What lies behind the children’s hospital’s ballooning budget?

1. The devil is in the detail

The team designing the hospital had a good idea: why not nail down the cost of materials with contractors at an early stage, thereby giving certainty about the overall price and protecting against inflation by fixing prices at 2016 rates?

So they created a two-stage procurement process. In the first phase, contractors would tender to clear the site and create the foundations, but they would also provide a preliminary indication of the costs of constructing the seven-storey building. The second phase tender would be for the construction of the building, and would include detailed design specification.

The problem was that although the prices of materials were nailed down at an early stage, the quantities were not. The bill of quantities submitted in the first phase of the tender for constructing the hospital was “approximate and remeasurable”, and it was not until the second phase that a full bill of quantities was provided.

Those designing the building underestimated the complexity involved – not just for construction but also for the mechanical and electrical services.

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“At the early stage of the design, the complexity of those services and the quantities involved were not fully recognised within the early-stage tender. That became clear as the design developed over 2018,” Tom Costello, chairman of the development board, admitted to the Dáil health committee earlier this month.

Project director John Pollock instanced the use of electrical cable. “[We have] 5,000 km of cable, of all different sizes, and we have rates for each type of cable, but the actual quantum of it was not fully defined in the documentation.”

The complexity of the mechanical and electrical systems in particular – all 24 of them – was underestimated. In a project this size, with more than 6,000 rooms, that amounted to a massive under-calculation.

2. Just who is in charge?

The original idea was simple: set up a board with the specific remit to build the new hospital. Leave behind the medical and local politics that bedevilled this project in its previous incarnations and populate the board with building experts with lots of experience and a single focus.

And so the National Paediatric Hospital Development Board was established in 2007, its members appointed by the Minister for Health and its functions set out in legislation. Costello, for example, is a former managing director of John Sisk.

In 2017 it was decided to revise these governance arrangements. New layers were created: a Children’s Hospital Project and Programme Board, chaired by the secretary general of the Department of Health; and a Children’s Hospital Project and Programme Steering Group, chaired by the deputy director general of the HSE. The steering group reports to the programme board, while the development board provides updates on progress to the steering group.

Confused? So were members of the Oireachtas health committee, which asked the HSE and Department of Health witnesses repeatedly why so many extra layers of governance were put in place and who exactly was in charge.

3. You had one job ...

Creating a single board filled with like-minded people with construction backgrounds to build the hospital might have seemed a good idea on paper. It certainly ticked the boxes for expertise and focus. However, with just one project to take care of, the danger is that the board does not concern itself with other considerations.

It does not have to worry about what other health projects were deserving of support, or what other projects in other Government departments should be advanced. Its only job is to get the hospital built – so cost considerations are always going to be farther down the priority list.

Put together a flagship project, a Government desperate for an achievement to put down on its CV and a board more focused on building than cost management, and you have what some critics label “a licence to print money”.

The project is too big to be allowed fail and, at this stage, it is too late to stop or relocate it.

4. You don’t change horses in midstream

Under the two-stage procurement process mentioned above, a second, separate tender process was held for the second phase of the project, the construction of the hospital building. It was always possible that the second phase of the project could be awarded to a different contractor.

Or was it? Members of the Oireachtas health committee had their doubts. What contractor would want to come in so late to a project, and build on top of the foundations laid by one of their rivals, asked Fine Gael TD Kate O’Connell. What if something went wrong; who would be to blame?

BAM, the construction firm that successfully tendered for both phases of the project, knew from the start, according to O’Connell that they “had it in the bag from day one. It knew that once it was on site . . . it was cushioned by the desperate need for a new children’s hospital. It knew that we were stuck.”

The result was a lack of competition, O’Connell told the committee. “The division of the tender into two phases did not lead to the opportunity for two contractors to come in and properly tender for a job.”

Fianna Fáil TD John Brassil made a similar point at the Oireachtas committee. “The company that got phase one was also going to get phase two. It could do what it liked with the price, and it did so.”

When costs became an issue, the project team looked at the alternative option of not awarding phase B of the contract to BAM and retendering.

They came to the unsurprising conclusion this would cost an extra €300 million and delay the project by two years, as well as opening up a legal minefield should claims arise.

5. Low estimates

The history of the children’s hospital project is full of low estimates. In 2012 St James’s Hospital, which stood to gain hugely in terms of prestige and size through the addition of a children’s hospital to its adult facilities, estimated “total estimate construction costs” at a mere €297.75 million.

Prof Chris Fitzpatrick, then master of the nearby Coombe maternity hospital, has recalled how the main interest of the medics and managers at the bid meeting he attended was to lobby to have a rival bidding hospital “taken out of the running”.

“Children were hardly mentioned. Detailed cost analysis was not an issue. An appeal to act in ‘the national interest’ fell on deaf ears. The main priority was to nail the decision to the site in question – come hell or high water.”

St James’s got the project, and in the years that followed, various figures for the cost of the project were put forward, with little clarification as to what was included. By 2017, when the tender process was completed, BAM had bid €637 million, more than the estimated cost but a full €131 million cheaper than the second-placed bid.

With the tender being decided 75 per cent on price and 25 per cent on quality, there could only be one winner.

That BAM was coming in 20 per cent cheaper than the next company should have caused questions to be asked, according to Brassil. “BAM, knowing that if it got in it could not be removed, bought the contract with the aim of recovering its costs at a later stage,” he claimed at the Oireachtas committee.

“A contractor renowned for its ability to claim extra on original tender prices saw an opportunity, came in and underbid everyone else by an amount that would have raised red flags in any circumstance. Once the company got in, it was in a position to gouge the next section of the job.”

6. It’s the economy, stupid

There is inflation – and there is construction inflation. Inflation is currently at about 0.7 per cent. Wage inflation is about 3 per cent. However, construction tender inflation, according to the industry, grew 18-22 per cent between 2016 and 2018. This is due to a buoyant market, skills shortages and, apparently, Brexit.

You and I might think the biggest construction project in the history of the State would enjoy economies of scale and attract fierce competition from contractors keen to get five years of work.

But because of the size of the project, only four firms ultimately tendered for the construction of the hospital. According to the project team, the cost of building the hospital has gone from €2,875 per square metre in 2014 to €6,500 four years later – an increase of 126 per cent. Even by the inflation rates suggested for the sector, this is a remarkable increase.

It also raises the prospect of further increases in the cost of the project because the contractors will be able to recoup future costs where the inflation rate exceeds 4 per cent.