16. Winning bidders expect to recover bid costs in their originally bid contract prices. In this case the costs became a specific item that, after the extended negotiating period, increased the Infrastructure Service Charge that London Underground pays the Infracos. Total bidder costs, including those for unsuccessful bidders, amounted to some £275 million (Figure 5).20
Figure 5: Bidders' costs
| Unsuccessful bidders (£m) | Tube Lines (£m) | Metronet (£m) |
Lawyers for bidders | - | 13.6 | 14.0 |
Advisers | - | 13.1 | 16.4 |
Lawyers for banks and funding bodies | - | 7.8 | 6.2 |
Banks technical advisor, modelling, etc | - | 4.4 | 2.5 |
Other 3rd party advisers' costs to end 2002 - tax, audit, VAT | - | 4.2 | 3.4 |
Balance of 3rd party costs forecast for remaining period to close | - | 5.4 | 3.0 |
Bid team resources | - | 16.6 | 14.3 |
Transition team resources | - | 21.5 | 2.4 |
Project office expenses | - | 1.4 | 3.2 |
Unsuccessful SSL bid | - | 7.0 | - |
Success fees | - | 39.0 | 50.6 |
Unsuccessful bidders | 25.0 | - | - |
TOTAL (£m) | 25.0 | 134 | 116 |
Source: London Underground and Department for Transport
17. The bidders' costs included success fees to compensate them for the use of staff and other resources which might otherwise have been used profitably elsewhere. Tube Lines received £39 million of success fees and Metronet £51 million. In total, success fees amount to over 30% of overall bid costs. The Department said it had learned a lesson and that it ought to have established from the outset what was a legitimate bid cost in relation to this element. Faced with a similar situation again it thought there was a strong argument to disallow success fees from bid cost reimbursement.21
18. Excluding success fees, Tube Lines was reimbursed £95 million of bid costs and Metronet was reimbursed £65 million of bid costs. Tube Lines concluded one deal, while Metronet concluded two. Allowing for £7 million reimbursement for a bid that Tube Lines did not win, the immediate cost for one Tube Lines contract was £88 million. This was £23 million higher than the amount that Metronet was reimbursed for two contracts. The Department gave the following reasons for the differences:
• Earlier deal closure (December 2003 for Tube Lines, compared to April 2004 for Metronet). As the Tube Lines contract was negotiated, developed and completed earlier, the company incurred greater costs than Metronet in being the first to agree contract principles. The Tube Lines contract work was incorporated into the two remaining contracts, thus reducing transaction costs on the Metronet bids where agreed terms could be incorporated from the Tube Lines deal.
• Metronet was a single bidder for two contracts, avoiding some inevitable duplication in costs had separate bidders been selected.
• Different pre-operational contract activities and the creation of business plans. These costs were some £21.5 million for Tube Lines, compared to £2.4 million for Metronet, reflecting the different make-up of the two consortia. Tube Lines was required to prepare supply contracts for sub-contractors before deal close and build up resources capable of letting these contracts. Metronet, with a supply chain that formed part of the consortium, was not required to undertake a similar level of preparation before deal close because contracts had already been arranged with suppliers. The Metronet supply chain will have incurred substantial costs pricing their respective obligations and in particular performing the necessary due diligence to offer fixed prices. These costs, while recoverable through the Infrastructure Service Charge, are not separately identifiable but included in the overall fixed prices offered to Metronet by suppliers.
Some of Tube Lines' costs covered design work that should already have been covered by the Infrastructure Service Charge. There is, therefore, the risk of double payment.22
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20 Qq 131-134, 166-167; Ev 35-39
21 Q 131