Estimating and monitoring the costs of building roads in England
58th PAC Report 2006-07
Edward Leigh MP, Chairman of the Committee of Public Accounts, today said:
“What would you think of a builder whose work on your house ended up costing 40 per cent more than his original estimate? But that’s the position the Highways Agency is in over its multi-billion road building programme. Since the dawn of civilisation, governments have been building roads, but the Agency is apparently unable to get on top of providing accurate estimates. As the costs of schemes soar, the Agency keeps within its budget by delivering the schemes late, sometimes years down the line.
“A lot of this is down to poor commercial acumen by the Department for Transport and the Agency. On the basis of detailed analysis of the market - in particular, of the costs of construction materials and labour - they must develop strategies for keeping costs down. The Agency must also develop much more sophisticated ways of judging whether enough progress has been made on a road scheme for the money spent.
“The Highways Agency depends far too much for its project management expertise on external consultants. It must recruit and retain its own staff with commercial skills and the ability to act as intelligent and challenging customers of the consultants.”
Mr Leigh was speaking as the Committee published its 58th Report of this Session which, on the basis of evidence from the Department for Transport and the Highways Agency , examined the steps taken to improve value for money and oversight of the roads programme and contracting methods and project management capability.
The Department for Transport (the Department), the Highways Agency (the Agency) and local authorities have considerable experience of road building, but the Agency and Local Authorities have a poor track record in estimating the costs of road schemes. By September 2006, the Agency’s 36 completed schemes in the Targeted Programme of Improvement cost 40% more than estimated initially. For schemes still to be completed, while the latest ministerially approved estimates are 5% more than the initial estimates made when the scheme was approved, the latest forecasts indicate that final costs could be 27% more than those original estimates. Local authority schemes undertaken within Local Transport Plans fared little better, with the 20 completed schemes costing 18% more than estimated and approved estimates for current schemes 11% more, with latest forecasts for final costs 31% above original estimates.
Estimates are prepared at an early stage, often when there is considerable uncertainty, for example on the line of the route, and before risks are fully identified, making preparation of a robust estimate difficult. The Agency should however, have a wealth of data and experience from completed schemes to inform and improve the reliability of estimates. The Department and the Agency have not until recently collected or analysed data on cost increases and delays for schemes or aggregated them to identify the main trends or reasons for cost overruns. Work by the National Audit Office and others identified the main causes for costs exceeding estimates as increases in construction cost, higher than forecast land prices and compensation to landowners, inflation and changes in the scope of the project. The Department and the Agency had not monitored emerging market trends closely, relying instead on inaccurate historical data on construction costs. The Agency had also made slow progress in comparing its costs both internally and against others, and on developing unit standard costs.
The Department has not been rigorous enough in its oversight of the Agency’s delivery of major road schemes, allowing it too much latitude on delivery and cost plans. The Department has not monitored in-year expenditure against progress and delivery milestones. Agency schemes slipped from one year to the next and some regional and local schemes had been deferred on the basis of prioritisation at regional level. The Agency is overly reliant on consultants for project management expertise and needs to develop its in-house capability so that it can be an intelligent customer of contractors and consultants and to negotiate and manage the Early Contractor Involvement schemes. The Agency faces a particular challenge over the next five years, with some of its most experienced staff due for retirement at the same time as the larger and more complex road schemes come on stream.