Question

Mini case study – Scottish Parliament: the £431m question

Scotland’s new parliament building cost more than 10 times the original estimate and opened three years behind schedule.

Official cost estimates changed 10 times and ballooned from the initial £40 million estimate to a final £431 million.

The procurement model chosen for Holyrood in early 1998 has emerged as the root of the problem. A fast-track contracting method known as construction management was used to build the parliament. It works by splitting a large building job into numerous smaller packages that are designed, tendered and let independently of one another.

Its main advantage is to speed up construction, because the overall design does not have to be complete before basic building work can begin.

It does not allow a client to know the total cost of a project until well after work has begun. It is considered risky for the client, which is responsible for running each individual package – in this case more than 60.

The project cost escalated from about £40 million in 1997 to £109 million in 1999, £241 million in 2001 and £294 million in 2002, and finally £431 million in February 2004. There were 18,000 design change orders over the five years of construction, combining

to form a three-year delay. Requests for design freezes on three occasions were ignored. The reality is that construction management was the only contract option for a client

wanting to make an early start on a project that was still at the design concept stage.
It is also clear that this was a classic case of procurement expertise being bypassed. The procurement department at the Scottish Office was not involved in the project. It was

not consulted over the procurement model.
There is nothing wrong with construction management as a procurement route. It is

best suited to high-quality, potentially high-cost projects, where the client is fully engaged, has a clear goal and works closely with the supply side team.

Some estimates put the money lost to delays and backtracking over design changes at as much as £100 million. If one trade contractor has a problem, it tends to ripple through all the others and cause delay and changes. The contracts are with the client, so the client picks up the cost of that.

However, between the extremes of fixed speedy construction management, a host of options exist under the heading of ‘conventional’ procurement. Their structures affect the risk and control over the final design that falls to the client.

The ‘design and build’ route would have seen the project management team drawing up a detailed design brief, which the main contractor then builds. It leaves the contractor footing the bill for cost overruns, but freezes the design as well.

A middle-of-the-road option, prime contracting, keeps design more open, but cuts the risk of costs going up if things go wrong. This is because a contractor joins the client’s project management team, and brings its entire supply chain of proven builders and suppliers along.

Then there is management contracting, where the client retains the design brief fully and splits up the project into small packages to be individually let, as in construction management. However, a professional intermediary runs all of the contractors on a daily basis, although they are still contracted to the client, which pays for design alterations.

Management contracting may, it seems, have given a more stable framework to the project by introducing an industry expert to run the many contractors.

Construction management was not the most suitable procurement vehicle. Sir Michael Latham, whose influential 1994 report, ‘Constructing the Team’, called on the construction industry to move towards partnering in the supply chain, says that full partnering should have been used to share the risk between client and contractor.

Discussion Question:

1. What was the nature of the procurement including the organization that conducted it and Who was involved in the procurement?

2. What was the process followed (briefly)?

3. Critique the procedure indicating what went wrong and how costly it was.

4. Suggest necessary improvements.

Answer 1

1) In the given case the procurement model used was construction management. This involved breaking up of the overall project into smaller projects which were all treated independent of each other as separate units. However the decisions were taken by the individual project teams and central procurement was not a part of the decsion making process.

2) The broad process followed was the break-up of the building project into several small individual packages which were dealt with independently. Significantly the structure also meant that as part of the process a central procurement team was not consulted in deciding trade contracts.

3) The procurement team not being consulted on trade decisions means that their expertise in terms of negotiating better costs was not utilized at all. This resulted in project costs ballooning from 40 MM to almost 11x of that at 431 MM in 2004 by the time project was complete. Also the use of construction management technique implied that design changes were too frequent and this resulted in inordinate delays of over 3 years.

4) Improvements to look at would be in the way contracting is carried out. The essence of it is to have greater control over the project even while splitting up independent tasks. The approaches to be used could be a mix of prime contracting which leverages the contractor's supply team by making the contractor a part of the project management team; and management contracting, where a professional intermediary coordinates with the contractors of the independent units - much like a CEO functions with a leadership team.