Hard task of nailing down costs of building

Most of Scotland's major construction projects cost more than forecast. Our Scottish Political Editor asks what chance do trams and a new Forth crossing have of coming in on budget?

TAXPAYERS have grown accustomed to seeing the cost of major projects spiral upwards and completion dates recede.

The £414 million Scottish Parliament building – finished at ten times the original quoted price and opened three years late – is a permanent reminder of the problem.

But a report by Audit Scotland has called for more robust costings and closer tabs to kept on projects.

The report says around 60 per cent of Scotland's major building projects are over-budget and only one third are finished on time.

It looked at dozens of past and current projects and calculated the average price increase was around 40 per cent and time overruns could be up to 200 per cent.

Neither the trams project nor the new Forth Road Bridge – two of the most important projects for the Capital – were among the projects studied.

But the bill for the trams, due to start running in 2011, has already gone up significantly.

And it would take a brave person to bet against a rise in the estimated cost of the bridge, given that the scheme is not even properly under way yet.

Last month the cost of Phase 1a of the trams scheme, from Newhaven to the airport, went up twice in the space of a fortnight.

First, delays in contract talks and fluctuation in the exchange rate with the euro pushed the price up from £498m to £508m.

Then, protracted negotiations with German and Spanish contractors led to another increase.

TIE says the fixed-price contracts negotiated for Phase 1a of the trams scheme means the cost is now set in stone at £512m – not a penny more, unless TIE varies the contract.

But the £87m price for Phase 1b – the Haymarket to Granton spur – is fixed only until March next year. If a decision to go ahead is not taken by then, it would have to be renegotiated.

Fixed-price contracts involve paying a bit more to avoid the risk of cost increases as the project proceeds.

A TIE spokesman says: "It's about looking at the risk involved in the project and pushing that away from the taxpayer – looking at the euro exchange rate, steel prices or labour costs and pushing that back on to the contractor.

"There are also penalties written into the trams contract.

"If the contractor cannot finish it by 2011 and has to take another six months, the taxpayer doesn't pay for that."

The new Forth Road Bridge was originally talked of as costing half a billion pounds. But Government agency Transport Scotland says that figure never came from it.

The official price is between £3.2 billion and £4.2bn at 2016 prices – the year the project is due for completion – and officials say they would not expect the cost to go outside that range.

Transport Scotland says the estimates take into account inflation as well as land, design and development and other works, in addition to potential environmental and physical constraints.

A spokeswoman says: "We would expect to get a more defined range of costs within the current estimates as the project becomes more developed."

But the Scottish Parliament building is a constant reminder of how projects can go spectacularly out of control. Lord Fraser's conclusion from his inquiry into the Holyrood debacle that there was "no single villain of the piece" was another way of saying almost everyone involved had to take some responsibility for the huge cost rises and time delays.

Since the parliament project, the Treasury has issued guidelines requiring that costings for certain projects must now include a figure for "optimism bias". This is almost literally taking the number you first thought of and, if not doubling it, at least adding a hefty percentage to make sure you don't underestimate the cost.

As a "non-standard" civil engineering project, the new Forth Road Bridge carries an optimism bias of 66 per cent, included in the quoted price range.

But estimating the cost of any major project years in advance and before work gets under way is inevitably not going to be an exact science.

George Hazel, former director of city development with Edinburgh City Council and now a transport consultant, says the bigger the project and the longer the timescale, the more scope for cost increases.

He said: "You are always going to come up against something unforeseen and the contractor will say 'That wasn't priced' and there is an additional cost for that.

"You will have done your best, but inevitably when you are taking boreholes and seismic readings you may well miss something."

He admits people are sceptical about cost and time projections – but hopes Edinburgh's trams might help restore some faith.

"There is a certain public perception because of the parliament and other projects where the cost has drifted. But if the tram project is a fixed price contract and can be held to £512m, that will go some way to persuading people that the public sector has got a grip on these things."