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                      Note by the Comptroller & Auditor General

1. This memorandum has been prepared to report on progress since the
   Commission’s last review of the project in July 2008. In view of the issues
   discussed in this memorandum we are seeking the Commission’s approval for
   additional funding of £5.8 million to enable us to enter into contract for the main
   works without further delay. This would increase the total amount of funding
   approved for this project from £77.44 million to £83.24 million, an increase of just
   under 7.5 percent.

Progress since July 2008

2. In July we reported to the Commission that the initial offer price for the main
   works was significantly higher than budgeted. We agreed a two month period to
   review the alignment of the contractor’s (Wates) design with the project
   objectives, including the development of “value engineered” design options to
   reduce construction cost without compromising the design objectives. To
   maintain progress on the construction works, we also agreed a programme of
   enabling works which the contractor could progress without the need for us to
   commit to the totality of the main works. This package of works valued at just
   over £8 million (plus VAT) centred around external repairs, procurement and
   installation of new windows and internal demolition work.

3. The enabling works package was agreed in late July and has had two benefits in
   keeping some degree of construction momentum whilst we sought to overcome
   the budgetary issues, and in reducing the time pressure on the main works
   programme once satisfactorily agreed. Work began in August and has
   progressed well against plan with window installation well advanced and the
   internal demolition largely complete.
4. The general strip out of the building above ground was completed in accordance
   with the works timetable. Strip out works in the basement and sub-basement
   have been delayed because of shortcomings in the clearance of asbestos, as
   previously reported, but is on target to finish in November 2008 in line with the
   revised works schedule. Strip out work throughout the building has continued to
   uncover further areas of asbestos contamination far in excess of the levels
   expected from earlier survey work.

5. The condition of the façade and internal steel structure supporting the Clock
   Tower have been identified as risk areas throughout the project. The final
   surveys have not revealed any deterioration beyond the level we had expected to

Revised Offer Price

6. In the last month activity on the project has centred around validating Wates’
   completed design for the refurbishment including, where appropriate, revised
   design specifications reflecting agreed value re-engineering options. In assessing
   these options a balance has been struck between realising cost savings and
   ensuring the continued delivery of the design intent and overall project objectives.
   In particular, it was considered important that any approved value engineered
   solutions did not result in less sustainable product substitutions or the removal of
   sustainable design criteria on the grounds of cost. The revised design solution
   retains the original project aspiration of achieving a BREEAM (Building Research
   Establishment Assessment Method) Excellent rating. This would be a major
   achievement for a refurbishment of a long established building in Central London.

7. Following completion of the design work and re-tendering of many of the works
   packages Wates’ submitted their revised offer for the construction contract at the
   end of September in line with the revised timetable. The revised offer at £47.995
   million (plus VAT), which although lower than their original offer of £51.551 million
   (plus VAT), was still significantly above the pre tender budget estimate at
   £40.961 million (plus VAT). This revised offer price was based on a 55 week
   programme of works commencing at the end of October 2008 with a target
   completion date of 20 November 2009. Table 1 below summaries the
   movements in the main elements of the estimate and contract offer prices
     between the budget set in December 2007 and the revised offer price of
     September 2008.

Table 1                                        £000s               £000s               £000s
                                            Pre Tender        Wates Original       Wates Revised
                                             Estimate          Offer Price          Offer Price
                                          December 2007        May 2008           September 2008
Short Form Contract:
                                               1,024               1,072                1,510
Strip-out works and asbestos removal
Professional Services Contract:
                                               2,747               3,271                3,751
Design works and surveys
Option A:
                                               34,644             43,408 1             40,699
Main Construction Works
                                              [31,212]            [36,528]            [32,854]
  (of which works packages totalled)

Contingency and Inflation Reserve 2            2,546                 0                    0

Wates identified additional items 3               0               3,760 4              1,995 4

TOTAL COST                                     40,961             51,511               47,955
     Wates initial offer price for the main works contract submitted on 19 May 2008 and reported to
     the Public Accounts Commission in an earlier memorandum from the C&AG dated 24 June
     The Pre-Tender Estimate included a construction contingency and an inflation reserve to allow
     for price inflation between November 2007 and January 2009.
     Wates assessment of additional costs arising from a combination of further asbestos
     discovery, additional design costs and costs arising from the deferred start of the main works
     and an extended programme of works.
     Includes the additional costs of asbestos discovering and removal

8. The revised offer price (£47.955 million plus VAT) reflected savings in excess of
     £5.2 million, achieved through value engineering and competitive re-pricing of
     works packages. However, attempts to bring the price back within budget have
     been affected by:

     •    continued cost growth attributable to a combination of the increased costs of
          significant discovery of asbestos mainly in the rooftop plant rooms and service
          risers and an associated elongation to the programme of works; and,

     •    the continued growth in raw and fabricated materials costs well above the
          expectations of analysts and much faster than predicted when the project
          budgets were set.
9. A further additional cost has emerged during the strip-out of the building. The
   structure is in fact three separate buildings (constructed in the 1930’s, 1950’s and
   1960’s) bolted together, so the original budget provided for a reasonably high risk
   of discovery of defects and inconsistencies throughout the building. In the event
   the building defects discovered during the strip-out have been over and above
   the level that could have been reasonably predicted whilst the building was still in
   occupation, and before strip out to shell and core. The main issues discovered
   can be summarised as follows.

