there is a note about the most recent risk review. Will you detail briefly when your next review will be and whether you are likely to see any particular movement in that review? How often do you intend to have reviews between now until the end of the project?

Leaving aside the possibility of extraordinary events, such as the review of acceleration measures, we assume that the risk review will be held to tie in with our obligation to report quarterly to the committee. We would normally expect to have another review towards the end of January. A report would be made to the committee more or less immediately thereafter. As I indicated earlier, the main matter on which there will be greater certainty at that time will be the design risk.

On that basis, I ask you for greater clarity when you report in writing in advance of coming before the committee so that we know the areas that are covered by the review and what the changes are.

Yes, we will examine the format of the report.

There is a caveat to that. What we cannot do, because of commercial confidentiality, is reveal actual amounts against specific risks in the register.

What about the range of risks?

Subject to that caveat, we will give the committee as much information as we can.

It is great what one can do with conjunctions. Paul Grice used the word dialogue when he was talking about the relationship between the architects and the engineers. Given the way in which he said that, I wonder whether "dialogue" is a bit of a euphemism.

Secondly, Sir David says in his letter that

"the design team have clarified and strengthened their internal lines of responsibility".

I would have thought that it was a bit late in the day for the team to be strengthening its lines of responsibility. That should have happened a long time ago.

I did not intend to speak euphemistically when I mentioned dialogue.

Alasdair Morgan made a fair point about timing. The timing reflects the movement into a different phase. David Davidson asked questions about whether we are at the end of the design. The answer—as Sarah Davidson said—is yes, apart from the contractor design issues.

The focus is on getting the building built. It was envisaged from the outset that the Edinburgh end of the partnership would take the lead in that. We are now at that point and that is why we took the decision to change lines of responsibility. That would not have been an appropriate change to make a year or a year and a half ago. The time is right to make the change, and we have done that in the past month or so.

The other underlying reason behind that change is the process that we are going through to tie up detailed design with individual contractors. We are taking a team-based approach as an internal team and we are involving the rest of the design team. We have put together a multidisciplinary team to deal with each of the major outstanding issues, such as specialist glazing and the foyer roof. That team involves members of my project team, people from construction management and a specialist quantity surveyor from the cost consultants. They are dedicated and devoted to individual issues as they come up as a way of trying to get speedily through them and get them resolved. That enables us all to interact with the design team, members of which are in many ways the key players in all those issues. We ask them to give us a structural or organisational chart that makes it clear who has the decision-making responsibility for each package. That is all part of the process. We have found that that has been helpful in the past few weeks.

We have tackled a number of different issues.

I thank the witnesses for coming along this afternoon. We look forward to the next quarterly report at the end of January. I am sure that they will keep us updated on how the potential costs may or may not be realised.

That concludes our meeting today. I wish everyone seasonal greetings. We will reconvene on 14 January.

Meeting closed at 16:50.