Noel Whelan: Children’s hospital report only scratches the surface of this scandal

When the controversy about the costings for the national children’s hospital was at its most intense in early February, the Government survived by kicking for touch. It pointed to a report on the project which it had commissioned from accountancy firm PwC as being where answers would ultimately be found about what went wrong and how.

That report was published this week. For its type it is admirably short. It runs to 80 pages, with an additional 20 pages of appendices.

It is not, however, an easy report to follow. It is an extremely dense document, tortured in its language and layered with complex concepts touching on the tendering and procurements processes. Anyone looking for an accessible chronological narrative of how the costing of the project went so wrong will not find it in the PwC report.

The primary focus of the report is the two-stage tendering process which was put in place for this project. The first phase involved clearing the site and the initial build. It was tendered separately, and then the remaining work to complete the hospital was tendered as a second phase.

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The central flaw, according to the report, was not with the two-phase tendering process per se, but with the way that process was designed and implemented in this instance.

The one thing the report does make clear is that “red flags” were missed from the outset. The first of these was very big and very red. It flapped loudly when the tendering for the first-phase contract was concluded in October 2016.

A budget of €575 million had been allotted for this aspect. There were four bidders for this contract. All of them submitted bids which were substantially higher than the budget. One of them put a price of €636 million on it. Another submitted a price tag of €814 million. This, the report points out, “should have served as a warning that the amount budgeted for the project was way too low.”

This underbudgeting was compounded by the fact that of the 1,000 points that bidders could be awarded under the tender criteria, 750 were based on price. PwC point out that this “inevitably encouraged lean pricing”.

Contractor

The next key difficulty came after the main contractor was on site carrying out the first phase. The process of negotiating a guaranteed minimum price (GMP) for the remaining phase then commenced.

Once this GMP is agreed the private sector contractor is bound to deliver the project for that price. Therefore the risk of a cost overrun passes at that stage from the government to the private sector contractor.

The PwC report should serve merely as a starting point for our parliamentarians

Because it carries this risk the private contractor was always going to charge a premium in the guaranteed price. The PwC report repeatedly says that the “capital budget for the project made no provision for the price premium that the public sector would need to pay the contractors to bear the risks transferred to them through the GMP process”. As a consequence the budget, which was already overly-optimistic,“significantly underestimated the likely outturn cost”.

The process of negotiating a GMP is necessarily complex but PwC says it was also flawed in this case.

There was little reality of any other contractor competing for the tender for the second phase. The scale of the project, the time delays which would be involved in transitioning on site to a new contractor, and the fact that the pool of contractors able and willing to do such a project is so small meant the main contractor for the first phase was always going to be the one best placed to complete the remaining phases of the project. This gave the contractor rather then the client the upper hand.

Other flaws

The report itemises a series of other flaws. These included poor understanding of the risk profile associated with the procurement and contracting strategy “at all levels of the governance structure”, and little provision to counter “optimism bias, whereby project analysts overestimate the benefits and underestimate the costs and timings for a project”.

The arrangements for document and information management were “brief and fall significantly short of what we would expect”.

The project control environment was “weak and inadequate”.

Progress reporting was “unstructured, fragmented and lacked key information”.

Processes to manage risk were “ineffective” and project systems were “insufficient”.

As negotiations of the GMP were being conducted last summer it quickly became apparent that the actual cost of the project had been dramatically underestimated.

The flawed tendering and budget process which was then exposed had been approved by the Government itself in 2016.

The PwC report cannot be the last word on this scandal. It should serve merely as a starting point for our parliamentarians on the important task of determining what went wrong, where accountability for it should lie and how to avoid such errors again.