NZ Report / Proposal Template - State Services Commission

Report of the State Services Commissioner 

into the Cost Escalation in the Regional Prisons 

Development Project 

7 August 2006

State Services Commission 

Review of Cost Escalation in Regional Prisons Development 

Project 

31 July 2006

Disclaimer 

In preparing this report, we have relied upon, and assumed the accuracy and 

completeness of, all the information made available to us from organisations that have 

provided information relevant to our report. We have been assured by the Department of 

Corrections that all information relevant to the completion of the review has been 

provided. We have evaluated that information through analysis, inquiry and review but 

have not sought to verify the accuracy or completeness of any such information. It 

should not be construed that we have conducted an audit of the information. 

The statements and opinions expressed in this report have been made in good faith. 

Accordingly, neither PricewaterhouseCoopers nor its partners, employees or agents, 

accept any responsibility or liability for any such information being inaccurate, incomplete, 

unreliable or not soundly based, or for any errors in the analysis, statements and opinions 

provided in this report resulting directly or indirectly from any such circumstances, or from 

any assumptions upon which this work is based, proving unjustified. 

We reserve the right, but are under no obligation, to revise or amend our report if any 

additional information which exists on the date of this report, subsequently comes to light. 

This report has been prepared solely for use by the State Services Commission and the 

Treasury for the purpose of assisting these organisations in their reporting back to 

Ministers regarding the processes, systems and contracting practices at the Spring Hill 

and Otago prisons. We accept no responsibility to any other party, unless specifically 

agreed by us in writing. Furthermore, we accept no responsibility for any reliance that 

may be placed on this report should it be used for any purpose other than that set out 

above.

Table of Contents 

1 Executive Summary .................................................................................................1 

2 Introduction ..............................................................................................................6 

3 Background..............................................................................................................9 

4 Key Drivers and Causes of Cost Escalation ..........................................................13 

Overview of Cost Increases 14 

General Comments Regarding Cost Increases 15 

Market Influences 16 

Consents and Regulatory Changes 19 

Design Finalisation 20 

Summary 20 

Lessons Learned 21 

5 Methodology and Processes: Design, Costing, Procurement and Scheduling ......22 

Introduction 24 

Design 24 

Costing 25 

Procurement and Scheduling 34 

Summary 43 

6 Governance and Project Management ..................................................................45 

Introduction 46 

Current RPDP Arrangements 48 

Development of Governance and Management of RPDP 50 

Issues and Challenges 51 

Summary 54 

Lessons Learned 55 

7 Reporting to Ministers ............................................................................................57 

Appendix A : 

Funding Approvals...................................................................................60 

Appendix B : CWA Best Practices ................................................................................62 

Appendix C : 

Overview of Governance and Project Management................................66 

iv

1 Executive Summary 

1.1 Construction of new prisons at Spring Hill in North Waikato (referred to as the 

Spring Hill project) and near Millburn in Otago (referred to as the Otago project) is 

underway. In December 2005, Ministers were advised that the cost of the projects had 

increased by $140.8 million compared to estimates provided earlier in the context of 

Budget 2005. 

1.2 In light of the added cost, the State Services Commission, in consultation with the 

Treasury, was asked to independently review the processes, systems and contracting 

practices used by the Department of Corrections (the Department) in connection with the 

two prisons. 

1.3 Consistent with the terms of reference for the review, the report which follows has 

been structured around the four primary questions: 

• What were the drivers and causes of the cost escalation? 

• What lessons can be learned from, and about, the Department’s methodology and 

process used to design, cost, procure and schedule (excluding commissioning) the 

Spring Hill and Otago projects? 

• What lessons can be learned in relation to the project management and 

governance of the projects? 

• What level of reporting to Ministers would be appropriate for projects of this size? 

Context 

1.4 The Spring Hill and Otago projects are part of a wider programme of increasing 

prison capacity. The Department has been building 325 beds per year on average since 

1996 into existing prisons. However, this is not sufficient to meet the expected growth in 

the prison population. New prisons have also been required and the Spring Hill and Otago 

projects are part of a wider programme referred to as the Regional Prisons Development 

Programme (RPDP). 

1.5 The RPDP was announced in 1997. It comprises two regional prisons in addition 

to Spring Hill and Otago, both of which are now operational; these are located at Ngawha 

in Northland and in Manukau (the recently opened Auckland Women’s facility). 

1.6 Several factors have had a significant bearing on the Spring Hill and Otago 

facilities (and RPDP more generally). Foremost among these is the expected growth in 

prison population. In 1999, the prison population forecast for 2008 was 6,800. The 

current forecast for 2008 is 8,600; a 26% increase. It is important to note that the 

Department depends on Ministry of Justice prison population forecasts. These forecasts 

have a five year horizon which is significantly shorter than the lead time for completing a 

new prison. As a result of this, and reflecting the revised forecasts, the RPDP has 

required considerable flexibility to adapt to changing circumstances. In particular, there 

have been changes to the bed numbers at three of the four regional prisons: 

Auckland Women’s ‣ 150 to 286 

Spring Hill ‣ 350 to 650 

Otago ‣ 220 to 335 

Executive Summary 1

1.7 The increases have impacted on planning, consents, design, construction and 

cost. 

1.8 A second key factor influencing the RPDP has been the process of obtaining 

consents under the Resource Management Act. The outcome of this process (which is 

not part of this review) has resulted in changes to the approach to design and 

construction. These changes have, in turn, contributed to the Department using a form of 

procurement – referred to as a Collaborative Working Arrangement or CWA – that is 

fundamentally different to the more traditional fixed price form of contracting. The change 

in procurement method has assisted the Department to deliver the regional prisons in time 

to meet growth in the prison population. However, the CWA methodology has also raised 

a number of issues and lessons. 

1.9 The third contextual consideration is the fact that the new prisons have been built 

during a heated construction market. As a result, substantial cost increases have been 

experienced in relation to labour and materials. Moreover, the sheer size of the RPDP 

project in relation to New Zealand’s construction, design and quantity surveyor capacity 

has stretched available resources. 

Key Findings 

1.10 Growth in the prison population has been a key driver for the RPDP. The 

Department has successfully responded to this, and the changes in forecasts, by 

delivering the Northland and Auckland Women’s prisons on time, within budget and to the 

standard required. It is on track to complete the Spring Hill and Otago facilities in time to 

meet requirements. 

1.11 The costs of the Spring Hill and Otago facilities have increased by $140.8 million 

compared to estimates presented as part of Budget 05. Several factors have contributed 

to the increase including: 

• market factors, including inflation in relation to input costs (e.g. steel) and labour, 

as well as the need to pay increased allowances to attract scarce labour 

resources. The remote location of the construction sites added to these 

pressures; 

• the outcome of consent processes and regulatory changes; and 

• design changes following the completion of Northland and additional work on a 

range of infrastructure services. 

1.12 It is important to note that the estimates provided as part of Budget 05 should have 

been clearly communicated as indicative only. In particular, the level of cost escalation 

incorporated into the Budget 05 numbers was based on external forecasts that are known 

to have limitations. Further, the estimates were based on traditional quantity surveyor 

data that did not sufficiently recognise the specific circumstances of the Spring Hill and 

Otago projects. 

1.13 It is also important to note that the CWA methodology used for the RPDP projects 

differs from traditional procurement methods in that the principal contractors do not submit 

fixed price quotes. Instead, the overall cost of the projects is a function of direct costs 

(labour and materials) plus agreed allowances for margins and overheads. There is a 

process – referred to as the development of the Target Outturn Cost (TOC) – that is 

fundamental to agreeing the level of overall costs. Various factors including, in particular, 

constraints around the availability of design and cost estimation resources, have delayed 

Executive Summary 2

the development of the TOC until much later in the construction phase than is desirable. 

This has exposed the Crown to cost risk, which the Department has managed through 

independent scrutiny of cost data presented by contractors. 

1.14 The CWA methodology has a number of inherent advantages compared to 

traditional forms of procurement and the Department has captured many of these: 

• there has been close integration of design, construction and commissioning teams 

which assists in achieving an optimal balance between design, construction and 

operational requirements; 

• several value management reviews have been undertaken to further optimise 

designs and take out unnecessary costs; 

• at a site level, resources have been mobilised to deal with day-to-day issues 

thereby increasing the efficiency of on-site resource utilisation; 

• the collaborative approach to dealing with issues has helped to maintain 

momentum with the projects, thereby enabling the timing of projects to be 

completed on, or near to, expectations; 

• high levels of transparency in relation to costs have been achieved at the project 

level consistent with the “open-book” philosophy that underpins CWA (with some 

opportunity for more transparency over margins – see Section 5); and 

• costs submitted by the commercial CWA partners have been exposed to extensive 

third party scrutiny and review. 

1.15 Overlaying all of these benefits, the methodology chosen by the Department 

means that it is on track to deliver Spring Hill and Otago in time to meet the expected 

growth in the prison population. There were sufficient indications to suggest that had the 

Department elected to follow a traditional procurement method, timeframes for completing 

the projects would probably not have been met. 

1.16 Projects of the size and complexity of Spring Hill and Otago need tight 

management. RPDP project governance and management arrangements have delivered 

(or will soon deliver) four regional prisons to accommodate the growth in prison 

population. 

1.17 Current arrangements for project governance, following a review during 2005, 

have resulted in improved governance and project management of RPDP. In particular, 

we consider desirable changes have included: 

• establishment of the Programme Management Office (PMO) and a specialist 

construction sub-committee; 

• separating responsibilities for direction of construction from commissioning; and 

• the inclusion of a Department employee on the CWA Principals Groups in Spring 

Hill and Otago. 

1.18 Under arrangements prior to late-2005, the Steering Group established for the 

RPDP was often constrained in its decision-making effectiveness through a lack of 

sufficient information to support decisions (notwithstanding the transparency of cost 

Executive Summary 3

information at the project level that was emerging from August 2005). Decisions were 

often taken with discussion, but before the provision of supporting information. The 

Steering Group comprised a majority of busy Departmental functional line managers, with 

heavy reliance on contractors for advice regarding large construction project decisions. 

These managers did address some knowledge gaps through the appointment of an 

independent member with construction, project and procurement methodology experience 

in 2004, and the conduct of internal and external audits to assess aspects of process. 

1.19 Prior to 2005, there was a lack of clarity amongst some, including Steering Group 

members, of the role of the Steering Group as to its role as an advisory group 

representing the different areas of Department endeavour, or a governance group. This 

may have affected the strength of the Steering Group to challenge the issues with 

reporting and information for key decisions. 

1.20 Due to the pressing nature of the growth in the projected prison population, the 

completion of the projects to the proposed schedule became a paramount factor in 

decision-making. 

1.21 Overall, these arrangements made it very challenging for the Steering Group to 

assess governance risks and to communicate these beyond the Steering Group. The 

Steering Group seemed surprised to learn of the actual size of the cost escalations in late 

2005. 

1.22 The nature and level of reporting to Ministers was also an issue. In our view, the 

information provided to Ministers as part of Budget 05 did not sufficiently or clearly signal 

the uncertainty around the estimates and the risk of cost increase. Further, the fiscal risks 

should have been on the radar for the pre-election fiscal update in mid-August 2005, at 

least in a qualitative sense. 

Lessons Learned 

1.23 Growth in the prison population drives the need for additional capacity. Given the 

long lead times involved with building new prisons, a longer term view of future capacity 

requirements is needed (than is provided by the Ministry of Justice five year forecasts) in 

order to enable the Department to appropriately plan, resource and schedule the delivery 

of additional greenfield capacity. 

1.24 The choice of CWA methodology has assisted the Department to deliver the 

required increase in capacity. However, CWA will not be suited to all projects. There is a 

need to identify the conditions under which CWA is likely to be preferred ahead of other 

forms of procurement. The methodology chosen should be justified on a project by 

project basis. 

1.25 The CWA methodology adopted by the Department requires careful and 

experienced management to protect the Crown’s interests. A blend of competencies and 

experience (commercial, construction and public sector management) is required for 

effective management. For future projects of this size and complexity, sponsoring 

agencies need to be confident that they have the appropriate mix of competencies and 

these are represented within the CWA Principal’s Group. 

1.26 The development of the TOC is a central part of the CWA methodology adopted by 

the Department. It needs to be finalised sooner than has been the case with respect to 

Spring Hill and Otago. Specifically, the TOC should ideally be completed at, or about, the 

time construction commences. However, appropriate time and resources need to be 

planned for to enable this. Until the draft TOC is well developed, estimates of construction 

Executive Summary 4

cost should be seen as indicative only. Pre-TOC estimates of cost involve significant 

levels of risk and uncertainty and this needs to be made clear. Once TOC estimates 

begin to emerge, there should be transparent reporting of these to provide the Department 

and, as appropriate, Ministers with opportunities to explore options for saving cost if 

budgets are under pressure. 

1.27 With respect to project management and governance, for projects of this size and 

importance, there is a need to ensure that: 

• project goals and objectives are agreed and clearly communicated to all parties at 

the commencement of the project, and that they encompass all three key elements 

of time, costs and quality, even in cases of ‘fast-tracking’; 

• the Steering Group has the appropriate mix of knowledge and skills to be able to 

represent the Department and the wider Government interests, and manage a 

large scale project; 

• the roles and accountabilities of the respective governance and management 

groups and individuals are clearly specified and communicated from the 

commencement of project planning; 

• there are independent quality assurance processes in place for oversight of 

governance and project management approaches, as well as the lower level 

project management processes for cost calculation and quantitative risk 

assessment; 

• the Steering Group is provided with adequate information in a timely fashion to 

assess and manage risks, support effective decision-making, and reporting to 

Ministers; and 

• project reporting not only assesses historical progress but also estimates future 

issues and progress remaining against all project objectives. 

1.28 In terms of reporting to Ministers, the following should be noted: 

• the regular discussions with the Minister should include clear reference to cost 

developments and associated risk estimates as work on the TOC proceeds; 

• where cost estimates are uncertain (as was the case with these projects), this 

needs to be clearly explained to Ministers. For the purposes of providing advice to 

Ministers, it would be appropriate to indicate a range of possible cost estimates 

and, moreover, indicate the level of uncertainty attaching to the estimates. Such 

estimates should be clearly distinguished from formal Budget processes and 

funding decisions (where point estimates specified to the nearest $1000 are 

required); and 

• on projects of this scale, reporting should be linked to significant project milestones 

rather than to the Budget cycle. For example, cost estimates developed for 

Budget 05 preceded the start of construction on Spring Hill and Otago. A report to 

Ministers at, or about, the start of construction would be better practice. 

Executive Summary 5

2 Introduction 

2.1 The Regional Prisons Development Project (RPDP) is a major construction 

programme undertaken by the Department of Corrections (the Department). The project 

involves the delivery of new prisons in Northland (referred as Northland Region 

Corrections Facility or Northland), Auckland (referred to as Auckland Women’s) North 

Waikato (referred to as the Spring Hill Corrections Facility or Spring Hill) and Otago 

(referred to as the Otago Region Corrections Facility or Otago). 

2.2 The focus of this review is on the Spring Hill and Otago facilities which are located 

near Meremere and Milburn respectively. The other two facilities (located at Ngawha and 

Manukau) have been considered to the extent that they have assisted understanding of 

the arrangements at the Spring Hill and Otago sites. 

2.3 Both the Spring Hill and Otago projects are still under construction. Spring Hill is 

due for completion by July 2007 and Otago by March 2007. A key driver for the review is 

the significant increase in the estimated cost for these projects. As part of Budget 04, the 

costs for Spring Hill and Otago were forecast to be $248 million and $161 million 

respectively. As part of Budget 05, these estimates were increased to $283 million and 

$175 million respectively. These estimates were revised further in light of detailed costing 

analysis and reported to Cabinet in December 2005. Spring Hill is expected to cost $380 

million and Otago’s cost has been estimated to be $218 million; a combined increase of 

approximately 31% over and above the Budget 05 estimates. 

2.4 In light of the cost increases, the Cabinet invited the State Services Commissioner, 

in consultation with the Treasury, to independently review the processes, system and 

contracting practices at the Spring Hill and Otago prisons. PricewaterhouseCoopers has 

been engaged by the Commission to undertake the independent review. 

Review Objectives 

2.5 The primary objective of the review is to learn lessons from the Spring Hill and 

Otago projects for the benefit of future capital projects. To this end, the review is to 

recommend best future practices that can be applied to future projects in the Department 

and, if relevant, to the wider state sector. 

2.6 A second objective for the review is to identify the key drivers and causes of the 

cost escalation. 

Review Scope 

2.7 In order to meet the objectives for the review, its terms of reference have required: 

• an evaluation of the end-to-end process of designing, costing, procuring, 

scheduling and project management of the new facilities; 

• an assessment of the adequacy and quality of approach in these areas against 

best practices in the public and private sectors; 

• an assessment of project governance and management; and 

• a review of the quality and timeliness of reporting to Ministers for capital projects of 

this size. 

Introduction 6

2.8 As indicated above, the scope of the review includes the Spring Hill and Otago 

projects, but regard has been given to the other projects in the RPDP where appropriate. 

The scope of the review has also focused on events post completion of consent and 

related approvals up to the current day (which for the purposes of the review includes the 

period up to approximately March 2006). The scope of this review has specifically 

excluded: 

• consideration of the regional prisons policy (i.e. the policy has been taken as a 

given); 

• the commissioning of the facilities; and 

• the consents process. 

2.9 It should be noted that at the time of undertaking this review, several other, and 

related, reviews were also been undertaken in relation to the projects. This includes 

various reviews being undertaken by the Department into aspects of the projects’ costs 

(e.g. a review of the methodologies for establishing margins and reviews relating to 

preliminary and general costs). Where available, the findings of these reviews have been 

incorporated into this review. It has not been our intention to duplicate the other work 

being undertaken. 

Approach to the Review 

2.10 Our approach to this review has involved a process of documenting good practices 

and comparing actual practices against these. This has assisted in identifying areas 

where procurement and management of the projects has met the standards required as 

well as those areas where there are opportunities for improvement. 

2.11 The assessment of actual practices has relied heavily upon information provided to 

us by the Department and on interviews with a range of Department and other personnel 

involved with the projects. It is important to note that the interviews were conducted on a 

non-attribution basis. The process of reviewing relevant documentation and conducting 

interviews took place during April, May and June 2006. After several requests, and the 

subsequent receipt of information after completion of draft reports, we have now been 

assured by the Department of Corrections that all relevant information to enable us to 

complete the review as required has been provided. It is important to note, however, that 

the projects that are the focus for this review are still in the process of construction and, 

accordingly, fresh and updated information is continually coming to hand. As far as 

possible, we have sought to include information up to and including June 2006. 

