Infrastructure UK cost review: Update report

26 October 2010

This update is being published on the Infrastructure UK website to coincide with the publication of the Government’s National Infrastructure Plan.

The June 2010 Budget announced that Infrastructure UK (IUK) would carry out an investigation into how to reduce the cost of delivery of civil engineering works for major infrastructure projects, chaired by Terry Hill (Arup). This investigation is being led by IUK in collaboration with wider government, the Institution of Civil Engineers and industry. The investigation will report by the end of 2010.

IUK has led a general call for evidence, in collaboration with the Institution of Civil Engineers, and engaged in extensive consultation with industry and other stakeholders in the public and private sectors.

This update provides further detail of the investigation and the emerging findings.

Summary

1.1 The barriers to efficient delivery of infrastructure need to be tackled. IUK is leading an investigation into how to reduce the cost of delivery of civil engineering works for major infrastructure projects, which will report by the end of 2010. Initial results confirm that the outturn costs of civil engineering infrastructure works in the UK are high in comparison with the rest of Europe and IUK is gathering evidence to understand better the key reasons for high costs.

1.2 By increasing certainty of the investment pipeline, removing wasteful process and strengthening the capability of those involved in procurement and the supply chain, there are opportunities to achieve sustained reduction in the costs of delivery and maintenance of infrastructure.

1.3 Whilst many of the factors identified by IUK have been recognised in previous studies, there has not been sufficient concerted effort by government and industry in the past to make the changes necessary to resolve them. The current fiscal environment and drive for efficiency provide an opportunity to ensure that, this time, the necessary actions will be taken.

Improving delivery

1.4 The ability to deliver infrastructure investment priorities efficiently and effectively is crucial to achieving the UK’s growth objectives. This applies to capacity enhancing projects and renewal programmes. The challenge is to make investment go further by reducing the costs of infrastructure construction; by removing wasteful process and strengthening the capability of those that procure projects; and by supporting the supply chain.

1.5 While the majority of infrastructure is delivered by the private sector, government has considerable influence in creating an environment that supports efficient delivery of public and private sector schemes; for example in setting the planning regime, safety and design standards and procurement policy. Improving the efficiency of delivery will require action by both public and private sector organisations, nationally and at the local level.

Reducing the costs of construction

1.6 Initial results from the investigation confirm that the outturn costs of civil engineering infrastructure works in the UK are high in comparison with the rest of Europe and that there are opportunities to deliver projects and investment programmes more efficiently. Macro analyses of international civil engineering works indicate that overall UK output costs are high when compared to other European countries (See Chart 1.A.). Project based benchmarking studies, for example the High Speed 2 cost report¹ and similar studies in roads², metro systems³ and initial feedback from IUK’s data collection provide further evidence of higher costs in the UK.

Chart 1.A: International construction output statistics for civil engineering works

Source: Eurostat Construction Price Survey - 114/2008

1.7 In some instances, higher relative capital costs in the UK can be attributed to greater intensity of use and enhanced design life of assets (where efficiencies in the cost of maintenance and renewal over the lifetime of the project balance against a higher initial cost), together with geographical factors such as the UK’s greater density of population. However, these factors do not fully account for the differences in cost. The general costs of labour, plant and raw material inputs during construction are broadly comparable with the UK’s main European peer group so it is unlikely these are driving UK costs. However, there are exceptions – for example some data suggests that mineral aggregate costs in the UK may be more than 25% higher than other Western European countries.⁴

1.8 The evidence is indicating that higher costs for UK infrastructure are mainly generated in the early project formulation and pre-construction phases. In these early phases there are policy related factors (for example the UK planning and consents regime and regulatory standards) that impact on the whole infrastructure sector, including public and private sector investments.

Key emerging findings from the investigation

1.9 The following are emerging from the investigation as the key reasons for UK infrastructure costs being high. The investigation is continuing to test these findings through further analysis and is developing conclusions for its final report.

1.10 Stop-start investment - Lack of certainty of budget commitment to programme investment reduces efficiency, suppresses innovation and has a negative impact on industry’s appetite to invest in the UK. Where the private sector is given greater clarity of the pipeline, costs have been reduced. Significant savings have been delivered in the utilities sector as a result of the private sector being able to offer greater continuity in the pipeline for infrastructure renewal and investment. Potential exists to achieve increased savings in the roads programme and to extend the benefits to other areas, including more publically funded infrastructure programmes. The savings generated by creating greater certainty over maintenance and renewal programmes could be used to bring forward capacity-enhancing projects.

1.11 Standards and regulation compliance - In the UK there is a complex web of planning, consents, regulation, process and standards, which absorb time and add considerably to cost. While these systems are designed to protect the rights of citizens and ensure high quality, safe infrastructure, the cost impact is considerable and is exacerbated by a risk-averse culture that can lead to over specification, excessive assurance, monitoring and scrutiny throughout the delivery process.

1.12 Poor commissioning⁵ - Poor practice in commissioning is a major cause of inefficiencies in the specification, design, procurement and construction phases. The public sector in the UK does not generally discharge its role as commissioner and procurer of infrastructure effectively. Ill-defined stakeholder accountability in the pre-construction phases leads to unnecessary reworking during construction. The commissioning and procurement processes appear to be more efficient in the private sector, both for bespoke projects and renewal programmes; especially where economic regulation has added to the downward pressure on costs and encouraged innovation. An example of this is the development of standardisation and off site fabrication in some parts of the water industry.

1.13 Ineffective cost management – The processes of budget preparation, approval and management do not provide effective incentives to minimise the outturn costs. Insufficient consideration is given to the assessment, placement and management of contingency and risk budgets, where the current process can lead to perverse behaviour. In some areas the benefits and value for money achieved in transferring risks needs to be challenged.

