NZ Report / Proposal Template - State Services Commission

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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 Methodology and Processes: Design, Costing, Procurement and Scheduling 28
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 Methodology and Processes: Design, Costing, Procurement and Scheduling 29
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 and 18: 3.12 While the merits of the new de
Page 19 and 20: 4 Key Drivers and Causes of Cost Es
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: • Auckland Women’s was a full C
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-
Page 75: The decision-making for each projec

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