2.12 Reflecting its nature and objectives, this review has not sought to independently 

verify the accuracy of the information provided to us. In this regard, the review should not 

be interpreted as an audit or inquiry. 

Report Structure 

2.13 The report is structured as follows: 

Section Three 

Section Four 

Section Five 

‣ provides some context within which the new prisons have been built. 

‣ discusses the causes and drivers of the cost increases. 

‣ assesses methodologies and processes in relation to design, 

costing, procurement and scheduling. 

Introduction 7

Section Six 

Section Seven 

‣ assesses project governance and management. 

‣ comments on reporting to Ministers. 

Introduction 8

3 Background 

3.1 Before discussing the processes, systems and contracting practices associated 

with the new facilities, it is important to outline some of the environmental and contextual 

factors bearing upon the prisons project. To varying extents, these factors have had a 

significant impact on the approach to, and cost of, the new prison builds. 

Prison Population Growth 

3.2 The Spring Hill and Otago projects are part of a wider programme of increasing 

prison capacity. The Department has been building 325 beds per year on average since 

1996 into existing prisons. However, this is not sufficient to meet the expected growth in 

the prison population. New prisons have also been required and the Spring Hill and Otago 

projects are part of a wider programme referred to as the Regional Prisons Development 

Programme (RPDP). 

3.3 The RPDP, which was announced in 1997, identified the need for four new 

regional corrections facilities, comprising two regional prisons in addition to Spring Hill and 

Otago. Both of the other prisons are operational; they are located at Ngawha in Northland 

and in Manukau (the recently opened Auckland Women’s facility). 

3.4 In 1999, the prison population forecast for 2008 was 6,800. The current forecast 

for 2008 is 8,600; a 26% increase. These forecasts are prepared by the Ministry of 

Justice. The Ministry’s forecast underpins the Department’s modelling of future prisoner 

demand and the optimal build programme to provide additional capacity to meet that 

demand. The forecasts have a five year horizon which is significantly shorter than the 

lead time for completing a new prison. As a result of this, and reflecting the revised 

forecasts, the RPDP has required considerable flexibility to adapt to changing 

circumstances. In particular, there have been significant changes to the originally-planned 

bed numbers at three of the four regional prisons: 

Auckland Women’s ‣ 150 to 286 

Spring Hill ‣ 350 to 650 

Otago ‣ 220 to 335 

3.5 Time pressure is a key issue affecting the RPDP because of the growth in the 

prison population. At the time decisions to proceed with the new prisons were taken, it 

was clear, and subsequently demonstrated, that new facilities had to be built in order to 

accommodate the increased numbers in the prison population. The timeline for 

completing the new prisons is tight and completion on time remains a high priority in order 

that the growing prison population can be appropriately housed. In recent years the 

Department has had to rely on police and court cells to manage the prison population 

overflow, a practice which is not desirable. Completing the construction of additional beds 

is therefore of utmost priority for the Department. 

3.6 In this regard, and notwithstanding many of the points made later in this review, it 

needs to be acknowledged that the programme of new prison builds has delivered, and is 

delivering, the additional capacity that is needed to meet growth in the prison population. 

Moreover, the programme is adding the new capacity more or less within the very tight 

deadlines that had to be achieved in order to avoid a situation of demand for beds 

Background 9

exceeding available capacity. The significance of this achievement should not be underestimated. 

Long Lead Times 

3.7 The need for new prisons was foreshadowed as part of the RPDP announcements 

in 1997. The Northland and Auckland Women’s facilities were the first two of a four-prison 

build programme. The table below indicates some of the milestones associated with the 

Spring Hill and Otago projects. As can be seen, the lead times for getting to the point 

where prisoners can be accepted is long; in the order of six to seven years. 

Design contracts let and site 

selection 

Spring Hill 

Otago 

December 2000 - May 2001 September 2001 - June 2002 

Construction RFP Issued September 2004 September 2004 

CWA Partner Selection October 2004 October 2004 

Environment Court Clearance June 2004 December 2004 

Earthworks Start November 2004 January 2005 

Construction Starts May 2005 April 2005 

Planned Construction Completion July 2007 March 2007 

Prisoner Induction Commences October 2007 June 2007 

Planned prisoner Capacity September 2008 November 2007 

3.8 As noted above, the Ministry of Justice provides a five-year forecast of the prison 

population. However, the typical consent and construction life-cycle for new facilities is 

significantly longer that this. The Department sees this lack of alignment of forecasting 

and construction lead-time periods as a constraint on its ability to appropriately plan, 

resource and schedule, and deliver capacity to meet demand. 

New Design 

3.9 Prior to the construction of Northland (which was the first of the four new prisons to 

get underway), it had been a relatively long period since the Department has constructed 

a new non-remand prison. As alluded to above, growth in prison capacity over prior years 

had been achieved through addition to existing facilities rather than “greenfields” 

development. Only one new facility (Auckland Central Remand Prison commissioned in 

1999) has been completed by the Department prior to the RPDP programme setup. 

3.10 By implication, the Department did not have a recent history of deep involvement 

in construction and certainly not on the scale of the four prisons which cumulatively have a 

cost in the region of $900 million (excluding commissioning). 

3.11 Moreover, compared to existing prisons, the facilities proposed for Northland, 

Auckland Women’s, Spring Hill and Otago reflected different design and operating 

philosophies. Although not part of the brief for this review to investigate these, the 

designs underpinning the four new facilities are quite different from what has gone before. 

The origins of the new design can be traced to facilities in Australia and Canada. The 

physical design of the new prisons in part reflects an intentional policy to promote greater 

self responsibility and, ultimately, reduce the incidence of recidivism. 

Background 10

3.12 While the merits of the new design are not part of the brief for this review, the new 

design is important for the reason that it represented a departure from what had gone 

before. Therefore, in terms of estimating the costs of the new prisons, the new design, 

coupled with the passage of time since the last major prison build, meant that 

benchmarking against the cost of earlier prisons was of limited assistance and relevance. 

Moreover, the new designs meant changes in operational policies and practices which, in 

turn, spurred considerable iteration between the requirements of the construction team 

and of the commissioning team within RPDP. It should be noted also that two main 

designs were developed for the four new prisons. In broad terms, the design for 

Northland and Spring Hill is comparable, as is that for Auckland Women’s and Otago 

(although being a women’s prison, some of the features of Auckland Women’s are specific 

to it). 

Resource Constraints 

3.13 By New Zealand standards, the RPDP projects are large construction projects. 

The sheer size of the RPDP project in relation to the New Zealand market has placed 

considerable demand on construction, design, and quantity surveyor capability and 

capacity. The lack of design capacity and costing capability and capacity had a direct 

impact on the timeframe for the development of early cost information in relation to Spring 

Hill and Otago. 

NIMBY 

3.14 The “not in my back yard” phenomenon applies with some force in the context of 

prison builds. NIMBY has several implications. In the case of Northland, Spring Hill and 

Otago it has been a contributing factor to the remote location of the facilities. 

Remoteness, as will be discussed later, has had a significant influence on cost. NIMBY 

also means that consent and other approval processes (often involving legal challenges) 

can be long-term and result in costs that were not originally planned. This has also been 

a factor contributing to the cost increases associated with Spring Hill and Otago. 

3.15 From a time perspective, uncertainty created by the NIMBY effect has also 

affected the speed with which projects have proceeded through the consenting and other 

approval processes. In turn, this has impacted upon the planning for, and management 

of, the projects. For example, the Otago project had an unexpectedly smooth run through 

the Environment Court which meant that construction was able to start eight months 

ahead of plan. While this outcome had several advantages, it also placed extra demands 

on the design team at a time when the design team was already stretched with other 

work. As discussed later, the time taken to complete detailed design work has important 

implications for the estimation of project costs and consequential implications for the 

actual cost of the project. 

Economic Conditions 

3.16 A further factor that has had significant bearing on the projects is the state of the 

economy. At the time the four prisons were being built, including, in particular, Spring Hill 

and Otago, the construction market was “heated” in the sense of demand outstripping 

supply. Prices (rates and margins) were increasing accordingly. Escalation of 

construction prices is factored into the estimated costs for the project but, with the 

advantage of hindsight, it is clear that the extent of escalation was under-estimated. 

3.17 Economic conditions, and the heated nature of the construction market in 

particular, have also influenced the procurement method used to construct the four 

prisons. Spring Hill and Otago have been constructed under what is referred to as a 

Background 11

“Collaborative Working Arrangement” (CWA) agreement. The CWA approach is 

discussed further in section 5. 

. 

Background 12

4 Key Drivers and Causes of Cost Escalation 

Key Findings: 

• Since Budget 05, further appropriations totalling $140.841 million have been approved in 

order to fund the completion of the Spring Hill and Otago projects. This reflected increased 

construction costs totalling $157.976 million, together with the off-setting impact of lower 

that expected expenditure in other areas (e.g. earthworks and reclassification of some 

commissioning costs) totalling $17.135 million. 

• The drivers and causes of the construction cost increases include market conditions, the 

impact of consent and regulatory requirements and the impact of finalising design. 

• Market influences accounted for about 57% of the increase and reflected: 

o the heated nature of the construction market which affected labour rates and 

margins; and 

o substantial increases in key commodities including, in particular, steel which 

increased in price by over 26% between June 2003 and June 2005; and 

o increased travel and accommodation allowances as a result of having to attract 

labour from areas located well away from the construction sites. 

• The outcome of the consents process and regulatory changes contributed to higher costs 

although the overall impact of these was relatively small (about 6% of the overall cost 

increase). 

• Design changes following the completion of Northland and additional work on a range of 

infrastructure services (drainage, water, roads etc) contributed to the balance of the cost 

increase (i.e. approximately 37%). 

Lessons Learned: 

• The estimates included as part of Budget 05 (and earlier in Budget 04) set expectations 

regarding the costs to construct Spring Hill and Otago. The estimates at that time were, 

however, based on relatively high-level assessments of possible construction costs given 

that detailed designs had not yet been completed. Furthermore, the cost indices relied 

upon to escalate costs between Budget 04 and Budget 05, while the best available, had 

several limitations. These factors meant that the cost estimates had significant risks and 

uncertainties attaching to them. It is important that the risks and uncertainties be 

emphasised and clearly communicated so as to avoid creating unrealistic expectations. 

• The remote location of the sites (especially Otago) put substantial pressure on local labour 

markets. Spring Hill and Otago are major projects. For projects of this size, there is a 

need to consider fully the impact on local markets and the upward pressure on resource 

costs that is likely to occur. 

• Projects of this size also put considerable pressure on local infrastructure which gives rise 

to the need for upgrades. These impacts need to be fully assessed and anticipated as part 

of initial cost estimates. 

• The form of procurement has implications for the Crown in terms of information regarding 

fiscal risks. Traditional fixed price forms of contract mean that the Crown is provided with a 

quoted price at the start of a project (although the eventual price paid depends on the 

extent, if any, of contract variations). In contrast, under the CWA methodology, the 

expected cost is not known until the Target Outturn Cost (TOC) is completed. The actual 

costs are not known until the project is completed, and any pain-share or gain share 

payments have been settled. Until the TOC is in place, there is risk of being exposed to 

cost increases relative to preliminary estimates. This highlights the need for timely 

completion of the TOC, particularly in a public sector setting where the Crown places a 

high premium on cost certainty. 

Key Drivers and Causes of Cost Escalation 13

Overview of Cost Increases 

4.1 Initial estimates for the cost of constructing Spring Hill and Otago were made as 

early as May 2000. However, substantive estimates were not made until late 2003. 

These estimates were included as part of the reporting to Ministers in the context of 

Budget 04. At that time, the costs associated with Spring Hill and Otago were expected to 

be approximately $248 million and $161 million respectively. The estimates indicated as 

part of Budget 04 were informed by the tenders submitted for the Northland project. 

4.2 The estimates were updated as part of Budget 05 and took account of escalation 

since the previous estimates made in 2003. The costs for Spring Hill and Otago reported 

as part of Budget 05 were revised upwards to $283 million and $175 million respectively. 

4.3 Since Budget 05, costs have risen further. In December 2005, approval was 

sought for additional appropriations totalling $140.841 million. This reflected the net effect 

of increased construction costs totalling $157.976 million, together with the off-setting 

impact of lower than expected expenditure in other areas (e.g. earthworks and 

reclassification of some commissioning costs) which totalled $17.135 million (giving a net 

increase of $140.841 million). 

4.4 The table below summarises the reasons provided to Ministers, as part of the 

December 2005 reporting package, behind the significant construction cost increases 

between Budget 05 and the numbers reported in December 2005. 

Spring Hill 

Cost Contributors 

($ million) 

Market Influences 53.773 

Consents and 

Regulatory Changes 

Escalation 16.640 

Labour rates and location 13.123 

Margins and overhead 13.570 

On-site construction cost increases 10.440 

Consents 5.740 

Holidays Act, Building Act 1.540 

7.280 

Design Finalisation 50.650 

Changes arising from Northland 13.600 

Site works requirements 

37.050 

• Drainage $11.3 

• Ducting $4.6 

• Water reticulation $2.9 

• Gas reticulation $0.6 

• Roading $6.0 

• Finishing works & landscaping $10.1 

Total Increase 111.703 


Otago 

Cost Contributors 

($ million) 

Market Influences 36.635 

Consents and 

Regulatory Changes 

Escalation 11.660 

Labour rates and location 9.283 

Margins and overhead 7.910 

On-site construction cost increases 7.800 

Consents 1.570 

Holidays Act, Building Act 1.010 

2.580 

Design Finalisation 7.040 

Changes arising from Northland 7.040 

Total Increase 46.273 

General Comments Regarding Cost Increases 

4.5 Several general comments regarding the cost increases can be made. Later in 

this section, we comment further on each of the cost contributors. 

Supporting Information 

4.6 As part of this review, we have sought to assess the data and calculations 

underpinning the cost analysis included in the tables above (and which was reported to 

cabinet in December 2005). The assessment has been only partially completed. We 

have obtained, and been provided with, information that assists in explaining some 

aspects of the cost contributors outlined in the tables. This includes some high-level 

analysis developed in late November 2005 as retrospective explanation of cost 

movements. However, the information provided does not amount to an integrated set of 

working papers that assist in verifying the explanation of cost increases provided to 

Ministers. For example, while we have information relating to general construction cost 

inflation and inflation associated with some specific commodities (e.g. steel) used in the 

construction of the facilities, the Department has not been able to provide detailed working 

papers which show how the inflation data has been used to calculate the amount of 

escalation. Similarly, we have not seen detailed calculations underpinning the estimates 

of additional costs attributed to consents and regulatory changes or design finalisation. 

Accordingly, we have not been able to independently verify the information provided to 

Ministers. The analysis of the factors contributing to cost increases needs, therefore, to 

be treated with a reasonable degree of caution and should be regarded as indicative, 

rather than definitive. 

4.7 Notwithstanding the limited information to enable an assessment of the cost 

increases, this should not be interpreted as saying that the total estimated costs reported 

in December 2005 are inaccurate. As will be discussed more fully in section 6, the 


Department has in place processes for reviewing the cost estimates prepared for each of 

the projects. This has involved use of external professional/expert advisers. 

Uncertainties With the Earlier Cost Estimates 

4.8 The information presented to Cabinet in December 2005 was intended to provide a 

link back to earlier cost estimates provided in the context of Budget 05 (and before that, 

Budget 04). It is important to appreciate that the earlier estimates were indicative only. 

4.9 The Budget 05 (and Budget 04) estimates were based on high-level assessments 

of construction cost. At the time of the earlier estimates, detailed designs had yet to be 

completed. Accordingly, the earlier estimates had high degrees of risk and uncertainty 

attaching to them. The initial estimates were also based on a traditional quantity surveyor 

approach to cost estimation which involves assessing the scope of work (e.g. m 2 of floor 

space) and attaching a generic rate ($/m 2 ). In contrast, the latest cost estimates reflect 

the outcome of applying the CWA methodology. This involves a detailed line by line 

assessment of all inputs and processes involved in constructing the facilities. This is a 

fundamentally different approach to estimating cost and, accordingly, there is an element 

of attempting to compare apples with oranges when comparing latest with earlier 

estimates. 

Market Influences 

4.10 Under the heading of market influences, the Department has apportioned the cost 

increases under four headings; escalation, labour rates and location, margins and 

overhead and on-site construction costs. 

Escalation 

4.11 The construction market has been heated over the time period during which Spring 

Hill and Otago have been being constructed. Estimated construction costs have been 

escalated with reference to the Capital Goods Price Index for Non-Residential Building 

(CGPI-NRB). Forecasts of the CGPI-NRB are prepared by the New Zealand Institute of 

Economic Research (NZIER) and, as far as we are aware, the NZIER forecasts are the 

only ones that are widely available and published quarterly. The CGPI-NRB is produced 

by Statistics New Zealand (SNZ) and is based on a basket of “model buildings” 

determined by SNZ. The prices associated with each model building are updated by SNZ 

from the New Zealand Building Economist (NZBE) publication. 

4.12 There are several limitations and caveats around the CGPI-NRB index that need 

to be taken into account. 

• There is considerable uncertainty regarding the degree to which margins and 

discounts are incorporated into the NZBE prices. 

• SNZ seeks to adjust its index numbers to strip out the effect of quality changes. 

For example, if the quality of a new building is enhanced and costs are increased 

accordingly, the SNZ approach will attempt to strip out the quality dimension and 

lower the prices accordingly. 

• The models being used by SNZ were last revised in 2000 and are viewed as being 

out-of-date. 


• The types of building included in the category of NRB are wide ranging and not 

necessarily comparable with penal institutions. Differences in cost escalation 

between building types is averaged out. 

• The data is not published on a regional basis. 

• The data is heavily influenced by trends in the Auckland market which accounts for 

35-40% of all building activity. 

4.13 NZIER produces forecasts of the CGPI-NRB index using econometric techniques. 

The main drivers in their model are the level of non-residential building activity, wages, 

employment and producers’ input prices. Based on forecasts issued in December 2004, 

the rate of growth in the CGPI-NRB was forecast to be: 

• 6.1% for the year ending September 2005; 

• 3.2% for the year ending September 2006; and 

• 2.5% for the year ending September 2007. 

4.14 The forecasts issued in December 04 have, however, generally overstated the 

actual increase in CGPI-NRB as shown in the table below. 