1.14 Fragmented supply chain - The private sector construction industry for infrastructure in the UK is not structured to optimise efficiencies and maximise productivity through the supply chain. The UK construction industry for infrastructure has tended towards a relatively large number of smaller construction companies acting as main contractors by comparison to its European peer group. The various technical trades and suppliers tend to exist as separate companies engaged through sub-contracts, rather than being part of a vertically integrated supply chain. This fragmentation of the contracting industry contributes directly to low skills development, training and productivity that add to costs of construction.

1.15 Contractual approach - The UK generally adopts a more contractual approach to infrastructure projects and programmes compared to other countries, which can lead to perverse behaviour particularly in tough market conditions, where low prices achieved under competition may be increased at outturn as a result of claims. There is concern that behaviour in the current economic climate may result in a return to an adversarial culture.

1.16 These factors are all compounded by the lack of readily available data on UK infrastructure costs and asset condition. The private sector often uses independently derived benchmarks to ensure that planned projects are in line with general market levels, whilst an accurate assessment of existing asset condition will enable contractors for maintenance and renewal contracts to compete effectively. It is important that the savings realised are capable of being sustained not only in the current environment, where construction costs are depressed, but also in times of increased activity when construction inflation is rising. IUK is working with the Efficiency and Reform Group in the Cabinet Office and Office for National Statistics to establish a benchmark against which the effectiveness of cost saving measures can be assessed over time.

Moving forward

1.17 Most of the factors identified in the IUK study so far have been recognised in previous studies but the changes have not been successfully implemented.⁶ The current fiscal environment and drive for efficiency provide an opportunity for government and industry to work together to address some of the barriers to change.

1.18 The challenge is to change behaviours within the public and private sectors by realigning incentives and providing an environment within which savings can be achieved. IUK will be considering the detailed measures associated with each of the areas identified for action to deliver the identified cost saving benefits for UK infrastructure projects and renewals programmes. The principal measures being considered are set out in Table 1A below.

1.19 IUK is developing recommendations for achieving cost reductions in the infrastructure sector and will publish these with its report. Where these have common themes with the wider public sector construction programme IUK is working with the Construction Client Board, chaired by the Government’s Chief Construction Adviser, to agree how to effect change consistently across the public sector.

Table 1.A: Overview of emerging measures for consideration

Objective	Areas for potential action
To increase the certainty and continuity of pipeline for committed projects and renewal programmes	Explore opportunities to extend investment programmes across regulatory review periods. Enable other public sector and regulated commissioning bodies to commit to longer term programmes and set cost reduction targets. Through alliancing and partnering agreements encourage greater investment by private sector contractors in trade skills, innovation and supply chain development.
To create clearer distinctions between the roles of commissioner, client, funder, and delivery agents	Develop measures to implement effective leadership and governance so that key decisions vest through individuals or bodies capable of discharging their function as a ‘single controlling mind’. Incentivise unified management of costs, risks and contingency between stakeholders.
To instil greater discipline to commissioning of infrastructure projects and programmes	Encourage greater use of outcome based specification and the removal of unnecessary prescription of standards to encourage innovation. Introduce greater objective challenge of the specification of requirements and budget costs. Explore the benefits of separate management of contingency budgets outside of the promoter or delivery body, particularly on larger one-off infrastructure projects. Improve the availability and transparency of asset condition and benchmark data, including cross-sector access to UK and international benchmarks. Consider the opportunities to derive better value for money from a portfolio management approach to risk transfer, for example in contingency budgets, project insurance and cost indexation.
To develop smarter ways of using competition	Encourage the use of effective competition and procurement to realise cost savings through the whole supply chain and minimise wastage in the procurement process. Develop mechanisms to encourage greater alignment of interest between contractors and clients in reducing costs. Continue to encourage increased early contractor involvement. Where appropriate, encourage further standardisation of contracts, including payment and incentive arrangements.
To reduce the direct costs of construction	Develop measures to improve productivity, for example through site project management, supervision and skills. Encourage standardisation, the use of off-site fabrication and other means of improving efficiency. Review the way in which standards and regulations are applied with a view to developing more efficient means of ensuring safe and high quality construction. Support the development of better structured and incentivised partnering between supply chain providers. Improve the standardisation and processes around change control under the current preferred standard forms for infrastructure and consider ways to avoid escalation of a ‘claims culture’.

The consultation and evidence gathering phase of the investigation is in its final stages. The investigation is now completing its analysis of the evidence and developing its conclusions and recommendations for achieving cost reductions in the infrastructure sector. It will publish these with its report by the end of 2010.

Any comments or questions in relation to the cost review should be addressed to infrastructurecost@hmtreasury.gsi.gov.uk.

¹ HS2 BSL comparison of high speed lines’ capex, Nov 2009
² EC Harris and TRL report for the Highways Agency, Dec 2009
_³ Bent Flyvbjerg Comparison of Capital Costs per Route-Kilometre in Urban Rail, Mar 2008
⁴ Gardiner & Theobald: International Construction Cost Survey, Feb 2010
⁵ Commissioning in this context is the function of setting the requirements of a particular project or programme and putting in place the mechanisms by which it is subsequently procured and delivered into operation.
⁶The Investigation has undertaken a review of the recommendations made in numerous construction and civil engineering industry reports going back over the last 15 years. There is also consistency between the IUK investigation findings and the work being done by ERG/BIS in the general construction arena, by Sir Roy McNulty in rail and by Building Schools for the Future.