COSTLY MISTAKES

5 June 2010 Construction projects can cost twice as much in Britain as they do in Europe, wasting billions of pounds. Now, a government investigation aims to find out why. By Max Rashbrooke

When, in 10 years’ time, workers begin cutting the first trenches and laying the first rails on the high-speed line between London and Birmingham, they will be working on one of the biggest engineering projects in recent history. At a projected cost of at least £16bn, it will also be one of the most expensive.

But will that money be well spent? Emerging evidence that British engineering costs may be double those on the Continent has forced the Treasury into launching a major investigation. At stake are billions of pounds of taxpayers’ money that could be saved – or wasted – once high-speed rail, and a host of other projects, get underway.

The investigation, which will be led by the Treasury’s new Infrastructure UK (IUK) unit, will focus on civil engineering – the process of designing and building major pieces of so-called hard or economic infrastructure. On rail projects, for example, that means earthworks, constructing viaducts and bridges, and tunnelling.

Concerns about the costs of this work first emerged late last year, in a report entitled ‘Productivity and skills in UK engineering construction’ by the Whitehall and Industry Group. The report found nothing wrong with the basic technical skills of British workers, but claimed projects were being hampered by a combination of poor management and supervision of workers, weak project controls and planning, and a "breakdown of trust" between management and workers.

As a result, workers’ productivity on engineering projects varied widely, individual projects being up to 30% better or worse than the average – a much bigger spread than in other countries. Productivity was on average 5% worse than in Europe and 11% less than in the US.

More damaging evidence came in a report in March for HS2, the body in charge of the proposed high-speed rail line. Comparing the cost of building HS1 (Britain’s section of the Eurostar London-Paris line) with equivalent rail projects in Europe, it found that HS1 had cost more than twice as much on a per-kilometre basis than the Continental projects.

These extra costs, the report said, "may be an indication of a wider issue in the building and overall delivery of civil engineering works for major infrastructure projects". In other words, it isn’t just a problem for the rail industry. That’s borne out by 2007 figures showing Britain had the fifth highest construction costs in the EU, 42% above the European average and significantly worse than competitors such as France (just 12% above the average), Germany (16%) and Ireland (7%).

But just what, other than poor productivity, is making engineering work so expensive? Though the current investigation will have the last say, the HS2 report identifies the four main factors it believes are driving up prices.

The first two, relatively straightforward though still contentious, are the so-called ‘goldplating’ of European legislation and the optimism bias used in many projects. The report blames "a more prescriptive approach" to adopting European legislation in Britain, compared with the "more enabling" attitude adopted on the Continent. This creates an army of technical, safety and commercial supervisors not deemed necessary elsewhere.

The widespread use of the optimism bias, the report goes on to say, can create "self-fulfilling project price inflation whilst allowing ‘still on budget’ completion". In other words, factoring cost increases into the budget at the outset means staff are more likely to work towards the inflated figure – which in turn encourages "the belief that the optimism bias was justified".

The third factor is the way in which Britain plans – or rather, doesn’t plan – its infrastructure programmes. Continental countries are much more likely to carry out big projects as part of "a rolling programme of construction", giving contractors a continuous stream of work "and hence the opportunity to develop stable, skilled teams and management, with efficient repeat work techniques using capital-intensive equipment".

In contrast, British workers have weaker skills, and project managers are forced to deploy more supervisors "given the one-off nature of work without the same developed skills of construction staff on continuous work in Europe".

Nelson Ogunshakin, the chief executive of industry body the Association of Consultancy and Engineering, says the report makes "a valid point. We have always called for a strategic approach to what I consider critical national infrastructure." Mark Henning, a partner at consultants Appleyards, is more blunt: "The French are master planners, whereas we tend to do things ad hoc."

So what can be done? Ogunshakin says the investigation is an opportunity to create strategic delivery organisations that have "the national interest in mind". Such bodies are needed to schedule projects better and ensure they don’t compete against each other for a limited supply of skilled workers. However, there are reasons to be cheerful, he says: project managers on the two major London projects, the Olympics and Crossrail, already have "a very strong dialogue".

Layer upon layer

HS2’s last point concerns the British enthusiasm for multiple subcontracts. Despite the belief here that such arrangements are more efficient, the report says multiplying the layers of subcontracts encourages "multiple layers of technical and commercial supervision", each commercial layer "adding overheads and profit". That, in turn, encourages a dependency on large teams of external programme management to keep an eye on delivery risks and integrate the different subcontractor firms.

Not everyone agrees. Mark Gibson, who wrote last year’s Whitehall and Industry Group report, says: "We don’t take a view on the best way for clients and contractors to share risk ... we saw good projects and bad with different levels of subcontracting and plenty of subcontracting on the international projects [we studied]." The key factor, he says, remains "very good project engineering and good relationships between management and employees".

Ogunshakin warns there are plenty of other issues for the investigation to consider. Planning is one: "There is a big issue about streamlining the planning system, a big issue about the government taking an executive role on critical national infrastructure, making sure they are not going through the process of stop-start, stop-start."

The British tendency to constantly refine and rework project designs is another bugbear. "In Europe, once they have a clear idea of what they want to do, they distil that into a design solution, and the design solution then progresses unchanged into execution. Here, the client keeps going back to the design and changing it!"

Ogunshakin would like to see more "enlightened" clients with a clear view of what they want. The Olympics team’s determination to have "the best of British" working on its projects gets his seal of approval. And he adds: "Once the design is already frozen, don’t change it. Move on. Once you change it, that’s a feast for the lawyers to milk."

Counting the cost

So just how much money might Britain be wasting? The cost of the HS2 project alone is estimated at £15.8bn-17.4bn – so if UK engineering costs (which are typically 73% of total project cost) really are twice those on the Continent, as much as £6bn could be going down the drain on just one project.

IUK chief executive James Stewart is in no doubt that billions of pounds are at stake. "It appears to cost more – up to double – to put infrastructure on the ground in the UK than it does in Europe," he said recently.

"We’ve tested the HS2 case with the [engineering] industry. Not one person says it’s not more expensive in the UK." Paul Skinner, the IUK chairman, has also pointed out that countries including Australia, Canada and New Zealand regularly benchmark their infrastructure costs – and that Britain should follow suit.

Ogunshakin raises a note of caution about the HS2 research and whether it compares "like with like … If you’re talking about the cost of rail from A to B, is it new-build or refurbishment? Greenfield or brownfield?" The price of acquiring land can vary hugely between countries, as can the cost of working within the constraints of existing rail corridors or tackling planning problems.

"You can just blast through France," he says. "[But] trying to do a highspeed rail link between Birmingham and London, you are going to go through a whole lot of Nimbys." Ultimately, Ogunshakin says, "I don’t think it’s as bad as is quoted [in the HS2 report], but there’s room for improvement."

The HS2 report acknowledges it is "quite possible" that costs will not prove to be twice as high as in Europe. But, it points out, "even a more modest 5-10% difference could save up to £1.5bn."

The construction industry hopes that IUK’s report, expected by the end of the year, will set out how to achieve those savings – and more. The report will draw on expertise from across government, including the Office of Government Commerce, the Department for Transport, and the government’s chief construction adviser, Paul Morell.

IUK’s advisory council, meanwhile, includes several men – among them the PPP Arbiter Chris Bolt, former engineering boss Terry Hill and Carillion chief executive John McDonough – with long experience of managing construction and engineering costs.

Their investigation will be carefully watched by the engineering, construction and partnerships industries. At a time when the public finances are so desperately stretched, they all know that wasting money on engineering projects is a luxury the UK can ill afford.

This page was last updated on:
16 June 2010.

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