Date 

Forecast Quarterly Change 

(issued December 2004) 

Actual Quarterly Change 

December 2004 1.7% 1.8% 

March 2005 1.6% 0.2% 

June 2005 1.4% 1.2% 

September 2005 1.3% 1.2% 

December 2005 1.0% 0.4% 

March 2006 0.8% 1.7% 

4.15 Notwithstanding that the CGPI-NRB forecasts over-estimated the actual change in 

the index at the aggregate level, there is some evidence to suggest that the increase in 

construction costs for the Spring Hill and Otago projects were well above the levels of 

increase recorded by the CGPI-NRB index. Over the period June 2003 to June 2005, the 

CGPI-NRB increased by 13.8%. However, independent advice 1 received by the 

Department in relation to Spring Hill indicated that over the period June 2003 to June 

2005: 

• rates per tonne of steel increased by 26.4%; 

• PVC products increased by up to 30%; and 

1 Peter Waterhouse - Report to RPDP on Construction Costs and Alternative Procurement 

Strategies 31 October 2005 


• the cost of construction in the hospitals and health categories increased by 

between 16.9% and 18.5%. 

4.16 However, the same advice noted that concrete supply and concrete products 

generally increased by only 4% - 8% and timber framing by 4% - 5%. 

4.17 In addition to increases in commodity prices, there were also significant increases 

in labour costs (which are another component of the CGPI-NRB). 

Labour Rates and Location 

4.18 Advice received from Peter Waterhouse (an independent construction cost 

consultant) provided evidence of increased labour rates: 

• rates for carpenters in Auckland region increased by up to 35%; 

• rates for concrete workers increased by up to 29%; and 

• rates for labourers increased by up to 25%. 

4.19 The remoteness of the Spring Hill and Otago sites also contributed to increased 

direct costs. 

• In the case of Otago, up to a third of the workforce at peak levels has had to be 

imported from outside of the coastal Otago region. This increased the level of 

travel and accommodation allowances. 

• Additional travel costs added the equivalent of approximately one hour per person 

per day to labour costs on the Spring Hill project. 

• We understand that the normal level of construction activity in the coastal Otago 

area is around $90 million per annum. Clearly, therefore, the Otago project 

represents a substantial increase over and above this figure. It is not too 

surprising, therefore, that the Otago project has put considerable upward pressure 

on costs. 

4.20 There is scope for some overlap and, hence, double counting across the various 

factors. In particular, the escalation factor measures increases in the costs of completing 

buildings. Implicit within the escalation is increases in labour rates, margins, overheads, 

materials costs and so on. In theory, therefore, the increases attributed to labour rates, 

margins and overheads (and possibly on-site construction costs) in the context of Spring 

Hill should be over and above the increases captured by the escalation. We are not 

convinced that this is strictly the case, but have no way of verifying it because of the lack 

of detailed workings. 

Margins and Overhead 

4.21 In addition to upward pressure on direct costs, there have also been increases in 

margins (which leads to a compounding effect when applied to increased direct costs). 

CMS reported to the Department 2 that: 

2 Assessment of Profit and Overheads margins for CWA Members dated 4 November 2005 


• sub-contractors’ margins have trended upwards by between 3% and 10% in the 

years 2002-2005; and 

• sub-contractors’ margins in the concrete, carpentry, roofing, painting, tiling and 

similar trends have increased by between 2% and 7% over the same period. 

4.22 It was also noted, however, that main contractors’ margins had remained relatively 

constant or fallen during this period. 

On-Site Construction Cost Increases 

4.23 This element of cost increase comprises two parts: 

• on-site management costs; and 

• the outcome of the first-principles approach to building up the TOC. 

4.24 Increased on-site management costs have stemmed from requirements to 

maintain standards in effectiveness and quality. The projects have involved large 

numbers of contractors and this has increased the amount of on-site management 

required accordingly. In the case of Otago, more so than Spring Hill, the net for 

contractors has had to be cast more widely than was originally anticipated. These costs 

have been offset in some measure through efficiency gains including economies gained 

through procurement on a whole-of-site, rather than individual contractor, basis (e.g. sitewide 

cranes and scaffolding). 

4.25 The second, and more general aspect to cost increases reflects the approach to 

determining the TOC and the fact that it is fundamentally different to that used in a 

traditional NZS 3910 approach to procurement. The determination of the TOC is a 

bottom-up, line by line, build up of all the costs involved in the project. In our view, there 

is an inherent risk in this form of costing toward overstatement of costs compared to a 

more traditional fixed price approach which focuses on tendering a price that the supplier 

believes will be price competitive (notwithstanding any loading for a risk premium). In a 

sense, therefore, the increased cost attributed to on-site construction is a reflection of the 

inherent difference between CWA and traditional fixed price contracts. While the 

magnitude of this might not be known ahead of the TOC’s development, the risk of 

increased cost due to the different approach should be acknowledged. In this context, we 

note that the Treasury received advice in March 2004 from Opus which, among other 

matters, noted that CWA involves a new (compared to traditional fixed price contracts) risk 

assessment and cost estimate framework and that this needed to be allowed for in 

reporting and funding approvals. 

4.26 The risks associated with the “bottom-up” approach to costing are managed, 

however, through the process of exposing the cost estimates to review by all CWA 

members, including the Department and its advisers. In our view, while such processes 

can go a long way to mitigating the inherent risks associated with “bottom-up” approaches 

to costing, there is there is the potential for a residual element of cost bias compared to 

the situation of a competitive fixed price contract. 

Consents and Regulatory Changes 

4.27 Much of the cost associated with consent requirements involved additional 

investment in water and wastewater services. In general, the existing infrastructure of the 

relevant local authorities did not have the capacity to deal with the additional demands 

created by the new prison facilities. The level of investment required reflected the 


outcome of negotiations with relevant local authorities. There were also some changes in 

Ministry of Health standards relating to water treatment and waste-water discharge. 

4.28 Other regulatory changes related to the Holidays Act. These changes resulted in 

additional labour costs. We note that the additional costs stemming from the Holidays Act 

should be reflected in the CGPI-NRB and so there is some risk that this element of the 

overall cost increase is being captured twice. 

Design Finalisation 

4.29 According to the advice presented to Cabinet in December 2005, completion of 

detailed design works at Spring Hill (which occurred subsequent to the reporting in April 

2005) identified a number of additional items, the total cost of which amounted to $37.050 

million or roughly 10% of the total project cost. These included: 

• site drainage ($11.3 million); 

• underground ducting and future proofing ($4.6 million); 

• water reticulation and management ($2.9 million); 

• gas reticulation ($0.6 million); 

• access roads and car parking ($6 million); and 

• finishing works and landscaping ($10.1 million). 

4.30 This is a significant amount. Although the reason behind these changes is 

referred to as being a function of completing detailed design work, we understand that 

some of the changes are also a function of the outcome of the consents process. In 

particular, the consent process lead to some significant design changes, including moving 

building platforms. This had flow-on consequences for infrastructural services such as 

drainage and utilities reticulation. A general difficulty facing the Department is that when 

such changes are being discussed/negotiated as part of the consents process, the cost 

impact is not necessarily known with any degree of precision. 

4.31 As far as we are aware, Ministers were not advised of these additional costs until 

the December 2005 report to Cabinet. In our view, the prospect of additional costs in 

these areas would have been known at the time of Budget 05 even though the scale of 

cost would not have been known at that stage. Given the scale of the additional cost, 

more forewarning of Ministers could have occurred. 

Summary 

4.32 Many factors have contributed to the increase in costs over and above those 

reported as part of Budget 05. The underlying drivers of these can be summarised as 

follows: 

• the heated nature of the construction market which resulted in higher input costs 

(materials and labour); 

• international trends for the price of steel; 

• the remote location of the sites which has given rise to additional allowances; 


• the impact of the projects on local infrastructure; 

• the outcome of consent hearings and negotiations; and 

• the impact of various regulatory changes. 


4.33 The Spring Hill and Otago projects have experienced substantial cost increases. 

Approximately 57% of the increase in costs since those reported in Budget 05 stems from 

the heated nature of the construction market; something that the Department had no 

control over. 

4.34 Notwithstanding this, there are several steps that can be taken to minimise large 

fiscal surprises. The first of these steps is to be clear as to the risk and uncertainty 

attaching to early cost estimates. The estimates included as part of Budget 05 (and 

earlier in Budget 04) set expectations regarding the costs to construct Spring Hill and 

Otago. The estimates at that time were, however, based on relatively high-level 

assessments of possible construction costs, given that detailed designs had not yet been 

completed. Furthermore, the cost indices relied upon to escalate costs between Budget 

04 and 05, while the best available, had several limitations. These factors meant that the 

cost estimates had significant risks and uncertainties attaching to them. There is a need 

to ensure that the risks and uncertainties involved are clearly identified and 

communicated, especially to Ministers who might otherwise think that the estimates are 

relatively certain. 

4.35 The remote location of the sites (especially Otago) put substantial pressure on 

local labour markets. This has added to cost in terms of having to pay more to attract 

labour and the cost of upgrading local infrastructure. In developing initial estimates of 

cost, there is a need to take into account, as far as possible, local impacts and conditions 

and assess the implications for high-level estimates of cost. Spring Hill and Otago are 

major projects. For projects of this size, there is a need to consider fully the impact on 

local markets and the upward pressure on resource costs that is likely to occur. 

4.36 Projects of this size also put considerable pressure on local infrastructure which 

gives rise to the need for upgrades. These impacts need to be fully assessed and 

anticipated as part of initial cost estimates. 

4.37 The form of procurement has implications for the Crown in terms of information 

regarding fiscal risks. Traditional fixed price forms of contract mean that the Crown is 

provided with a quoted price at the start of a project (although the eventual price paid 

depends on the extent, if any, of contract variations). In contrast, under the CWA 

methodology, the expected cost is not known until the Target Outturn Cost (TOC) is 

completed. The actual costs are not known until the project is completed, and any painshare 

or gain share payments have been settled. Until the TOC is in place, there is risk of 

being exposed to cost increases. This highlights the need for timely completion of the 

TOC, particularly in a public sector setting where the Crown places a high premium on 

cost certainty. 

4.38 Overall, the magnitude of the increases signals that large projects of this type 

involve significant levels of fiscal risk. In turn, this emphasises the need for robust 

procurement strategies and tight project governance, management and reporting. These 

requirements are assessed further in the following two sections of this report. 


5 Methodology and Processes: Design, Costing, 

Procurement and Scheduling 

Key Findings: 

• A key feature of the Spring Hill and Otago projects is that they have involved the use of the 

Collaborative Working Approach (CWA) methodology. This methodology is relatively new 

to New Zealand, although it is used by Transit for some road projects. 

• A hybrid form of CWA was used for the Northland project and it was key to overcoming 

some issues that were threatening to disrupt progress with that project. 

• The collaborative approach implied by the CWA methodology, the advantages offered by 

CWA and the positive experience with CWA in the context of Northland led the Department 

to use CWA for the other regional prisons, including Spring Hill and Otago. 

• The way in which the Department has applied the CWA methodology has enabled it to 

benefit from many of the advantages inherent in the CWA approach. In particular: 

– there has been close integration of design, construction and commissioning teams 

which assists in achieving an optimal balance between design, construction and 

operational requirements; 

– several value management reviews have been undertaken to further optimise designs 

and take out unnecessary costs; 

– at a site level, resources have been mobilised to deal with day-to-day issues, thereby 

increasing the efficiency of on-site resource utilisation; 

– the collaborative approach to dealing with issues has helped to maintain momentum 

with the projects, thereby enabling the timing of projects to be completed on, or near 

to, expectations; 

– high levels of transparency in relation to costs have been achieved at the project level 

consistent with the “open-book” philosophy that underpins CWA (with some opportunity 

for more transparency over margins – see below); and 

– costs have been exposed to extensive third party scrutiny and review. 

• Overlaying all of these benefits, the methodology chosen by the Department means that it 

is on track to deliver Spring Hill and Otago in time to meet expected prison population 

requirements. There were sufficient indications to suggest that, had the Department 

elected to follow a traditional procurement method, timeframes for completing the projects 

would probably not have been met. 

• Notwithstanding these benefits, there are aspects of the way in which methodology and 

supporting processes have been applied that can be improved. In particular: 

– analysis of the reasons for preferring CWA ahead of other procurement options was 

not sufficiently documented; 

– the timing for completing the TOC has not conformed with good practice. However, key 

reasons behind this were delays in completing designs caused by changes in the 

scope of facilities, lack of design resource and shortage of experienced costing 

resources. To avoid delays to the projects (and the problems this would cause in 

terms of accommodating the increasing prison population), the Department decided to 

proceed with the projects; and 

– while there is good transparency over costs at the project level, the Department does 

not have visibility over margins. As a result, it is dependent on the advice of third 

parties. 

Methodology and Processes: Design, Costing, Procurement and Scheduling 22


• Notwithstanding the advantages offered by the CWA methodology, there are also some 

risks involved and the methodology requires considerable management resource. 

• CWA will not be suited to all projects. There is a need to identify the conditions under 

which CWA is likely to be preferred ahead of more traditional fixed price contracts. Factors 

to take into account include the size and complexity of project, the level of uncertainty (e.g. 

technological change and design requirements), and the timeframes for project completion. 

Projects should be evaluated against these, and other, factors before the choice of 

procurement method is made. The decision and underlying reasons should then be 

documented. 

• The CWA methodology requires careful and experienced management to protect the 

Crown’s interests. A blend of competencies and experience (commercial, construction and 

public sector management) are required for effective management. For future projects of 

this size and complexity, sponsoring agencies need to be confident that they have the 

appropriate mix of competencies and these are represented within the CWA Principal’s 

Group. 

• The way in which the Department has implemented CWA means that there has not been 

the usual market testing of prices through obtaining competitive quotes. The CWA 

methodology can be modified, however, by seeking indicative target costs as part of the 

CWA member selection process. This can go some way toward providing more 

information on likely costs. However, this modification to the selection process requires 

extra time and resources to complete the tender evaluation. Given the extra costs and 

time involved, it may not be appropriate in all circumstances to modify the selection 

process in this way, but at the least, consideration should be given to this option. 

• The development of the TOC is a central part of the CWA methodology. It needs to be 

finalised sooner than has been the case with respect to Spring Hill and Otago. Specifically, 

the TOC should ideally be completed at, or about, the time construction commences. In 

order to achieve this, there needs to be: 

o as much flexibility as possible over the lead time for constructing a prison; 

o appropriate levels of capacity to undertake detailed design work once CWA 

members have been agreed; 

o agreed standards against which to base designs; and 

o continual pressure on the commercial CWA members from the Department to 

achieve timely completion of the TOC. 

• Until the draft TOC is well developed, estimates of construction cost should be seen as 

indicative only. Pre-TOC estimates of cost involve significant levels of risk and uncertainty 

and this needs to be made clear. 

• Once TOC estimates begin to emerge, there should be transparent reporting of these to 

provide the Department and, as appropriate, Ministers with opportunities to explore options 

for saving cost if budgets are under pressure. 


Introduction 

5.1 In this section, the methodology and processes employed by the Department to 

design, cost, procure and schedule the projects is reviewed. Relatively more emphasis is 

given to procurement. This is because the Department chose to use the CWA 

methodology for the procurement of Spring Hill and Otago. CWA is not a common form 

of procurement in New Zealand, although it is used by Transit on some road projects. 

Reflecting the relative newness of the CWA methodology in the New Zealand context, the 

Department’s experiences with it provide some valuable insights as to its advantages and 

disadvantages compared to more traditional forms of procurement. 

Design 

5.2 The origins of the design for the Spring Hill and Otago facilities have linkages with 

designs in Australia and Canada. As noted in section three, the design for Spring Hill was 

broadly aligned with that for Northland and the design for Otago was broadly based 

around that for Auckland Women’s. That said, however, there are significant differences. 

For example, Otago involves differences in heating, ventilation and insulation reflecting 

the cooler climate. Otago also has other design differences compared to Auckland 

Women’s which is a women’s prison. Similarly, the different scale of Spring Hill and 

Northland led to some design differences. 

5.3 We have not reviewed in any detail the approach to the development of the 

designs used for Spring Hill and Otago given that the origins of the designs pre-date both 

of these projects. Notwithstanding this, several points can be noted. 

• The CWA methodology has the advantage of promoting close interaction between 

the construction contractors, the design teams and the client in the development of 

detailed designs. In contrast, under traditional forms of procurement, it is not 

unusual for design contracts to be let, followed by construction contracts once 

designs are largely completed. The advantage of the more integrated approach 

under CWA is that there is greater scope for assessing the implications of design 

on construction and on operations and, hence, greater scope to adjust designs to 

achieve the optimal balance between design, construction and operational 

considerations. 

• The Northland project was the first of the prisons to use the new style of facility. 

Several lessons were learned from the construction of Northland that assisted in 

refining the design to achieve better outcomes from an operational viewpoint. 

Reflecting the relative newness of the design, the Department developed 

standards through the design process for Northland. It was only following the 

completion of Northland that standards were finalised and documented. The 

Department took advantage of these lessons by incorporating them into the Spring 

Hill and Otago projects. 

• The relative newness of the prison design also placed added pressure on design 

resources. These resources were, at times, stretched. In the case of Otago, 

pressure was incurred through the reallocation of design resources from Otago to 

Auckland Women’s (approx June – December 2004) to address the capacity 

increase from 150 beds to 286 beds. 

• Although outside the scope of this review, we note that there were issues around 

design in the case of the Northland project. As discussed later in this section, the 


Costing 

CWA methodology provided a mechanism for addressing these issues and for 

ensuring those difficulties were not repeated for Spring Hill and Otago. 

5.4 The approach to costing has several phases: 

• various initial cost estimates, based on high level $/bed comparisons were made in 

2000 for Spring Hill and Otago. These were updated at various points over the 

period 2001 to 2003; 

• more substantive estimates were made as part of Budget 04. These were 

subsequently updated as part of Budget 05 to take into account construction price 

increases over the intervening period; and 

• the latest cost estimates were reported to Cabinet in December 2005. These 

estimates incorporate the outcome of the detailed work that has been undertaken 

as part of the development of the TOC for both projects. 

5.5 We focus on the second and third of these phases. The initial phase of cost 

estimates in 2000 – 2003 should be seen as preliminary only. They did not have any 

material bearing on whether or not to proceed with the Spring Hill and Otago projects (or 

to what specification) as the key funding decisions were taken as part of Budget 04 and 

Budget 05. 

Budget 04 Estimates 

5.6 The majority of the funding for Otago was approved as part of Budget 04 (and 

significant funding decisions were also taken with respect to Spring Hill). Accordingly, the 

estimated completion costs provided as part of Budget 04 took on considerable 

significance. At that time, the costs for Spring Hill and Otago were signalled to be $248 

million and $161 million respectively. 

