NZ Report / Proposal Template - State Services Commission

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“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
Page 1: Report of the State Services Commis
Page 5 and 6: Disclaimer In preparing this report
Page 7 and 8: 1 Executive Summary 1.1 Constructio
Page 9 and 10: the development of the TOC until mu
Page 11 and 12: cost should be seen as indicative o
Page 13 and 14: 2.8 As indicated above, the scope o
Page 15 and 16: 3 Background 3.1 Before discussing
Page 17: 3.12 While the merits of the new de
Page 21 and 22: Otago Cost Contributors ($ million)
Page 23 and 24: • The types of building included
Page 25 and 26: • sub-contractors’ margins have
Page 27 and 28: • the impact of the projects on l
Page 29 and 30: Lessons Learned: • Notwithstandin
Page 31 and 32: Costing CWA methodology provided a
Page 33 and 34: • Auckland Women’s was a full C
Page 35 and 36: 5.20 Several points should be noted
Page 37 and 38: • The CWA methodology has been pu
Page 39 and 40: • • Department engaged CMS in r
Page 41 and 42: • Outsourcing arrangements - thes
Page 43 and 44: the hyb rid CWA subject to the cond
Page 45 and 46: • • where complexity gives rise
Page 47 and 48: 5.65 A probity audit of the selecti
Page 49 and 50: determination of TOC/QRA and the in
Page 51 and 52: 6 Governance and Project Management
Page 53 and 54: Public Sector Project Governance an
Page 55 and 56: 6.12 It is noted that these arrange
Page 57 and 58: Previous Arrangements 6.20 While th
Page 59 and 60: Department ‘Client’ Representat
Page 61 and 62: • While it is outside of the scop
Page 63 and 64: 7 Reporting to Ministers Key Findin
Page 65 and 66: • it is a core expectation that p
Page 67 and 68: • The report prepared by the Depa
Page 69 and 70:
elationships and, as part of this,
Page 71 and 72:
• the gain and pain is linked to
Page 73 and 74:
Decision-making Effective decision-
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The decision-making for each projec
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