NZ Report / Proposal Template - State Services Commission

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.
Methodology and Processes: Design, Costing, Procurement and Scheduling 26