5.7 Because of the importance attaching to the estimates provided at that time, it is 

important to understand the context within which the estimates were provided and the 

basis upon which they had been developed. 

• The outcome of the Northland tender was taken into account in developing the 

estimates of cost for Spring Hill and Otago. The tender was analysed and the 

rates were applied to an area schedule for Spring Hill and Otago. The significance 

of this is that the prices tendered for Northland were approximately $12 million 

above the estimates for Northland pre-tender. In the case of Otago, estimates 

developed in connection with Auckland Women’s were also used to inform the 

rates for Otago. Auckland Women’s was, at that time, at the “developed design” 

stage with several detailed estimates having been completed. 

• Northland was tendered as a traditional NZS 3910 form of contract (only later did 

the procurement method for Northland modify into a hybrid form of CWA). By 

implication, while the tender prices for Northland were visible to the Department, 

the actual costs associated with the project were not transparent (as is always the 

case with NZS 3910 contracts). 

• The estimates were made by the Department with input from its independent 

quantity surveyors – Rider Hunt. At the time of Budget 04, the RFP for the Spring 


Hill and Otago projects had yet to be issued, so the estimates were made well in 

advance of the CWAs being formed. 

• The estimates made as part of Budget 04 were based on concept designs. 

Detailed design work had yet to occur. By implication, the Budget 04 estimates 

could only be indicative at best. 

• The approach to estimating costs at that time rested on applying $ rates per M 2 of 

gross floor area (taking into account the Northland tender prices). However, 

benchmarking the rates applied to Spring Hill and Otago with other projects, 

including Northland, was problematic because of the greenfield nature of the 

Spring Hill and Otago sites. With the advantage of hindsight, it is also apparent 

that the remoteness of the Spring Hill and Otago sites has played a significant part 

in explaining the differences between the latest estimates of cost and the 

estimates communicated in Budget 04. 

5.8 In short, the basis upon which the Budget 04 estimates rested were, at best, 

indicative only. Reflecting the basis upon which they had been developed, the estimates 

provided as part of Budget 04 had quite high levels of risk and uncertainty attaching to 

them. However, the indicative status of the cost estimates could have been made clearer 

in the business cases submitted to Cabinet as part of Budget 04. Because the cost 

estimates were presented to three decimal places consistent with Budget process 

requirements, there is a risk that Ministers would have interpreted the estimates as 

conveying a high degree of certainty. Any such perception needed to be corrected. 

5.9 The business cases submitted as part of Budget 04 noted that escalation was a 

significant risk for the Department (and, by implication, the Crown). However, the 

magnitude of the risk was not quantified. Ministers could not have gauged from the 

business case whether the risk amounted to a small amount or, as it turned out, tens of 

millions of dollars. In our view, there was a need to indicate more clearly the status of the 

cost estimates including, in particular, the level of certainty attaching to the estimates. 

5.10 We note that contingency funding was also provided for, but the interpretation of 

what the contingency represented was not made clear in the business case presented to 

Ministers. 

Budget 05 Estimates 

5.11 The next major reporting milestone to Cabinet was in April 2005 as part of Budget 

05. At that time, the costs associated with Spring Hill and Otago had been revised 

upwards to $283 million and $175 million respectively. In the case of Spring Hill, the 

explanation provided to Cabinet for the increase of approximately $34.5 million since 

Budget 04 was not particularly clear but appeared to be a function of adjustment for 

further escalation. With respect to Otago, the total estimated cost increased by 

approximately $13.8 million compared to Budget 04. Almost all of the increase was 

attributed to escalation (there was a further small amount relating to commissioning). 

5.12 At the time of Budget 05, work on Northland and Auckland Women’s was 

underway. However, both projects were of limited usefulness in terms of informing cost 

estimates for Spring Hill and Otago. 

• Northland has a hybrid form of CWA. As such, the project was being completed 

under fixed price conditions and the Department did not have visibility over the 

actual costs being incurred by the project. 


• Auckland Women’s was a full CWA approach and progress reports indicated that 

costs were tracking according to plan and, accordingly, did not provide any earlywarning 

signals of impending cost issues that were to affect the Spring Hill and 

Otago projects. 

• The Auckland Women’s would not have provided detailed insights regarding 

Spring Hill in any event given the different designs between the two facilities (and 

to some extent the same point applied with respect to Otago which is a men’s 

prison). 

December 2005 Estimates 

5.13 During the period from April 2005 to October 2005, work on the TOC for Spring Hill 

and Otago proceeded (at the same time that construction was also proceeding). 

5.14 The TOC is, in effect, the agreed budget for the project. It is intended to include all 

project costs except those specifically defined and agreed as being excluded and, hence, 

the responsibility of others. The TOC is, in theory, a pre-construction estimate of the 

efficient level of cost to complete the project. It has the following components: 

• Direct costs. These comprise labour, materials and plant. Labour rates are 

“burdened” to reflect personnel-related costs such as ACC, sick leave, annual 

leave and, if appropriate, allowance for travel time, protective clothing and so on. 

In the context of the RPDP, the process of calculating burdened labour rates has 

been undertaken by CMS and reviewed by Sherwin, Chan & Walshe. There is 

also a burdened rate for plant that includes depreciation, repairs and maintenance 

and consumables (e.g. fuel). 

• Normalised Profit Margins. Each contractor (and sub-contractor) that is part of the 

CWA can expect to earn their “normalised” profit margins in addition to recovering 

their actual costs and overheads contribution. In the case of the RPDP projects, 

normalised profit margins have typically been established with reference to the 

previous three years financial accounts of the contractor. Adjustments have been 

made to smooth out unusual/abnormal profit results (either good or bad), the 

current state of the construction market and levels of risk involved. This work has 

also been performed by CMS and reviewed by Sherwin, Chan & Walshe. Once 

margins are determined, they are “ring-fenced”; that is, the dollar value assigned to 

margins does not change unless there is a substantial change to the scope of work 

involved. 

• On-site overheads (also referred to as Preliminary and General or P&G). This 

includes, for example, the costs associated with on-site project managers and 

management team, project offices, site stores, administration staff and so on. 

• Off-site overheads. This recognises that an element of the off-site corporate (e.g. 

head office) overhead is needed in order to support the project. As with the 

margins calculation, a normalisation process is involved with off-site overheads 

and once the level of off-site overhead is determined, it is “ring-fenced”. 

5.15 It is important to emphasise that the TOC focuses on cost. In contrast, under a 

traditional NZS 3910 form of contract, the tender quoted is a price; that is, it is the amount 

the client pays for the project as distinct from what it actually costs to complete the project 

(subject to any agreed variations). Because the TOC focuses on cost as distinct from 

price, it implies a fundamentally different basis for the allocation of financial risk. Under a 


strict fixed price contract, financial risk is substantially borne by the provider (although 

provisions relating to contract variations can result in sharing of financial risk). In contrast, 

under a CWA as adopted by the Department, it is not until the project has been completed 

and the final costs accounted for, that the client has certainty over the total amount 

payable for the project. 

5.16 Although not accepted by the Department at the time of preparing the report that 

went to Cabinet in December 2005, the TOCs were at an advanced stage. The draft 

TOCs indicated that costs had increased to $381 million and $218 million for Spring Hill 

and Otago respectively. 

5.17 The December 05 report to Cabinet included a description of the factors leading to 

the cost increases compared to the Budget 05 estimates. In brief, the contributing factors 

were grouped under the headings of market influences, regulatory and consent changes 

and omissions from earlier estimates (items seen by the Department as not previously 

included rather than items inadvertently overlooked). While the increases and underlying 

causes are site-specific, in the case of escalation, there is considerable overlap between 

the two sites and this issue is considered first. 

5.18 From the Crown’s perspective, it has a keen interest in achieving project 

completion on time, within budget and to specification. In normal fixed price contracts, 

price is established up front as part of the tender process (although actual price outturn is 

often the subject of contract variations). The way in which CWA has been used by the 

Department means that there is no price information arising from the selection process. 

Development of the TOC (and related QRA and gain/pain share arrangements) is, 

therefore, of critical importance, particularly from a fiscal management perspective. 

5.19 Building the TOC is not a straightforward process. In very general terms, the 

processes around its development are illustrated below. 

er 

Pre-tend 

phase 

Concept 

Scheme Design 

Detailed Design 

Negotiating Framework 

Agreement Phase 

Risk Identification 

Quantified Risk 

Assessment 

Direct Costs 

Margins 

Overheads 

Independent QS review 

Labour & Plant 

Burdening 

Independent 

Normalisation 

Audit 

Normalisation 

Draft Total Outturn Cost 

Value Management 

CWA 

Agreement 

Phase 

Agree TOC, QRA and 

Gain / Pain Share 

Agree CWA Agreement 


5.20 Several points should be noted. 

• Detailed designs need to be in place before any serious attempt can be made at 

determining the TOC. 

• The time taken to develop the TOC once detailed designs are completed will 

depend on the size and complexity of the project. However, as a guide to good 

practice, a time frame of 2-4 months should be expected. 

• The process of determining the TOC is heavily dependent on transparency of 

financial and other data and on independent scrutiny of the numbers, assumptions 

and calculations. In general, CWA involves an “open book” approach to the 

determination of costs. Transparency and independent scrutiny are the 

mechanisms through which assurance is gained that costs are efficient (on the 

assumption that there is no market testing of the cost estimates through a tender). 

• 

estimates of the TOC may exceed this expectation in which case a process of 

• 

The process is very iterative. The client will (should) have a budget in mind. Initial 

value engineering is used to strip out unnecessary expenditure and explore more 

cost effective ways of achieving the client’s requirements and budget expectations. 

A lot hinges on getting the TOC in place as soon as possible. Until the TOC is 

agreed, the commercial CWA partners are remunerated according to the actual 

costs they incur. Until the process of independent scrutiny of direct costs, audit of 

margin, overhead and burdening calculations and value management is 

completed, the client does not have final assurance that the estimated costs 

represent an efficient level of costs. Moreover, until the TOC is in place, the gain 

and pain share arrangements cannot be finalised. The gain/pain share provide an 

important and further spur to efficiency and delivery of the project within, or in 

excess of, client expectations. 

5.21 In relation to this last point, a key point to understand with alliancing is that while it 

offers benefits over traditional contracting methodology, it raises new and different risks 

that have to be managed. In particular, there is a balance to be struck between having 

faith in the collaborative nature of alliancing and the need to protect the client’s financial 

interests. CWA does not involve a fixed price from the client’s perspective. 

TOC Development Timing 

5.22 The TOC plays a pivotal role in CWA agreements. At the time that the Spring Hill 

and Otago tenders were awarded (to Mainzeal and Hawkins respectively), there was an 

expectation that the CWA Agreement and TOC would be finalised within a matter of 

months. Negotiation Framework Agreements 3 (NFAs) were entered into with the CWA 

partners at both Spring Hill and Otago. In both cases, the NFA was agreed through to 15 

January 2005 during which the parties would work together to develop an accurate TOC. 

It is worth noting that, in the context of the Auckland Women’s project, it was expected 

that approximately nine weeks would be required to finalise the CWA (including TOC). 4 

3 NFAs are interim arrangement pending formalisation of the CWA Agreement. They do not 

represent the award of any contract, but signal the intention to enter into a CWA Agreement. NFAs 

set out various matters governing the negotiations leading toward a CWA Agreement. 

4 RPDP Steering Group meeting of 30 March 2004 


5.23 In the event, the development of the TOC has taken considerably longer than the 

initial expectation. In respect of Spring Hill, the Steering Group accepted the TOC as 

presented on 21 June 2006 and the CWA Agreement is being finalised for execution. In 

the case of Otago, the TOC was approved by the CWA commercial members and the 

Department on 25 May 2006. The CWA Agreement is currently with the CWA members 

for execution. 

5.24 The NFAs for Spring Hill and Otago have been rolled over multiple times (at least 

7 times in the case of Spring Hill since October 2004). On several occasions, the roll-over 

of the NFA took place after the expiry of the preceding agreement. It is not clear what the 

legal position of the parties was on such occasions. At several points during 2005, 

revised timetables for completing the TOC were advised to the Steering Group. For 

example, in May 2005, it was expected that 30% of the Spring Hill project would be 

scoped into a TOC by mid-July 2005 with 80% scoped by mid-August. By implication, 

there was clear expectation that elements of the Spring Hill TOC would be progressively 

known through the middle of calendar-2005, but we note that the numbers around the 

TOC were not being communicated to the Steering Group during this time. 

5.25 In the case of Spring Hill, the Department considered in mid-May 2005 whether to 

delay construction work until the TOC was in place or to proceed on a fast-track basis. 

The latter option was taken on the understanding that the first TOC would be available in 

mid-July 2005. In the event, this deadline was not met. It was not until around late- 

September that the TOC for Spring Hill was beginning to be disclosed and slightly earlier 

in the case of Otago. 

5.26 The long period over which the TOC was developed created financial risk for the 

Department. During the period prior to completion of the TOC, the commercial CWA 

members are effectively reimbursed according to cost. While such costs are transparent 

and subject to review by the Department and independent advisers, the fact that critical 

TOC information did not emerge sooner meant that the Department (and Government 

more generally), was denied opportunities to consider options for reducing cost in light of 

the higher than expected cost. Moreover, prior to agreeing the TOC, it was not possible to 

agree the gain and pain share arrangements. As a result, the added incentives that these 

arrangements bring were missing. In the case of Otago and, to a somewhat lesser extent 

Spring Hill, the timing of the TOC meant that the projects were well underway before the 

TOC was agreed. This situation is not consistent with best practice CWA methodology. 

5.27 The fact of the substantial delay in getting the TOC in place obviously raises the 

question as to why the delay occurred. In this respect, we consider that there is a 

combination of factors. 

• The Department had no experience in CWA methodology. Experience in CWA 

was being gained as work on the RPDP projects progressed. 

• Pressure on design teams meant detailed designs took longer to finalise than was 

expected (detailed designs are a necessary prerequisite for TOC development). 

We understand that the issue around design related more to building services than 

to the buildings themselves (for example, designs for underfloor heating for Otago 

were not complete until August 2005). 

• The sheer volume of work involved in reviewing and independently verifying TOC 

estimates is considerable. We consider this was under-scoped by the Department 

and its advisers. 


• The CWA methodology has been pushed down the supply chain to a very 

• 

• 

considerable extent. We understand that at the time of this review, approximately 

95% by value of the cost incurred and committed on Spring Hill was captured by 

the CWA methodology (i.e. only 5% or work was being performed under standard 

NZS 3910 procurement). We question whether it is sensible to drive the level of 

CWA as far as this. A consequence of this approach is that it adds significantly to 

the workload involved in developing a TOC. Our understanding is that the 

successful Auckland Women’s project had around 60% of cost under a CWA 

arrangement. 

There is a large number of partners involved in the CWA (there are 17 CWA 

members on the Otago project). The remoteness of the sites, particularly in 

Otago, has meant that the net for contractors has had to be cast widely so much 

so that, at the peak, approximately a third of the workforce on the Otago site is 

“imported” from outside of the coastal Otago area. Increasing the number of 

contractors increases the number of margins and overheads that have to be 

calculated. More fundamentally, the larger the number of CWA members, the 

more training in CWA that needed to be undertaken. 

There was generally insufficient experienced estimation and cost planning 

expertise available in the market and who were capable of undertaking the first 

principles approach to cost determination that is characteristics of CWA. 

Moreover, the expertise that did exist was more used to short-term projects rather 

than the major and long-term nature of the prisons project. 

• Governance and project management arrangements prior to changes in mid – late 

2005 have not, in our view, been as tight as they needed to be. This point is 

discussed further in the next section. However, issues regarding project 

management meant that the range of factors that were impacting on the timeliness 

of the TOC were not being managed as closely as they warranted. 

• The commercial CWA members, who were being reimbursed for costs incurred, 

did not necessarily face strong incentives to expedite the development of the TOC. 

That said, however, we note that incentives can change. For example, we 

understand some of the CWA principals involved in the Otago project entered into 

an arrangement to underwrite risks faced by some of the sub-contractors, 

stemming from potential time delays. This may well have contributed to the more 

timely completion of the proposed TOC for the Otago project (taking into account 

the design issues noted above). 

5.28 In summary, several resource constraints impacted on the timeliness of the TOC. 

These included pressures on scarce design resources and a relative lack of experienced 

estimation and cost planning expertise. The timeliness of the TOC was also influenced by 

the hea vy demands being placed on management of the CWA in part reflecting the extent 

to which the CWA has been driven down the supply chain. The resource constraints and 

demand pressures are, however, matters that are capable of being anticipated and 

managed. 

5.29 Notwithstanding these points, the Department faced a difficult set of 

circumstances. The need to maintain progress with the projects so as to ensure their 

completion in time to meet expected prison population growth meant that the option of 

delaying the project pending completion of the TOC was not a realistic option. 


5.30 In short, from a best practices perspective, it is not desirable to have the TOC 

being developed so far into the construction phase. A key lesson arising from the Spring 

Hill and Otago projects is the need to ensure that the TOC is developed much sooner in 

the process so as to minimise the amount of construction undertaken without there being 

an agreed TOC. 

TOC Development – Independent Assurance 

5.31 One of the guiding principles governing CWA is the need to ensure that costs are 

efficient and represent value for money. The Department is part of the TOC development 

process and, as part of this, it reviews and assesses the TOC with the objective of 

ensuring that it is receiving value for money and, consistent with this, that the TOC is 

based on an efficient level of prices. 

5.32 To assist in achieving these objectives, the Department obtains advice from a wide 

range of third parties as shown below. 

CMS 

Burdened rates 

SCW 

Independent 

review 

Direct Costs 

Labour costs 

Plant/eq 

uipment costs 

Materials costs 

Rider Hunt – 

independent review 

CMS 

Margins 

SCW 

Independent 

review 

Overheads 

5.33 While use of outside expertise is desirable, several points can be made. 

• There is a very heavy dependence on CMS. From a risk management 

perspective, having such a high proportion of the overall knowledge of the projects 

in one (small) firm needs careful management. The Department has sought to 

manage this through the roles performed by Sherwin, Chan & Walshe (a chartered 

accountancy firm). Their roles include review of margin calculations performed by, 

and the methodologies used by, CMS. 

