NZ Report / Proposal Template - State Services Commission

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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 Methodology and Processes: Design, Costing, Procurement and Scheduling 32
• • 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 Methodology and Processes: Design, Costing, Procurement and Scheduling 33
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 and 34: • Auckland Women’s was a full C
Page 35 and 36: 5.20 Several points should be noted
Page 37: • The CWA methodology has been pu
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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