   •   Structural testing revealed severe and widespread dilapidation to the concrete
       slab under the roof top plant on Block C due to salt corrosion. As a result
       significant unplanned demolition and restoration work will be necessary to
       ensure the roof has the required load bearing capacity.

   •   Part of the strip-out works involved the opening up of all the vertical
       distribution risers prior to redefinition consistent with the new design of
       mechanical and electrical services infrastructure. Most of these risers were
       found to have been in filled with concrete necessitating significant additional
       demolition work.

   •   Soon after the building became unoccupied severe cracking appeared
       around where A and B Blocks join. Investigation revealed that the two blocks
       had been attached without a movement joint. There was a movement joint at
       the join of Blocks B and C, but it was found to be in need of repair.

   •   The work necessary to all floors throughout the building has been greater than
       expected because of a combination of inconsistent floor screed depths and
       the consistently poor condition of the floor slabs.

10. Acting on behalf of the NAO, the Turner & Townsend Project Management Team
   have reviewed in detail all the individual works packages and cost elements
   making up the offer price. The Wates design solutions have been pared back to
   the original design intention or to the agreed re-engineered solution. Charge rates
   have been checked where appropriate and we have taken steps to ensure that
   Wates have sought through competition to match quality with cost considerations
   in agreeing works package prices.
11. Based on this review Turner & Townsend have challenged the Wates offer price
   as part of a process of negotiation seeking to reach a contract price that they felt
   able to recommend for acceptance by the NAO. The main areas of challenge
   related to the fees included to cover residual design risk and the amounts
   charged for the removal of asbestos. This latter charge was a substantial
   amount, in excess of £1.8 million against an original estimated cost of £200,000.
   A significant reduction in the proportion of these costs falling to the NAO has
   been negotiated to reflect the liability already accepted by Wates for the
   additional works beyond routine clearance of the asbestos contamination in the
   basement of the building.

12. Turner & Townsend have reported that in their professional opinion the value of
   the works packages presented in the Wates offer (see table 1) is reasonable
   taking account of the inflationary pressures on raw and fabricated materials and
   the impact of the condition of the building on the amount of repair work required.
   They have negotiated reductions on the other cost elements to reach a final offer
   price of £46.25 million (plus VAT). Turner & Townsend have confirmed to the
   NAO that in their professional opinion this is the best price Wates are prepared to
   offer and represents value for money in taking the project forward. Furthermore
   having incorporated value engineered changes in design in reaching this offer
   price, Turner & Townsend advised that the current design continues to deliver all
   the key project objectives as set out in the original business case.

13. They believe that they would be unlikely to be able to negotiate a contract price
   less than £46.25 million, without further re-design and programme delay, the
   combination of which would have a cost impact considerably greater than further
   reductions that might be achieved.

14. One of the original design objectives for the refurbishment was to retain as much
   flexibility as possible around how the NAO could use the space available in the
   building to meet changing business requirements. Since we last reported
   progress in July, we have commissioned a review of the extent to which we might
   be able to also flex our total space requirements within the constraints of the
   current design. This review has concluded that, based on surveys of our current
   space usage, we could reduce the average desk to person ratio from 1:1 to 0.8:1
   with minimum impact on our business operation. This would provide us with
   potential to release two floors of refurbished office space for future sub-letting.

15. Any decision to sub-let space in the building would not produce savings against
   the cost of the project but offers the potential for rental income in the future. The
   review has demonstrated that the refurbished building will provide us with space
   that is flexible enough to allow for shared occupancy. Further work would be
   needed to confirm the desirability of the office accommodation we could offer
   against other office space available on the market, and given the need for us to
   share front of house space there would be some restrictions on the type of
   organisation with whom we could share our building.

Request for Additional Funding

16. On the basis of the advice of our professional project management team that we
   should accept the reduced Wates offer price of £46.25 million (plus VAT),and
   having reviewed all other aspects of the project budget to secure savings
   wherever possible, we still find ourselves some way over the budget previously
   approved by the Commission. We have also taken advice on the level of
   contingency funding we should retain to cover ongoing risks to construction cost
   and the works programme timetable during the remainder of the project.

17. Taking all of these factors into account we are requesting that the Commission
   approve additional funding totalling £5.8 million.


18. When we last reported progress in July 2008, we alerted the Commission that
   the initial offer price from the contractor (Wates) was considerably greater than
   the budget provision. We gave a commitment to seek to reduce the price on offer
   via design alignment and value engineering. This process has been partially
   successful in realising savings against the original offer price. Our ability to bring
   costs down sufficiently to get back within budget has been frustrated through a
   combination of further significant discovery of asbestos contamination and a
   much greater level of defects and inconsistencies throughout the building than
   previously anticipated which has resulted in increased design and construction
   costs and a longer timetable for the programme of works.
19. We believe that the current offer price of £46.25 million (plus VAT) represents
   best value given where we are with the project. In accepting this price and in
   ensuring that we have sufficient contingency funding to cover future risks to the
   project, we would require additional funding from the Commission of £5.8 million
   to complete the project. The extra costs will fall in 2009-10. We see no need to
   increase the level of resources approved for the project in the current financial

20. The Commission is invited to approve the National Audit Office’s request for
   additional funding of £5.8 million to ensure the successful completion of their
   headquarters refurbishment project.

Tim Burr
Comptroller & Auditor General
22 October 2008

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