• There is a need for high degree of independence because of the need to challenge 

the draft TOC numbers being prepared by the commercial CWA partners. The 


• 

• 

Department engaged CMS in respect of this. CMS has a key role in facilitating the 

CWAs and, as part of its brief, takes responsibility for the quality of work going into 

the development of the TOC and plays a key role in determining margins and 

overheads which are key inputs to the overall determination of the TOC. In this 

regard we view CMS’ role as being very much on behalf of the CWA; not the 

Department. However, it is clear that the Department has placed considerable 

reliance on the advice of CMS. Notwithstanding the role performed by Sherwin, 

Chan & Walshe, we consider that the Department should seek to supplement 

CMS’ role with another adviser expert in CWA methodology in order to ensure the 

level of independence needed in order to effectively counter-balance and 

challenge the TOC estimates being submitted by the commercial CWA members. 

Rider Hunt has responsibility for reviewing the direct costs (labour, materials and 

plant). To undertake this role, Rider Hunt compares the quantities and values in 

the TOC against a database of information built up from many other projects. A 

difficulty that Rider Hunt faces is that it is being asked to review labour rates that 

do not include any element of profit or overhead. In traditional forms of 

contracting, labour rates do include profit and/or overhead (i.e. a builder’s hourly 

rate will normally include profit and a contribution to overhead). Rider Hunt does 

not, however, have access to margin or overhead data. While noting that there 

are commercial sensitivities around profit/overhead information, we consider that 

would be better to provide Rider Hunt with access to this information as it would 

provide a better basis for cost comparisons. 

More generally, the Department, as well as Rider Hunt, did not have full 

transparency over margins and, in this respect, the way in which CWA was 

implemented did not fully accord with the “open book” requirements of the CWA 

methodology. Only CMS had full transparency over margins. 

5.34 The process for determining margins and overheads involves extensive detailed 

unbundling of contractors’ accounts. There is potential for costs to be double counted. 

Considerable judgement needs to be applied by CMS in the process of trying to normalise 

the accounts and ensure that costs are counted only once. Sherwin, Chan & Walshe are 

retained by the Department as an independent check on the margin and overhead 

calculations performed by CMS. However, because the Department does not of itself have 

visibility over margins, it is totally reliant on the advice of third parties. Consistent with the 

open book principle upon which CWA is based, and recognising that the margin 

calculations are an important part of overall cost determination, we consider that the 

Department should have greater direct visibility over margins and their calculation. 

Development of the TOC – Lessons Learned 

5.35 Given the pivotal role played by the TOC, its development needs to be concluded 

much sooner in the overall process than has been the case for the regional prisons. 

Several factors need to combine in order for this to occur. 

• First and foremost, there needs to be more flexibility over the lead time for 

constructing the prison. A key issue affecting the regional prisons was the need to 

adhere to specified completion dates in order to accommodate the growing prison 

population. Realistically, the Department did not have the choice of deferring 

construction of Spring Hill and Otago to allow for the development of the TOC prior 

to starting construction. 

it 


• Related to this last point, the Department needs to take steps to ensure that 

appropriate levels of design capability are available to take designs from concept 

status through to detailed plans status so as to provide the basis for detailed TOC 

development work. Design was a bottleneck in the prisons’ development. 

• Timely completion of the TOC depends on there being completed and agreed 

designs. In part, delays in completing designs were a function of scarce design 

resources but, in part, there were design changes late in the process (e.g. in 

relation to site services at Otago). 

• Pressure has to be maintained on the commercial CWA partners to ensure early 

development of the TOC. Under cost plus margins arrangements there is an 

inherent risk that the commercial partners do not necessarily have strong 

incentives to conclude early agreement on the TOC. The TOC is an iterative 

process and requires the client to be in a position to challenge elements of the 

TOC from an informed position. This requires appropriate levels of resource and 

flexibility and nimbleness in decision making. Structures and processes need to 

support this. 

5.36 The corollary of ensuring the early completion of the TOC is that the amount of 

work that is undertaken on fast-track basis should be minimised. Getting the TOC 

determined before work starts maximises the opportunity for Government to make 

changes if costs turn out higher than expected. 

Procurement and Scheduling 

5.37 The method under which the prisons have been constructed is a major part of this 

review. As will be discussed below, a hybrid form of CWA was adopted for the Northland 

project. A key reason behind this was the need to address some issues with that project 

that had the potential to adversely affect the timing of that project. 

5.38 Prior to the Northland project, prison construction in New Zealand had been 

procured by a fixed price form of contracting (more formally, procurement had been 

undertaken pursuant to the NZ standard NZS 3910). This form of procurement is 

commonplace across a wide range of construction activity. In a sense, it is the traditional 

form of procurement. 

5.39 In contrast, Spring Hill and Otago have been procured using the CWA, or 

alliancing, form of procurement. There are major differences between the two forms of 

procurement. It has not been within the brief of this review to assess the merits or 

otherwise of the CWA versus more traditional forms of contracting. However, it is useful 

to have an appreciation of the differences involved and the key features of CWA 

methodology. 

Key Features of CWA Methodology 

5.40 CWA is one form of a more general form of procurement referred to as alliancing. 

Alliancing can take many forms, examples of which include: 

• Traditional joint ventures - until recently, the joint venture, in which two or more 

parent organisations join forces to create a separate legal entity, has been one of 

the most common type of alliance. In the traditional joint venture, organisations 

unite to obtain economies of scale and scope. 


• Outsourcing arrangements - these are partnerships in which an organisation 

outsources a business process or function (e.g., human resources or information 

technology) that is not central to its business mission. This allows the organisation 

to concentrate on its primary business objectives. 

• Marketing alliances - marketing alliances bring together organisations that 

market different products or services to the same group of consumers. They can 

take many forms, including co-packing alliances and co-operative advertising. 

Under a co-packing alliance, an organisation licenses the use of its brand name 

and product formula to organisations that have production, packaging and 

distribution capabilities. 

• Supplier/vendor alliances - closely related to outsourcing arrangements are 

supplier (or vendor) alliances in which organisations partner with suppliers to 

enhance the service, each bringing its specific area of expertise to bear on the 

project or service. 

5.41 

The CWA is closely related to the last of these forms. 

5.42 A key feature of CWA (and alliancing more generally) is that all parties in the 

alliance have a shared interest in overall project outcomes. Alliancing approaches share 

a number of distinct features that set them apart from more traditional forms of 

procurement. Included among these are: 

• alignment of the business goals of all parties; 

• selection of parties in the CWA agreement is based on capability, approaches and 

systems (as in traditional evaluation processes) and more subjective assessment 

around the level of project commitment, the composition and nature of the sponsor 

team, the likelihood of the combined team delivering outstanding results; 

• a selection process that may not include price; 

• joint risk allocation and management; 

• joint and integrated project governance and management; 

• 

fully open book among the parties implying very high levels of financial and other 

disclosure; 

• a principles-based collaborative form of contract that seeks to avoid adversarial 

conduct. This means, for examples, that there are no disputes resolution 

processes in CWA agreements. Where problems arise, the parties work 

collaboratively to identify solutions rather than seeking to “point the finger of 

blame”; 

• a cost reimbursement process that is open and pays actual costs and agreed 

margins (profits and overheads); 

• an equitable and appropriate risk and reward scheme (referred to as pain share 

and gain share arrangements); 

• an active relationship development and maintenance regime; and 


• high levels of support from parent companies in support of the contracting 

arrangement (as reflected by senior representation on what is referred to as the 

Principals Group). 

5.43 The CWA approach is aimed at fostering a best-for-project approach through a 

“no-blame-no-claim” culture where all parties have a unity of purpose to achieve a 

successful outcome. Decision making in regard to the project is conducted through a 

Principals Group. Decisions by the Principals Group are made on a unanimous basis; 

that is, all parties have to agree. 

5.44 In traditional fixed price contracts, the principal point of focus is the price that is 

paid for the services. Under the CWA approach, the focus is on the efficient level of costs 

because this is the amount that the client, in theory, pays for the services. 

Background To CWA for Prison Construction 

5.45 The CWA methodology has been used in the context of the Northland (albeit in 

hybrid form) and the recently opened Auckland Women’s prison. The Northland prison 

commenced as a traditional NZS 3910 contract. However, by August 2003, several 

factors pointed toward the need to modify the contractual approach to construction: 

• financial pressure on one critical consultant was such that it was doubtful if they 

would continue; 

• there was evidence of on-site “man-marking” where significant effort was being 

directed toward allocating blame rather than resolving issues; and 

• the construction programme was not universally agreed among the parties 

involved. 

5.46 In considering the options open to the Department, CWA was raised as a potential 

way forward. Several points are worth noting in this regard. 

• We understand that Mainzeal had for some time been considering alternative 

forms of procurement including alliancing. 

• Stewart Rix (of CMS) had considerable experience of CWA from previous roles in 

the United Kingdom (where CWA and alliancing generally is more commonplace). 

A meeting between CMS and the RPDP Project Director (John Hamilton) to 

present on CWA was arranged at the instigation of the Chair of the Inmate 

Employment Advisory Committee. CMS also presented to Hawkins Construction 

Ltd (the main contractor on the Auckland Women’s and Otago projects). 

• When difficulties with Northland emerged, the RPDP Project Director approached 

CMS out of which came a suggestion to convert the contractual framework for 

Northland to a CWA agreement (the Northland project had been running on-site for 

approximately six months). Mainzeal were the prime contractors for the Northland 

project. 

5.47 At the August 2003 meeting of the RPDP Steering Group, the Project Director 

provided an oral briefing on the proposal to enter into a hybrid form of CWA (the hybrid 

arrangements retained an element of the former NZS 3910 contract including, in 

particular, a cap on construction costs). The meeting approved in principle the change to 


the hyb 

rid CWA subject to the condition that a formal paper for approval be tabled with the 

Steering Group. 

5.48 Following the decisions to adopt the hybrid methodology, the Department decided 

to retain CMS to assist with training and to provide advice on managing the transition to 

the new arrangements. Both aspects of CMS’ role were vital: the Department had no prior 

experience of CWA. 

Choice of Procurement Methodology 

5.49 Subsequent to the decisions taken with respect to Northland, the Department has 

moved to adopt CWA for the Spring Hill and Otago projects (as well as Auckland 

Women’s). 

5.50 CWA represents a fundamental shift in procurement method. Accordingly, we 

would have expected a first-principles analysis of this, and other, procurement options to 

have been considered and debated at length before moving toward its adoption across 

the other projects in the RPDP. As part of this review, we have not, however, sighted 

papers provided to, or minutes of, the Steering Group that explicitly affirm the choice of 

CWA ahead of NZS 3910 (or any other form of contracting method) for either Spring Hill 

or Otago. 

5.51 In the context of the Northland project, the lack of in-depth analysis and 

consideration could perhaps be explained by the immediate and significant set of 

problems that needed to be addressed. CWA provided a framework to make progress 

with the project and avoid the time delay and cost implications that could have eventuated 

had the project either remained as a NZS 3910 or been re-tendered. 

5.52 Notwithstanding these circumstances, however, the decision to adopt CWA for the 

Spring Hill and Otago projects should have been justified on a project by project basis. 

The analysis should have extended not just to the traditional NZS 3910 contract but to the 

various forms of alliance arrangements and other options beyond alliancing such as: 

• reimbursable contracts under which the client pays for all of the work plus a 

margin to the supplier; 

• a construction management approach under which the client employs a 

construction manager who works for a fee which is applied to the value of the 

work; 

• design and build, and design, build and operate contracts; and 

• design, build, operate and finance contracts. 

profit 

5.53 It is not the purpose of this review to advocate these, or any other, forms of 

procurement. The point is that the Department chose to move away from NZS 3910 to a 

fundamentally different form of procurement. This decision should have been based on 

detailed first principles analysis of CWA and other forms of procurement. 

5 

5 This form of procurement is increasingly common in Australia under the banner of pubic-private 

partnerships and in the United Kingdom under the banner of private finance initiatives (PFI). In 

New Zealand, such forms of contract would require, under the Public Finance Act, approval from 

the Minister of Finance. 


5.54 This issue is not just a matter of good process for two main reasons. The first of 

these is that CWA potentially exposes the client to financial risk unless the CWA approach 

is well managed. To the extent that CWA was discussed with the Steering Group in the 

context of Northland, it is clear that the potential benefits of CWA were described. What 

is less clear is whether the risks and costs around CWA were explained along with the 

critical factors that must be achieved in order for a CWA to work well and in the client’s 

interests. The lack of paper trail makes this difficult to evaluate but our impression is that 

the benefits of CWA were emphasised to a much greater extent than the potential risks 

and costs involved. 

5.55 The second reason why the relative lack of consideration of procurement options 

is an issue is because prior to Northland, the Department had no knowledge or 

experience of alliancing. The need for rigorous consideration of this and other 

procurement options is even greater, the lesser is the knowledge and understanding of 

something new. 

5.56 These comments should not be interpreted as a criticism of the CWA 

methodology. Indeed, we note advice from the UK National Audit Office (NAO) 

recommending that departments not use traditional forms of procurement for construction 

projects unless it can be demonstrated that this form of procurement will provide better 

value for money ahead of design and build, or alliancing (the closest form of which is 

6 

described as “prime contracting” by the NAO) or PFI. Moreover, the comments should 

not be interpreted as saying that CWA was the wrong choice. In this regard, we note that 

the Auckland Women’s project appears to have been delivered on time and within budget. 

In the case of the Spring Hill and Otago projects, independent advice provided to the 

Department in October 2005 advised that the Department should not depart from the 

CWA path to another form of procurement unless as an absolute last resort (although this 

advice was tendered at the time when construction of Spring Hill and Otago was well 

underway). 7 

5.57 Notwithstanding these points, we consider that the choice of procurement 

approach for any given project should be made on a case-by-case basis. In this regard, 

there are several factors that need to be considered before choices regarding 

procurement method are made. Below, we set out some high-level characteristics that 

would tend to favour use of CWA in preference to traditional NZS 3910 forms of 

procurement. CWA is more likely to be preferred when the following conditions are 

characteristics are present. 

• The best way of achieving desired outcomes, in terms of the choice of 

technologies and processes, is uncertain. In the context of the regional prisons, 

their design was markedly different to that which had gone before and reflected a 

desire for a different approach to the management of inmates. By implication, 

however, there was uncertainty around the details of design and how this would 

interface with operational requirements. 

• There is a high degree of complexity in design, construction, technology and/or 

development which cannot be satisfactorily scoped at project commencement. 

Complexity per se does not favour CWA over other forms of procurement, but 

6 National Audit Office (2005) “Improving Public Services Through Better Construction” , London, 

p23. 

7 Peter Waterhouse 31 October 2005 “Report to RPDP on Construction Costs and Alternative 

Procurement Strategies” 


• 

• 

where complexity gives rise to risk and uncertainty CWA may provide a more 

flexible contracting methodology. In the context of the Spring Hill and Otago 

projects, it is generally the case that the construction techniques are not new or 

overly complex. While there is a considerable amount of technology that goes into 

prison buildings (security related), this is separable from overall construction (as 

indeed was the case with a separate CWA for security systems). Of themselves, 

the building designs do not appear to be overly complex although, as noted above, 

there was uncertainty around aspects of design. 

• 

project (at development and design stages). This is another way of saying that 

• 

there is uncertainty over the optimal design approach and, further, that the client 

wants to explore rather than getting locked into a particular approach under 

traditional NZS 3910 procurement. 

There is a necessity for innovation and step-change developments in design, 

technology and construction methodology. CWAs create a better framework than 

traditional forms of contracting for such developments to take place. Arguably, 

elements of this requirement existed for the regional prisons in respect of design, 

but less so with respect to technology and construction methodology. As 

experience with the regional prisons design grows, this characteristic may become 

less relevant. 

• The projects are large. CWA has a significant management overlay because 

5.58 In addition to these points, comments by various Department and contractor 

personnel have suggested that CWA might be better suited to projects being undertaken 

in a heated construction market, but less appropriate when market conditions are benign 

or declining. Various reasons support this view: 

• 

Technology is rapidly evolving. This does not appear to be a characteristic 

relevant to prison buildings. 

Timeframes for completion of the project are tight and, accordingly, the project 

demands innovative and flexible approaches to ensure project completion. This 

clearly is a feature of the Spring Hill and Otago projects and, arguably, is the 

strongest reason for preferring a CWA methodology for these facilities. 

There is considerable scope for value engineering into the early stages of the 

many checks and balances have to be built into the procurement process to 

compensate for the lack of market testing of prices through competitive tender. 

Various people interviewed during the review have suggested that the minimum 

size of project that can support CWA is probably in the order of at least $100 

million. Clearly, the Spring Hill and Otago projects meet this condition. 

The CWA methodology provides transparency over margins and seeks to 

normalise margins. The process of agreeing margins under CWA therefore 

enables adjustments to be made to margins such that abnormally high margins 

experienced at the peak of the market are adjusted downwards. 

• Because the CWA methodology allows for the pass through of direct costs, 

suppliers are not as exposed as they would be to unexpected cost increases. This 

can also be advantageous from a client perspective in that in a heated market, 

fixed price contracts are likely to seek to guard against unexpected price increases 

by quoting higher prices to start with. 


• From a practical perspective, and in the specific context of Spring Hill and Otago, 

the comment has been made to us by Department and contractor personnel that 

as the construction market grew tighter, there was less willingness on the part of 

the construction industry to enter into traditional fixed price contracts. The market 

was becoming a sellers market. Those in the market were increasingly being able 

to dictate their own terms and prices and this included, as noted earlier, a trend 

toward preferring CWA. 

5.59 In contrast to CWA, traditional NZS 3910 approaches to procurement are suitable 

for projects where the scope and requirements of the project are well defined and where 

the risks are known, understood and capable of being appropriately factored into tender 

pric es . In our view, these characteristics are present across elements of the prisons 

construction programme and, accordingly, we do not consider that traditional forms of 

procurement should be automatically ruled out. Each project should be considered in its 

own rig ht and the business case made for preferring one form of procurement over others. 

5.60 On a related point, we consider that there are lessons arising from the Spring Hill 

and Otago projects in terms of how far down the supply chain to carry the CWA approach. 

As noted earlier, 95% of cost at Spring Hill is being incurred by CWA members. This is a 

very high ratio. 

5.61 CWA is management intensive. For those CWA members who are new to CWA, 

there is also a considerable learning curve and associated training requirements. The 

deeper CWA penetrates through the supply chain, the greater are the administrative and 

management overheads and at some point, the additional costs involved exceed the 

benefits that CWA might bring. In the case of Otago, we note that there are 17 CWA 

members. This is a large number of firms to manage. Where CWA is implemented, it 

makes sense to include the primary contractors as CWA members. However, application 

of CWA becomes increasingly questionable the further below this level the CWA seeks to 

probe. In our view, there may not be sufficient benefits over cost to drive down as far as 

the small and even medium sized businesses that supply trade services to the project. 

Selection Process 

5.62 Although not part of the original brief for this review, the Commission has 

requested that comment be made on the process for the selection and appointment of the 

main contractors involved with Spring Hill and Otago and the appointment of the Project 

Director and CMS (reflecting the key role that CMS has played in facilitating the CWA). 

5.63 In the case of Spring Hill, a Request for Proposal (RFP) for provider of building 

works was issued in September 2004 and Mainzeal was the preferred respondent. The 

Department and Mainzeal entered into a CWA Negotiation Framework Agreement (NFA) 

on 26 October 2004. Also in September 2004, the Department issued a RFP for building 

works in respect of Otago and Hawkins Construction was selected. A NFA with Hawkins 

was entered into also on 26 October 2004. The evaluation of the tenders was undertaken 

with particular focus on performance, culture and capability. Cost was not part of the 

evaluation criteria. 

5.64 The Department has documented procurement processes and tender procedures. 

The latest version of these is based on an original document prepared in 2002 and which, 

in turn, is based on the framework contained in the Statement of Good Practice issued by 

the Office of the Auditor General (that framework remains at the core of the current 

processes). 


5.65 A probity audit of the selection processes for the construction contractors for 

Spring Hill and Otago was undertaken by Audit NZ in October 2004. Those reports 

concluded that: 

• generally, the RFP documentation and the processes surrounding its issue, the 

receipt, opening and evaluation of responses conform to good practice; 

• the evaluations were conducted fairly and impartially and in accordance with the 

documented process plan; and 

• Audit New Zealand was unaware of any probity issues outstanding. 

5.66 We also note that Sherwin, Chan & Walshe were engaged to undertake a financial 

due diligence of the main contractors. 

5.67 Notwithstanding the positive outcome of the review undertaken by Audit New 

Zealand, we note that there is an issue as to whether or not the evaluation criteria should 

include cost. We are aware that some CWA tenders do not include cost (as was the case 

for the RFPs issued by the Department), but equally it is possible to include cost as part of 

the evaluation process. However, in order to do this, a number of steps have to be 

completed. In particular, the client has to have undertaken some work to take design to a 

sta ge that can be used for costing purposes. 

5.68 As part of the tender process, the client can invite contractors to submit bids based 

on a reimbursable target-cost contracting basis. The benefits to the client are that 

contractors submit indicative target costs in a competitive environment. It is important to 

note, however, that where the scope of work is imprecisely defined, or there are particular 

features of the operating environment that create significant uncertainty, then assumptions 

need to be developed by the client regarding scope, specification and schedule. This 

enables bidders to submit indicative target costs based on shared and common 

understandings. We are unaware as to whether or not the Department considered 

approaching the tender on this basis. We note, however, that by late September 2004 

when the RFP’s were issued, the construction market was already heated. Based on 

discussions with industry and Department personnel, there is a view that the market would 

not have reacted favourably to such a tender approach given the amount of additional 

work involved in preparing a bid. Moreover, the time available to the Department to issue 

the RFP and then make a selection was very tight (a point noted by Audit New Zealand in 

its probity reviews). We doubt that the timeframes available would have allowed for 

indicative costs to be added into the tender process. 

5.69 The re-appointment of the Project Director position occurred in 2004. Prior to the 

re-appointment, the Project Director had been fulfilling project management and other 

roles within the Department and, accordingly, had acquired considerable institutional 

knowledge. A tender process for the Project Director position was initiated and managed 

by the then Chief Financial Officer. The CFO, together with two members of the Steering 

Group, formed the interview panel. We understand that four or five possible candidates 

were considered and this was refined to a short-list of two. 

5.70 In July 2004, Audit New Zealand provided some informal advice on an early draft 

of the Request for Proposal for the Project Director position. The appointment process 

had commenced in May 2004 and the appointment was made in October 2004. The 

review by Audit New Zealand raised a concern that the Project Director and the Manager, 

Administration and Contracting were involved in the renewal process for each other’s 

contracts. The Manager, Administration and Contracting had been involved in preparing 

the RFP for the Project Director position and the evaluation plan. We understand from 


Audit New Zealand that there were also some minor issues around documentation. We 

agree with the comment by Audit New Zealand that the engagement of key personnel for 

RPDP should be managed by the Department alone as far as possible, or by using a 

completely independent recruitment specialist. 

Contracting Expertise 

5.71 At the time of entering into CWA for the construction of the regional prisons, the 

Department had very little knowledge and understanding of CWA. It was heavily 

dependent on a small number of key individuals including, in particular, Stewart Rix of 

CMS and John Hamilton (the Project Director). Neither are employees of the Department. 

As a general point, it is preferable, particularly on projects of the size, complexity and risk 

(financial, operational and reputation) of the RPDP projects, to avoid being too reliant on a 

small number of external advisers. That said, however, it is acknowledged that expertise, 

particularly in relation to the CWA methodology, was relatively scarce (in part, reflecting its 

limited use in New Zealand). 

5.72 Through the projects completed to date (and nearing completion), the Department 

has built significant organisational capability within the RPDP team. For future projects, 

the Department needs to ensure that it retains people who are able to advise, from a first 

principles perspective, on the choice of optimal procurement methodology and then, once 

the decision is taken, lead and advise on the implementation of the chosen procurement 

method. This includes the role of being a member on the Principal’s Group. 

5.73 A blend of competencies and experiences are required to undertake these tasks; 

commercial, construction as well as understanding of Government machinery and 

decision making processes. The range of competencies is unlikely to be found in one 

individual. We note, and support, the decision by the Department to add a department 

employee to the Principal’s Group at both Spring Hill and Otago. This initiative usefully 

supplemented the commercial and construction background and expertise of the Project 

Director notwithstanding his previous involvement with the Department since 1997 (as 

employee and as contractor). 

5.74 We note that the issue of having the right mix and level of expertise might apply 

more widely than just the Department of Corrections. For example, a unit has been 

established within the State Services Commission to assist with and advise on aspects of 

major IT investments. Although well beyond the scope of this review, it is worth 

considering whether there is a need for an equivalent group in respect of major building 

construction or even procurement more generally for the public sector. Although not 

appropriate for New Zealand given the much smaller size of our economy, we note the 

example from the United Kingdom which has established the Office of Government 

Commerce (OGC) which is an independent Office of the Treasury. The OGC is 

responsible for a wide ranging programme which focuses on improving the efficiency and 

effectiveness of procurement within central government. 

Market Testing of Costs 

5.75 The Department and Government more generally, needs assurance that the 

amounts being paid for the regional prisons are based on efficient levels of cost. The way 

in which CWA has been implemented by the Department means that such assurance is 

sought through a process of subjecting the development of the TOC to extensive 

independent review and audit. Under traditional NZS 3910 contracts, prices are market 

tested through the competitive tendering process. As applied to Spring Hill and Otago, 

the CWA methodology has not provided this same market testing. Accordingly, under 

CWA, there needs to be exceptionally robust and transparent processes around 


determination of TOC/QRA and the inputs to these – direct costs, margins, off-site and onsite 

overheads. 

5.76 Notwithstanding these processes, however, we consider that the option of 

providing further assurance by requesting potential CWA members to submit bids based 

on reimbursable target-cost contracts should be considered for future projects. Such a 

process would involve submitting indicative target costs in a competitive environment 

before the selection of CWA members is made (but would also require more time and 

resource to implement than was available in the context of Spring Hill and Otago). 

5.77 In the context of the regional prisons completed, or under construction, we doubt 

that there was the time to undertake this process. However, for future prison builds, we 

see no reason why consideration should not at least be given to modifying the tendering 

process in this manner. The key advantages are that this approach comes closer to 

providing a market test of likely cost, creates the opportunity to consider options if 

indicative costs exceed available funding and provides an improved ability to give 

Ministers a realistic view of potential costs. 

Summary 

5.78 A key feature of the methodology and processes employed in relation to Spring Hill 

and Otago is the adoption of the CWA approach to procurement. A hybrid form of this 

methodology was successfully utilised on the Northland project. In that particular case, 

use of CWA assisted in overcoming some issues that were threatening to disrupt progress 

with the facility. 

5.79 The CWA methodology has many potential advantages compared to traditional 

fixed price forms of contracting. The Department has captured many of these including: 

• close integration of design, construction and operational perspectives; 

• cost savings and other benefits through undertaking several value management 

reviews; 

• efficient use of resources at site-level; 

• collaborative approaches to resolving issues as they arise at a day-to-day level; 

and 

• high levels of transparency around project costs at the project level (although as 

discussed in the next section, this transparency did not always percolate up to the 

Steering Group to the extent needed). 

5.80 Overarching these benefits, there are sufficient indications to suggest that had the 

Department elected to follow a more traditional procurement method, timeframes for 

completing the projects may not have been met. Had that been the case, this review 

wo uld have had a fundamentally different focus and set of drivers. 

5.81 Notwithstanding the benefits that have arisen through the use of CWA, there are 

some 

lessons that can be learned in terms of design, costing, procurement and 

scheduling. Specifically: 

• CWA is not necessarily suited to all projects. There is a need to identify the 

conditions under which CWA is likely to be preferred ahead of other forms of 


procurement. These considerations need to applied on a project-by-project basis 

and decisions documented. 

• The CWA methodology requires careful management and sound contracting 

experience. The Department entered the RPDP without recent major construction 

project experience. It is building that capability. This needs to continue if further 

new prisons are proposed. At a wider level, consideration may need to be given 

as to whether the public sector generally needs to build its contracting expertise for 

major projects (although this would depend on there being a sufficiently large 

scope of future projects). 

• CWA, along with any form of procurement, needs to be based on sound facility 

designs. In turn, this requires agreed standards and adequate design capacity. 

• 

As part of the CWA member selection process, it may be possible in some 

circumstances to seek indicative target costs. This would help to provide a degree 

of market testing of costs. However, to do this requires that the following 

conditions be met which, in the situation of Spring Hill and Otago, was not the 

case: 

– there be sufficient contractors prepared to engage in this process; 

– designs be developed to a stage sufficient to support estimation of costs 

– the Department have the resources to support the process; and 

– sufficient time be available for the process to work through. 

• The development of the TOC is a fundamental part of the CWA methodology and 

needs to be completed sooner than has been the case in the Spring Hill and Otago 

projects. This emphasises further the need for timely completion of designs and 

appropriate levels of project management resource. 

• Until the TOC is underway, cost estimates are indicative only. This needs to be 

made clear to decision makers. Once TOC estimates begin to emerge, they 

should be reported regularly so as to provide maximum opportunity to modify 

requirements if budgets are under pressure. 


6 Governance and Project Management 

Key Findings: 

Achievements 

• New Zealand will have four regional prison projects completed in time to meet the growth 

in the prison population. 

• The Steering Group comprised senior management in the Department and this group 

recognised gaps in knowledge and expertise that needed to be filled, namely: experienced 

Project Director, Audit and Independent Review processes, acquisition of external large 

scale project management expertise, and Treasury representation. 

• Changes to project governance and management structures from late-2005 have greatly 

increased the quality of review, reporting and decision-making on the projects. This 

includes the establishment of a Programme Management Office (PMO) in February 2006 

to assist with the project and risk management dimensions at governance and project 

management levels. 

• Formation of the Construction Sub-committee comprising appropriate expertise and with 

responsibility for decision-making advice to the wider group on complex technical matters. 

• These arrangements and changes have made significant improvements to the quality of 

reporting, decision-making and potential for risk management. We note that the PMO has 

potential to significantly assist the programme governance, but that this is still early days 

for this role. 

• Mid-2005, a senior Department manager was appointed to each of the CWA Principals 

Groups at Otago and Spring Hill sites. This has provided opportunity for the Department to 

be represented on the Principals Group by one of its senior managers and to more directly 

support the role of the Project Director. This arrangement has also provided for a more 

direct link between the senior management team and the Principals Group. 

• At site project management level, the departmental interest has been represented by 

appointment of permanent departmental staff as CWA Manager at Otago and Auckland 

Women’s. 

• While it is outside of the scope of this review to assess the specific project management 

methodologies at respective sites, we observe that the project management approaches of 

the main CWA partners do employ expected tools for project management of planning, 

project risks, costing, progress monitoring, resource management. We also note that 

RPDP played a role in developing planning and reporting tools for the programme. 

Challenges 

• The Steering Group composition did not include personnel with strong large scale project 

management experience (mainly line managers) until January 2004 with the appointment 

of the independent project consultant to the Group. 

• Prior to review in 2005, the role of the Steering Group was not consistently clear to all 

members in terms of the Group’s advisory and/or governance responsibilities. 

• Prior to review in 2005, there was insufficient formal reporting to the Steering Group to 

support key decisions and to signal project risks adequately. Formal reporting tended to 

Governance and Project Management 45

e historical in nature, with little (or no) indication of future estimations of costs to 

completion. 

• Prior to 2005, the Department’s representation on the Principals Group did not include any 

of the Department’s senior employees. The challenge for the Department was to maintain 

the close link that is needed between the senior management team and the Principals 

Group. 

• Throughout the progress of the RPDP the risk of not having adequate capacity to meet the 

rapidly growing demand for prison accommodation, and the implications of this was a 

major imperative and driving factor behind governance and management decisions. 


• Ensure that the project goals and objectives are agreed and clearly communicated to all 

parties at the commencement of the project, and that they encompass all three key 

elements of time, costs and quality, even in cases of ‘fast-tracking’. 

• Ensure that the Steering Group has the appropriate mix of knowledge and skills to be able 

to represent the Department and the wider Government interests, and govern a large scale 

project. 

• Ensure that the roles and accountabilities of the respective governance and management 

groups and individuals are clearly specified and communicated from the commencement of 

project planning. 

• Ensure that the Department is represented on the Principals Group by a senior manager in 

any future CWA arrangement to complement the commercial skills of any contractors. 

• Ensure that there are independent quality assurance processes in place for oversight of 

governance and project management approaches (including decision-making and risk 

management), as well as for oversight of the lower level project management processes 

for cost calculation, and quantitative risk assessment. This will ensure independent 

reporting of any governance issues/ risks at various stages, including concerns re 

information provision. 

• Ensure that the Steering Group is provided with adequate information in a timely fashion to 

assess and manage risks, support effective decision-making, and reporting to Ministers. 

• Ensure project reporting not only assesses historical progress but also estimates future 

issues and progress remaining against all project objectives. 

Introduction 

6.1 Underpinning the method of construction of the prisons are the overall governance 

and project management arrangements for the programme. Effective governance and 

project management is required to ensure that goals are achieved, on time, to quality and 

to agreed budgets. This section revisits the context for governance and management of 

the RPDP programme, and assesses governance and project management arrangements 

in this context. 


Public Sector Project Governance and Management 

6.2 In respect of public sector projects, there are specific requirements for 

transparency, accountability for decision-making in a broader public sector context, probity 

and independence. The interests of the Government, as stakeholder, must be recognised 

and managed through appropriate structures, planning, reporting and review processes. 

6.3 There is always a challenge when a public sector project is undertaken in a 

commercial environment, and when agents are themselves commercially focused. 

Project governance and management structures must be organised so as to ensure that 

commercial imperatives are balanced by the interests of the public sector agency and the 

wider public sector (particularly for projects involving large Government expenditure). 

6.4 This means clear definitions of roles and accountabilities, the early use of audit 

and review mechanisms, robust risk management, and effective reporting to support risk 

management and decision-making. Due attention must be given to project controlling and 

monitoring processes throughout. 

6.5 Ideal best practice for governance and project management is further outlined in 

Appendix C. Clearly the specific context for the RPDP project has meant challenges for 

achieving the ideal, and the discussion below recognises the Department’s successes and 

assesses issues in meeting these challenges. 

Context 

6.6 The context for the development of new prison facilities and the establishment of 

RPDP to implement the design, construction and commissioning of these facilities has 

been outlined in Section 3 of this report. 

6.7 The discussion of governance and management arrangements needs to recognise 

the specific nature of the environment within which the Department was operating. 

• The projected dramatic increase in the prison population according to Ministry of 

Justice forecasts, and the inability of existing facilities to cope. 

• Clearly substantial new facilities had to be built, and in a timely manner in order to 

house the growing prison population. 

• The RPDP project, encompassing often simultaneous design, construction and 

commissioning of four regional prisons, is a huge project by New Zealand and 

international standards ( around $900 million). 

• This project size means a significant challenge to manage the pressures on New 

Zealand’s construction, design and quantity surveyors capability and capacity. 

• The New Zealand Government had little recent experience in construction, 

particularly in projects of the scale of the RPDP project. 

• Prior to the RPDP project, the Department had managed the growth in prison 

population through addition to existing facilities, overseen by the Assets and 

Property Division. The most significant construction project overseen by this 

division was the successful completion of the Auckland Central Remand Prison 

(ACRP) in 2002. 


Current RPDP Arrangements 

RPDP Programme Governance and Project Management Structure 

6.8 At a high level, the current governance and management structure for RPDP 

consists of: 

• a steering group, comprising Matrix Manager (Chief Finance Officer) supported by 

a Programme Steering Group. Steering Group members are senior line managers 

from the Department (GM Public Prison Service, GM Probation and Offender 

Services, GM Corporate Management, GM Strategic Services) and an 

independent external expert with large-scale construction project management 

experience. A Treasury Vote Manager attends the Steering Group as an observer. 

The governance group also has a Construction Sub Committee reporting to the 

steering committee. This committee comprises the Chief Financial Officer, 

independent Steering Group consultant, Construction Project Director, 

Department’s Manager Construction Management, and the Department’s National 

Property Manager. Internal Audit also attend sub-committee meetings. 

• a management team, comprising Construction Project Director, Commissioning 

Manager, and Programme Manager. 

6.9 According to the RPDP terms of reference, the Steering Group has key 

responsibilities including: 

• provision of advice and support to the Matrix Manager and the RPDP Management 

Team; 

• overall decision-making, including approval of scope, budgets, plans and delivery 

mechanisms; 

• monitoring of programme progress issues and risks; 

• ensuring integration with wider organisational activities; and 

• ensuring appropriate expertise and business as usual resources are available to 

the project. 

6.10 The Management Team has responsibilities including: 

• planning and management of day-to-day activity within their respective projects; 

• ensuring that their respective areas of responsibility produce agreed deliverables 

within approved timeframes, budget and specification; and 

• accountability for the management of risks and issues within their respective 

function and ensuring programme-wide risks and issues are managed in an 

integrated way. 

6.11 This programme structure, together with detailed statements of roles and 

responsibilities across key groups and management positions, is clearly documented in a 

detailed RPDP Charter and Terms of Reference. The Charter also contains key 

processes for financial and risk management. 


6.12 It is noted that these arrangements also ensure Departmental representation on 

each of the Principals Groups at Spring Hill and Otago (through a senior management 

representative). This provides opportunity for Departmental staff to support the 

Construction Project Director in representing the Department’s interests at senior 

construction management level. 

6.13 This structure is illustrated below: 

Independent Advice 

6.14 There are a number of mechanisms for the RPDP programme to receive 

independent advice. 

• Review of project management processes for cost and margin development 

(Sherwin, Chan and Walshe, Rider Hunt). 

• Review of CWA methodology application (CMS). 

• Review of governance and management arrangements (Internal Audit unit, Audit 

New Zealand). 

• Reviews of TOC development (across a range of areas). 


6.15 The CWA methodology as discussed earlier is one which requires the overhead of 

checks and balances to prompt for probity and project efficiencies. Overall, there now 

does appear to be adequate checking on the project at both governance and project 

management levels. 

Development of Governance and Management of RPDP 

Current Roles and Structures 

6.16 The course of the RPDP programme has seen a number of developments to 

strengthen and improve governance and management arrangements as the programme 

has progressed. 

6.17 Current arrangements have been in place since late 2005 . These arrangements 

were developed following a review of project risks (specific to Northland) commissioned 

by the Department’s Internal Audit Unit in late 2004. The present structure addresses a 

number of issues raised by Audit New Zealand, and which are reflected in the research for 

the current review, namely that prior to late 2005, there was: 

• inconsistent understandings amongst Steering Group members as to their role: as 

an advisory group (representing their area of the Department) and/ or as a 

governance group (with decision-making responsibilities); 

• insufficient formal reporting to the Steering Group; 

• the requirement of the Steering Group to make decisions under considerable time 

pressure (the CWA fast track approach means that often significant decisions are 

required to be made/ accepted with some urgency to enable ongoing project 

progress); 

• provision of documentation for supporting decisions ‘after the fact’; 

• the Steering Group often made decisions based on verbal updates from the 

Project Director; 

• Steering Group questions regarding risks and issues would sometimes be 

answered specifically, and elsewhere responded to with broad assurances; and 

• the scope of responsibility of the Project Director was extremely broad, and there 

was a sense that commissioning activities might suffer at the expense of 

construction activities. 

6.18 Current arrangements are generally considered to address all of these issues. 

Roles and responsibilities are clearly documented, the Programme Office is managing 

reporting effectively, and the establishment of separate workstreams for construction, 

commissioning and programme management has improved focus. 

6.19 We note that the Department initiated these improvements in the RPDP 

governance prior to becoming aware of the cost escalation at Spring Hill and Otago. 

8 

8 

Internal Memorandum from Matrix Manager 19 September 2005, TOR Papers SG Meeting 

19 December 2005. Arrangements were based on a review commissioned from Deloitte during 

2005. 


Previous Arrangements 

6.20 While the Department’s Assets and Property Division continues to manage the 

additions to existing facilities, lessons learned from successful completion of ACRP and 

the significant size of the proposed new facilities construction motivated decisions to 

establish a different project management structure for the proposed new construction, and 

RPDP was established. Accordingly, the Department appointed a Project Director with 

large-scale construction project experience under the oversight of a Department 

governance group. 

6.21 Originally, the governance group comprised the Chief Finance Officer, and a 

Steering Group of Departmental senior managers. As the project progressed, decisions 

were made to complement the experience of the Steering Group with additional expertise 

(particularly in the construction area): 

• In mid-2001, a construction engineer was appointed advisor on materials 

production options and other building matters (for a 12 month period); 

• In January 2004, an independent consulting structural/civil engineer with wide 

experience in the building industry was appointed to the Steering Group; and 

• In 2004, a Treasury Vote Manager joined the Steering Group in an observer 

capacity. 

6.22 The Project Director reported directly to the Chief Financial Officer, and to the 

Steering Group. Initially, the Project Director had a wide responsibility for oversight over 

design, cont ract management, construction, procurement, commissioning (operational 

set-up) and security for all prisons projects. 

Issues and Challenges 

6.23 The governance and management of the RPDP programme has faced a number 

of issues and challenges, some of which have been recognised by the Department and 

addressed through review, structural and process change and the acquisition of additional 

capability (see above). The following sections discuss governance and management 

challenges faced over the course of the programme. 

Steering Group Decision-Making and Representation 

6.24 Steering Group members are senior managers with significant line responsibilities 

within the Department. The RPDP project was an additional responsibility to manage. 

One role for the CFO was to manage the Project Director and this on top of an already 

heavy workload. 

6.25 This situation and the specific functional and line management experience of the 

group members may explain the reported differences of understanding of the role of the 

Steering Group for the project at its inception (in review discussions). The role of the 

Steering Group was seen by many (including some Steering Group members) as an 

advisory one to the project, particularly regarding project impacts and interests for the 

respective functional areas of the Department, with a deferral to the Chair for project 

decision-making (often in consultation with the Project Director). Others (also including 

some Steering Group members) saw the role as more actively contributing to RPDP 

decisions. 


6.26 The role of the Treasury Vote Manager (from 2004) was that of an observer, 

recognising Treasury’s role in monitoring government spending. 

6.27 The Chair/ CFO holds overall financial delegations for the programme, within 

limits set by the Department’s delegations. 

6.28 We note that the documented RPDP Terms of Reference from September 2005 

clearly states the roles and responsibilities of Steering Group members, as a mix of 

advisory and decision-making. Our discussions with Steering Group members indicate 

there is still some lack of common understanding amongst Steering Group members as to 

their role (e.g. advisory vs governance). 

6.29 Prior to 2005 changes, the Steering Group also appeared somewhat constrained 

in its ability to contribute effectively to decision-making through a lack of sufficient and 

timely information for decisions. Review of Steering Group minutes and discussions with 

department personnel indicates numerous requests for additional information, which was 

often not forthcoming. 

6.30 The Department’s Internal Audit Unit also raised concerns around the need for 

improved transparency of information to the Steering Group and better reporting to 

enhance its decision-making role. In particular, Internal Audit identified some risks posed 

by the newness of the CWA methodology, and the desirability of more documentation to 

support its adoption. 

6.31 There was a Treasury Vote Manager as observer at Steering Group from early 

2004. Treasury have commented on the lack of depth and timeliness of information 

provided to support decisions. Repeated queries for information were not always 

satisfied. Treasury did commission an independent report on the CWA revised 

procurement strategy in February/ March 2004, which provided some assurances on the 

CWA structure adopted (at a high level), but which also commented on the lack of detailed 

documented rationale for this methodology (Opus 18 March 2004). 

6.32 We note that these issues of information and reporting are now resolved or being 

managed through the revised governance and management structures for the RPDP 

programme. 

6.33 The challenge is to ensure that recommendations are understood, implemented 

and monitored. At the governance level, the PMO has a significant contribution to make 

in ensuring project integration, and that the roles of the Steering Group and advisors are 

discharged as envisaged. 

Project Reporting 

6.34 Project reporting at site level was conducted using the systems of the various main 

CWA partners. The Department required reporting across all projects to enable the 

project management team to gauge project progress overall. Accordingly, the project 

construction management team developed standardised project planning and reporting 

tools. The system used by the Department did have some initial issues of integration with 

site specific systems. This integration issue led to some early delays in aggregated 

reporting on progress to the Project Director and to the Steering Group. These issues 

have since been overcome. 

6.35 For future projects, the question of integration of reporting systems across multiple 

projects should continue to be addressed in the tender assessment stage, to ensure that 

overall project reporting is able to be implemented from early on in the project. 

the 


Department ‘Client’ Representation 

6.36 Ensuring Departmental and Government interests are adequately represented at 

key programme levels has not been without challenge in a programme of this size and 

complexity. 

6.37 Below the Steering Group, prior to 2005, the three key project management roles 

of Project Director, Manager Administration and Contracting and the CWA Advisor were 

all filled by contractors. This is not surprising, given the lack of large scale construction 

project management expertise in the New Zealand public sector. Of these roles, the 

Project Director position had added significance due to the added responsibility of 

representing the Department on the Principals Group. 

6.38 We consider that representation on the Principals Group needs to include a senior 

department manager reflecting: 

• the senior level of representation on the principals Group (the commercial partners 

are represented by their CEOs); 

• the need for close links between the Principals Group and the Department’s senior 

management team; and 

• the need to ensure a public policy perspective complements the commercial 

expertise that is required for this role. 

6.39 For these reasons, we support the addition of one of the Department’s senior 

managers to each of the Principals Group in late-2005. 9 Notwithstanding, these 

individu als would still have a challenging job in “wearing two hats”, that of the CWA 

Principal and that of the Department (taking into account responsibilities to the wider 

public ). 

Effects of Project Fast Tracking 

6.40 The fast track nature of the prisons projects, particularly when the size of the 

projected prison muster was known, meant that there was often considerable pressure to 

make quick decisions at Steering Group level, again based on little information or on 

verbal representations from the Project Director. This often resulted in situations of so- 

to satisfy reporting 

called ‘no choice’ decisions presented to the Steering Group. Either the decision had 

already been taken, and the expectation was for Steering Group to endorse it, or there 

was insufficient time or information to allow appropriate assessment before decisionmaking. 

Documentation to support decisions would sometimes be provided after the fact, 

requirements. 

6.41 This was the situation regarding the decision to adopt the CWA methodology, 

where the idea was presented verbally, and followed up with some supporting 

documentation. By the time the documentation arrived, pressures of time and resource 

meant that the decision was considered inevitable. 

6.42 Another effect of fast tracking was the collapsing of project phases and processes. 

For example, in the case of the development of Otago, eight months was gained when 

9 

Audit). 

On the recommendation of Audit New Zealand (commissioned by Departmental Internal 


planning progressed through the Environment Court faster than expected. The decision 

was taken to proceed with project implementation, even though the design team had not 

yet completed detailed design and was under considerable time pressure. This decision 

would have had implications for early development of the TOC estimates on the project, 

as completed design is a requirement for this. 

6.43 The decision to adopt a fast tracking approach was driven largely by the 

Department’s need to manage the significant risk that, according to projections, there 

would be lack of capacity to meet prisoner demand. In the absence of information to 

signal any significant cost issues until mid/late-2005, the Steering Group did focus on 

project time frames as a priority. 

Summary 

6.44 This review has identified a number of challenges in respect of governance and 

management of the RPDP project, and has recognised areas of good practice and 

positive contribution from the project. 

Positive Contributions 

6.45 There are a number of positives that should be recognised. 

• New Zealand will have four regional prison projects completed on time and to meet 

the growth in the prison population. 

• The Steering Group comprised senior management in the Department and this 

group recognised gaps in knowledge and expertise that needed to be filled, 

namely: experienced Project Director, Audit and Independent Review processes, 

acquisition of external large scale project management expertise, and Treasury 

representation. 

• Changes to project governance and management structures from late-2005 have 

greatly increased the quality of review, reporting and decision-making on the 

projects. This includes the establishment of a Programme Management Office 

(PMO) in February 2006 to assist with the project and risk management 

dimensions at governance and project management levels. 

• Formation of the Construction Sub-committee, comprising appropriate expertise 

and with responsibility for decision-making advice to the wider group on complex 

technical matters. 

• These arrangements and changes have made significant improvements to the 

quality of reporting, decision-making and potential for risk management. We note 

that the PMO has potential to significantly assist the programme governance, but 

that this is still early days for this role. 

• Mid-2005, a senior Department manager was appointed to each of the CWA 

Principals Groups at Otago and Spring Hill sites. This complemented the 

commercial skills of the Project Director and provides a more direct link between 

the Principals Group and the Department’s senior management team. 

• At site project management level, the departmental interest has been represented 

by appointment of permanent departmental staff as CWA Manager at Otago and 

Auckland Women’s. 


• While it is outside of the scope of this review to assess the specific project 

Challenges 

management methodologies at respective sites, we observe that the project 

management approaches of the main CWA partners do employ expected tools for 

project management of planning, project risks, costing, progress monitoring, 

resource management. We note that RPDP played a role in developing planning 

and reporting tools for the programme. 

6.46 While the RPDP project is delivering regional prisons for New Zealand, this review 

has identified a number of challenges for governance and management of the project at 

varying times in the development of the overall RPDP programme. 

• The Steering Group composition did not include personnel with strong large scale 

project management experience (mainly line managers) until 2003 with the 

appointment of the independent project consultant to the Group. 

• Prior to the review in 2005, the role of the Steering Group was not consistently 

clear to all members in terms of its advisory and/or governance responsibilities. 

• There was little or no expertise amongst Steering Group members and Treasury 

as observer in respect of the CWA methodology, and therefore to provide a first- 

and 

hand appreciation of critical elements of the methodology to be managed, 

risks. 

• 

Prior to the review in 2005, there was insufficient formal reporting to Steering 

Group to support key decisions and to signal project risks adequately. Reporting 

tended to be historical in nature, with little indication of future estimations of costs 

to completion (against budget). 

• Prior to 2005, the Department did not have senior management representation on 

the Principals Group. This had the potential to weaken the linkage between the 

Group and the Department’s senior management team. Until mid 2005, the 

Department’s interests were represented directly at site CWA Manager level only. 

• Throughout the progress of the RPDP the risk of not having adequate capacity to 

meet the rapidly growing demand for prison accommodation, and the implications 

of this, was a major imperative and driving factor behind governance and 

management decisions. 


6.47 The experience of the RPDP project development provides a number of lessons to 

be learned from a governance and management perspective. 

• Ensure that the project goals and objectives are agreed and clearly communicated 

to all parties at the commencement of the project, and that they encompass all 

three key elements of time, cost and quality – even in cases of ‘fast-tracking’. 

• Ensure that the roles and accountabilities of the respective governance and 

management groups and individuals are clearly specified and communicated from 

the commencement of project planning. 


• Ensure that the Steering Group has the appropriate mix of knowledge and skills to 

be able to represent the Department and the wider Government interests, and 

govern a large scale project. 

• Ensure that there are regular independent quality assurance processes in place for 

oversight of governance and project management approaches (including decisionmaking 

and risk management), as well as for oversight of the lower level project 

management processes for cost calculation, and quantitative risk assessment. 

This will ensure independent reporting of any governance issues/ risks at various 

stages, including concerns re information provision. 

• Ensure that the Steering Group is provided with adequate information in a timely 

fashion to assess and manage risks, and support effective decision-making, and 

reporting to Ministers. 

• 

Ensure project reporting not only assesses historical progress but also estimates 

future issues and progress remaining against all project objectives. 


7 Reporting to Ministers 

Key Findings 

• A key advantage of the CWA methodology is that it promotes very high levels of disclosure 

around project costs and risks as projects progress. Through its membership of the CWA, 

the Crown can directly benefit from this transparency. 

• The Department holds regular (at least weekly) meetings with its Minister. Progress with 

the RPDP was typically discussed at these meetings. However, we understand that 

discussions tended to focus on progress with the projects rather than costs and associated 

risks. 

• The information provided to Ministers as part of Budget 04 and 05 did not provide 

adequate indication of the uncertainties and risks surrounding the cost estimates at that 

time. 

• Initial indications of a substantial cost increase were first signalled to the Minister of 

Corrections in August 2005 at which point work on the TOCs was well underway. Further 

and higher revised estimates were reported to Treasury (and, by implication, the Minister of 

Finance) in October 2005 and to Cabinet in December 2005. The risk of cost increases 

was not incorporated into the pre-election economic and fiscal update (published on 18 

August 2005 and including data up to 8 August 2005). 

Lesson Learned 

• The regular discussions with the Minister should include clearer reference to cost 

developments and associated risk estimates as work on the TOC proceeds. 

• Where cost estimates are uncertain (as was the case with these projects), this needs to be 

clearly explained to Ministers. For the purposes of providing advice to Ministers, it would 

be appropriate to indicate a range of possible cost estimates and, moreover, indicate the 

level of uncertainty attaching to the estimates. Such estimates should be clearly 

distinguished from formal Budget processes and funding decisions (where point estimates 

specified to the nearest $1000 are required). 

• There was scope to indicate, in at least a qualitative sense, the prospect of significant fiscal 

risk as part of the pre-election economic and fiscal update. 

• On projects of this scale, reporting should be linked to significant project milestones rather 

than to the Budget cycle. For example, cost estimates developed for Budget 05 preceded 

the start of construction on Spring Hill and Otago. A report to Ministers at, or about, the 

start of construction would be better practice. 

7.1 Cabinet directed that officials should report back on estimated costs associated 

with the projects as part of Budget 04 and 05. This was done. However, the information 

provided to Ministers did not provide adequate indication of the uncertainties and risks 

surrounding the estimates. Ministers could reasonably have interpreted the Budget 05 

cost estimates (and earlier estimates) as being firm estimates with relatively narrow 

margins of error when in fact the estimates, at that time, still had significant uncertainty. 

7.2 Based on interviews with Department and other personnel, the cost implications 

stemming from the TOC development were becoming apparent in August 2005. In light 

of this, the fiscal situation was progressively reported to Ministers as follows: 

• to the Minister of Corrections via Briefing on 2006 Budget Process and Five Year 

Planning Projections (19 August 2005). Indicative capital costs of $21m signalled 

Reporting to Ministers 57

in a table attached to the Briefing. We note that it is not immediately apparent 

from the table as to exactly what is the composition of, or basis for, the $21m; 

• to the Minister of Corrections via Briefing on 2006 Budget Process and Five Year 

Planning Projections (27 October 2005). This briefing signals in the text that 

increased capital approval will be required for Spring Hill and Otago. This is 

quantified as $130m in an attached table. Again, it is not clearly apparent from the 

table exactly as what is the make up of the $130m. The text of this table contains 

a conflicting reference to $80m additional capital approval (which we understand to 

be an error); 

• via Steering Group minutes of 27 September 2005, (advised by Construction 

Project Director that Spring Hill TOC estimated to be $50m above current budget); 

• via Steering Group minutes of 25 October 2005 (advised by Construction Project 

Director that Otago TOC estimated to be $30m above funding) 

• via Steering Group minutes of 29 November 2005 (advised by Construction 

Project Director that Spring Hill and Otago TOC estimated to be $140m above 

funding) 

• to the Treasury on 4 October 2005; and 

• to Cabinet on 15 December 2005 (although drafts of this paper were circulating 

among officials during November). 

7.3 Moreover, elements of the TOC had been completed prior to August 2005 and, 

therefore, provided some initial, but incomplete, insights to the potential cost increases. 

7.4 We note that quantification of the financial impacts were not clearly evident in 

RPDP Programme Reports to the Steering Group until December 2005 (although financial 

risk was foreshadowed to the Steering Group over several of the preceding months as 

evidenced in minutes). Meeting minutes do not record discussion on the verbal updates 

of financial impacts that are recorded. Such discussion may have been recorded if 

financial impacts had been clearly signalled in Programme Reports provided in advance to 

the Steering Group. 

7.5 Given the heated nature of the construction market in 2004 and 2005, it should 

have been clear that the increase in costs due to escalation was expected to be 

substantial. Given this, we consider that the reports to Ministers could have been more 

forthcoming in terms of foreshadowing the magnitude of expected cost increase. 

7.6 Reporting on financial impact tended to be verbal updates to Steering Group (as 

minuted) or through attached tables to reports to the Minister (and not immediately 

transparent). There is a judgement involved on the timing of reporting. The reasons for 

reporting as early as possible include: 

• it maximises opportunity to review the project and assess options for reducing cost 

if budgets are under strain; 

• it provides the Government with as much opportunity as possible to adjust its fiscal 

priorities; and 


• it is a core expectation that public servants strive to operate on a “no surprises” 

basis with Ministers. 

7.7 The reason for deferring the reporting of the TOC is essentially a function of the 

required level of certainty. Earlier estimates of the TOC could have been communicated, 

but they would have had wider “error margins”. Estimates that involve a wide range of 

possible costs are not necessarily helpful from a fiscal management perspective although, 

that said, there is a more general point regarding the communication of risks attaching to 

numbers that are reported to Ministers. 

7.8 We note that on 18 August 2005, the Pre-election Economic and Fiscal Update 

(PREFU) was published and that included data up to 8 August 2005. We understand that 

the fiscal information relating to Spring Hill and Otago included in PREFU was based on 

the April 2005 cost estimates. The PREFU is a significant document. Given the size of 

the fiscal risks surrounding Spring Hill and Otago, we consider that the fiscal information 

incorporated into PREFU should have included more up-to-date Spring Hill and Otago 

data, although we understand that because the risk was not under active consideration by 

Ministers at that stage, strictly speaking there was not a technical requirement to include 

up-dated data. Notwithstanding this, the fiscal risks should have been under active 

consideration. In particular, the progress that had been made with the TOCs for both 

projects should have been taken into account and signalled as part of PREFU at least in a 

qualitative sense. 


Appendix A: Funding Approvals 

The table below summarises the dates at which funding approvals for Spring Hill and 

Otago were provided as well as the dates at which Ministers received advice regarding 

the estimated costs for the projects. 

Date 

New Funding 

Approved 

Spring Hill 

Estimated Total 

Cost 

New Funding 

Approved 

Otago 

Estimated Total 

Cost 

15 May 2000 $1.5m $114.245m* $3.4m $79m** 

23 April 2001 $15.16m $194.4m* - - 

1 October 2001 - $172.826m* $7.8m Not indicated 

28 January 2003 - $232.455m - $133.611m 

17 November 2003 - $248.127m - $162.191m 

15 December 2003 $7.5m No further update 

given 

- - 

26 April 2004 $42.815m $248.127m $144.591m $160.991m 

15 September 2004 $3.636m $248.127m - - 

11 April 2005 $211.968m $282.579m $19.022m $174.813m 

19 December 2005 $97.731m $380.310m $43.110m $217.923m 

* These estimates assumed a 350 bed capacity. Later estimates relate to a 650 bed facility 

** This estimate assumed a 220 bed facility. Later estimates relate to a 335 bed facility. 

Several points can be noted from the table above. 

• The estimates of total cost were presented as point-estimates rather than ranges. 

This is unhelpful as it could be interpreted as implying a level of precision and 

certainty which was not warranted (and not intended). It is only the latest of the 

estimates where there is a relatively high degree of certainty. 

• Reporting has been linked closely to the Budget cycle (Budget 04 and Budget 05 

in particular). We consider that reporting should more closely track the 

construction timelines for the projects (notwithstanding the need to link funding 

decisions in with Budget processes and timetables). The frequency of reporting 

given the size of, and fiscal risks around, the projects should be increased once 

project construction is underway (this could be as frequent as quarterly). Reporting 

could, in the first instance be to the Ministers of Finance and Corrections and then 

to Cabinet as required. 

• The estimated costs reported to the Cabinet Business Committee on 28 January 

2003 were included in a paper prepared by the Treasury and the State Services 

Commission. The report did not provide any details as to the basis upon which the 

estimates had been prepared. 

: Funding Approvals 60

• The report prepared by the Department and considered by Cabinet on 17 

November 2003 provided further up-dating of the estimated costs for Spring Hill 

and Otago. This report provided little explanation regarding the basis for the cost 

estimates or how they link to earlier estimates. At that stage, however, Cabinet 

had not approved funding for the construction of Spring Hill and Otago. Fuller 

discussion of the cost estimates was held over, with the agreement of Cabinet, 

until Budget 04 (i.e. April 2004). Notwithstanding this, given that the numbers 

presented in early and late 2003 were substantially in excess of those previously 

reported, we would have expected there to be some discussion of the basis upon 

which the estimates were made. Further, although the report indicated fiscal risks 

stemming from the effects of escalation, the relative size of the risk was not 

articulated, even in general terms. 

In the case of Spring Hill, funding approvals were given on 15 December 2003, 26 April 

2004 and 15 September 2004. Each of the papers supporting the approvals included cost 

estimates expressed in 2003 dollars. Ministers were advised that escalation would push 

up the cost estimates and that additional funding in light of this would be sought as part of 

Budget 05. The heated nature of the construction market was increasingly evident over 

the period from December 2003 to September 2004. Accordingly, by September 2004, it 

should have been clear that the increase in costs due to escalation was expected to be 

substantial. Given this, we consider that the reports to Ministers could have been more 

forthcoming in terms of foreshadowing the magnitude of expected cost increase. 

: Funding Approvals 61

Appendix B: CWA Best Practices 

Objectives and Behaviours 

Clarity of objectives and shared understanding of those objectives is core to the success 

of any alliancing arrangement. Being able to describe and communicate objectives are 

not, of themselves, sufficient however. Actions need to be aligned with objectives and 

supported by behaviours that reflect and support the ethos of the alliance. Good CWA 

practice in this regard involves the following: 

• equity – sharing or rewards and penalties commensurate with performance but 

based around the goal of win/win rather than win/lose; 

• actions taken are best for project. This is required at many levels – for example, 

the PEG comprises personnel selected on the basis of best for project – not on the 

basis of which organisation employs them; 

• high levels of integration in terms of project management, governance, reporting, 

systems etc; 

• open and honest communication; 

• culture of no blame; 

• collective responsibility and accountability for project outcomes; 

• trust integrity and respect; 

• innovation; and 

• mutual support. 

CWA Partner Selection 

Irrespective of the form of procurement method used, getting the best mix of contractors 

and others is critical to project success. The process for selecting contractors and others 

is not part of the brief for this review (these matters have been reviewed by Audit NZ). 

Notwithstanding this, it is worth noting some of the similarities and differences between 

traditional procurement and procurement using CWA. 

Both forms of procurement for major projects tend to involve multi-stage selection 

processes involving Expression of Interest, Request for Proposal, shortlisting and then 

intensive negotiation with one or a small number of preferred bidders. Traditional 

procurement usually has price as a major, if not predominant, selection criterion. CWA, in 

contrast, may or may not have price as a criterion (but price does not have to be 

excluded). 

A further difference between procurement methods is that traditional procurement typically 

involves tendering several discrete contacts (for design, for construction, for civil works 

and so on) where as under alliancing, the objective is to build a team and the selection 

process needs to reflect this. Under CWA the selection process would normally involve 

workshops with shortlisted candidates. One of the objectives of the workshops is to build 

62

elationships and, as part of this, establish the ability of the parties to work collaboratively 

with one another in the spirit of alliancing. 

Leadership Structure 

Alliance projects have a single integrated project team. At the head of the alliance is the 

Principals Group. This group comprises the heads (typically CEOs) of the parties involved 

in the alliance. In a general sense, the roles of the Principals Group are to: 

• create the alliance vision, principles and objectives; 

• set policy and delegations; 

• appoint members of the PEG and empower it to perform the obligations under the 

CWA Agreement; 

• promote principles and objectives throughout the alliance team; 

• resolve issues that arise within the alliance; and 

• agree the TOC 

The Department is represented on the Principals Group. The Principals Group operates 

on the basis of collective responsibility and unanimous decision making. This creates 

some issues that are discussed in section six below because the Departmental 

representatives on the Principals Group have an obligation to the CWA as well as, of 

course, an accountability to the Department as client. This creates some complex 

dynamics that need to be carefully managed. 

Beneath the Principals Group is the alliance management team or, as it is referred to in 

the RPDP context, the PEG. PEG members are appointed on the basis of best for 

project. This means that in theory, a constructor could, for example, fill the position of 

design manager and vice versa. The roles of the PEG include: 

• delivering the project objectives; 

• day-to-day management; 

• providing leadership to the wider project teams; 

• appointing members of the wider project teams on a best for project basis; and 

• resolving issues. 

Beneath the PEG lie the various project teams. 

The structure and roles of the Principals Group and PEG are quite different to the 

structures and accountabilities that normally exist under a NZS 3910 form of contract. For 

example, in traditional projects, a client engineer overviews and checks the designer’s 

engineers and there are cost controllers and schedulers in each organisation. In contrast, 

under a CWA, there is one team, one schedule, one cost control team and one design 

team. In theory, the benefits of having one integrated team is the cost saving from not 

having duplication of roles and what is referred to as man-to-man marking. 

63

CWA Agreement 

The CWA Agreement is a key reference point. Effective agreements are characterised as 

having: 

• project delivery and performance objectives that are collective; 

• unanimous decision making (which forces the parties to find alternative solutions if 

there is not universal agreement); 

• no fault, no blame and no dispute. There are no dispute resolution clauses. It is 

the role of the Principals Group to sort out issues; 

• commercial arrangements (TOC, QRA and gain/pain share) that support the 

alliance principles and create the right incentives for win/win outcomes; and 

• transparency and an audited open book approach (which is critical in terms of 

determining the commercial aspects referred to in the point above). 

Commercial Framework 

A fundamental design principle of the commercial framework within an alliance is equity in 

the sense that if one party gains, the others gain as well and, equally, if one party loses, 

the loss is shared with all. This principle translates into alliance agreements by 

incorporating the following features: 

• the commercial participants entitlement to payment is limited to their agreed direct 

costs, margins, overheads and gain/pain share; 

• the commercial participants will earn at least their direct costs (but may not earn 

any, or all, of their margins and overheads if performance falls short of that 

required). In general, the painshare for commercial participants is capped at 100% 

of the sum of margins and overheads; 

• any cost overrun is shared across the CWA members on the basis of pre-agreed 

formula; 

• the gain share arrangements provide for reward for superlative performance (in 

financial and/or non-financial terms). The performance measures which seek to 

define standards of performance are agreed by the CWA partners; and 

• there is a pre-agreed process for the determination and timing of gain/pain share 

payments. 

The commercial framework under CWA is quite different to that for a traditional contract. 

From the client’s perspective, a traditional (tendered) contract involves a pre-agreed price. 

The basis upon which price is determined is, at best, of only secondary interest. In 

contrast, under CWA the focus is on the transparency of costs and risks. CWA members 

assume collective ownership for costs and risks with an equitable sharing of the gain or 

pain depending on how actual outcomes compare with pre-agreed benchmarks. 

7.9 Once a TOC has been agreed, the gain/pain share arrangements take on special 

significance. Some of the design features that would expect to be observed in gain/pain 

share arrangements include: 

64

• the gain and pain is linked to real risks and benefits that affect the value of the 

project from the client’s perspective; 

• gainshare is only paid if performance exceeds expectations; 

• gain and pain share arrangements promote win/win rather than win/lose outcomes. 

In other words, one CWA partner cannot gain at the expense of another; 

• the client is committed to paying 100% of the potential gain share if the relevant 

thresholds are achieved; 

• if gain and pain share arrangements are conditional on a mix of performance 

measures and objectives, then they should structured in a way that avoids 

achieving one objective at the expense of another; and 

• there is complete transparency over gain and pain share arrangements. 

65

Appendix C: Overview of Governance and Project 

Management 

The governance role is one which complements that of management, and of ensuring that 

good management practice is observed. The governance role is one which enables a 

group to focus on the larger picture – in this case the broader requirements of the 

Department, and of the Government as a whole – and to take a more future looking view 

of a programme of activity. In this way an effective governance group is prompted to 

ensure the goals of the programme are clear and maintained, to ask the ‘hard questions’, 

to require justification for management actions and to ensure key decisions are made on 

adequate information. 

In the public sector context the governance role is required to ensure that projects are in 

alignment with Government goals, risks are identified and managed appropriately, that 

processes and decisions are transparent, and that the proper requirements of probity and 

independence are observed. 

Risk Management 

Risk management is fundamental to effective governance, decision-making and 

monitoring. Risk management can and should occur at the various levels of governance 

and project management. Effective risk management means the continuous identification, 

evaluation and management of risk. 

Effective risk management at the governance level requires two key elements: adequate 

information reported on progress and plans, and the competency of the governance group 

to assess the meaning of events, the implications of decisions and risks, and the 

significance of lack of progress on key milestones. 

Accountabilities and Competencies 

An effective governance group will contain the range of competencies required to ensure 

effective governance and management of the project involved. In the case of RPDP 

competencies required would include understanding of the ‘business’ of Corrections and 

of prisons, sound understandings of large-scale construction project management, 

understandings of risk management and cost management, a strategic perspective 

regarding fiscal implications of projected project costs for wider government decisionmaking, 

and a clear understanding of the governance and leadership role of the 

governance group. 

At different times in the development of the project or its external environment the 

emphasis on different strengths required may change. Effective governance bodies will 

recognise this and adapt, through changing or reconfiguring their membership and 

competency mix. 

Accountability involves the governance group demonstrating to stakeholders that the 

project is being governed and efficiently managed, is sustainable operationally, risks are 

managed and that project integrity and probity are ensured. A key role is to ensure that 

sound independent audit processes exist to raise issues for assessment and confirm good 

practice is being adhered to. 

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Decision-making 

Effective decision-making requires the governance group to be as knowledgeable and 

fully informed as possible about the projects and what they are intended to achieve, and 

the key issues and risks that they face. In a typical governance decision-making situation 

decision-makers ‘must balance risk with opportunity, compliance being a given, but in the 

context of moving forward’ 10 

To enable this, decisions brought to the governance group should be supported by an 

appropriate amount of detailed background work, analysis and evaluation. 

In addition to background material, the governance group must receive enough material to 

enable it ‘to distinguish between fact and opinion’ 11 Many proposals will, by nature, 

contain both facts and opinions. The facts enable the governance group to assess the 

risks they are taking, possible opportunities and to make a sound judgement. With 

opinion, the assessment of risk and opportunity is not as clear and usually needs careful 

examination, discussion and consideration. With opinion, the governance group also 

need to consider the competence, the perspective or independence of the source of the 

opinion. 

To assist with the assessment of particularly complex materials, the governance group 

may decide to establish a committee or sub-group to examine proposals in detail and 

develop a recommendation for the governance group. At times it is also helpful, and 

important, to seek expert opinion on some matters. 

Reporting 

To support decision-making the governance group requires regular and appropriate 

reporting. Reporting needs to address not only progress on the project, but an indication 

of progress remaining, including an estimate of work to be completed. Reporting will also 

include an assessment of ongoing project risks and mitigation strategies. 

10 Doug Matheson, The Complete Guide to Good Governance in Organizations and Companies, 2004: p410 

11 Ibid: p410 

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Project Goals and Objectives 

A successful project is one which delivers the results expected by key stakeholders, and 

specifically the paying client (in this case the Department of Corrections) and achieves a 

balance across quality (results), time, cost and customer satisfaction. 

This can be represented: 

Balancing Four Project Dimensions 

Results/ quality 

Customer satisfaction 

Time 

Resources/ costs 

A good foundation for a successful project will have agreed goals and objectives for each 

of these key dimensions. This represents the project definition and scope, which is used 

to guide project and governance decisions and test project progress against expected 

results. 

Project Management Phases and Processes 

A project will generally move through a series of distinct phases from concept 

development, through planning, to definition and design and next to implementation and 

finally acceptance. Throughout these phases there are a number of key project 

management processes that are applied across initiating, planning, organising, controlling 

and closing. 

The following diagram illustrates the project phases and processes: 

Project Management Processes 

Project management processes recur throughout the lifecycle: 

Organising 

processes 

Intensity 

Initiating 

processes 

Planning 

processes 

Controlling 

processes 

Closing 

processes 

Conceptual 

Phase 

Planning 

Phase 

Definition & 

Design Phase 

Implementation 

Phase 

Acceptance 

Phase 

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The decision-making for each project phase is supported by project reporting (a key 

controlling process mechanism) against plans for progress, risks and projected project 

outturn. 

Project Management Tools and Techniques 

Each project phase requires the application of specific tools and techniques for effective 

project management. This includes tools and approaches for management of project 

integration (charter, planning and reporting tools), project timings, project costs, project 

quality, project risks, communications and procurement. 

Project Management Office 

For large scale projects it is often useful to adopt the approach of using a Project 

Management Office (PMO). The PMO is used to centralise and co-ordinate the projects 

under its domain. The PMO can operate on a continuum, from providing project 

management support functions (in the form of training, software, standardised policies and 

procedures), to actual direct management and responsibility for achieving the project 

objectives. 

Project Management and Line Management 

There are some fundamental differences between the orientation of line management and 

that of project management. Managing a project means making decisions around a 

unique programme of work (and which is often posing new challenges), working to defined 

deadlines and managing the resources and risks to achievement of the end result. 

Project management requires an approach of constantly thinking ahead for opportunities 

and risks, as well as monitoring progress. 

Line management is often about maintaining a flow of consistent business-as-usual work 

(which is generally familiar), in situations where the management of risk, while important, 

is not as volatile. Line management is a more continuous dynamic (although not without a 

need for planning). 

While line managers do get involved in managing projects, there is still a significant 

difference between the two disciplines. Therefore, it is important to ensure that the 

composition of a project governance group comprises individuals who have some 

experience of governance and project management as well as the specific technical 

competencies as their contribution. 

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