45. Towards the end of paragraph 2.13 on page 18 it says, referring to advisers, "MOD reimbursed costs up to the phase cap, on the basis of pre-agreed hourly rates and actual verified hours worked, but subject to a 10% retention until the delivery of approved deliverables for each phase". What is that 10% of?
(Sir Kevin Tebbit) 10% of £6.82 million.
(Mr Hoyle) Split phase 1 and phase 2.
46. What I am trying to discover is, as all these fees went up during the course of the project, certainly in phase 1, whether it is 10% of the original sum or 10% of the amount it went up by.
(Sir Kevin Tebbit) I assumed it was 10% of the total cost but I shall have to check that for you.1
47. On the subject of advisers there are two large advisers and then various sub-contractors, as stated in Table 6, first of all PricewaterhouseCoopers who took £6.82 million and Herbert Smith, which as I understand it is entirely legal costs. What exactly is the function of PricewaterhouseCoopers?
(Sir Kevin Tebbit) Mainly financial advice in putting the project together with Herbert Smith doing the legal side of things.
48. Do they have any ongoing involvement?
(Sir Kevin Tebbit) Yes, they still do.
49. What is that?
(Sir Kevin Tebbit) There are still technical aspects which they are advising on.
50. Could you be a bit more specific about what those technical aspects they are still advising on are?
(Sir Kevin Tebbit) They are advising us, but I will ask the Project Director.
(Mr Hoyle) The contract has a range of completion tests through the course of each phase which the contractor has to achieve, many of which are engineering and quite technical as you would expect in a building. PricewaterhouseCoopers co-ordinate that technical advice to us from the advisers listed in table 6 through a construction engineer to make sure we are getting what we set out in the contract.
51. Let me get this clear in my own mind. If there is a technical problem with the project, and it needs advice on what the most appropriate solution is, PricewaterhouseCoopers will go out and, through these various sub-contractors, put together a piece of advice as to the best solution to the problem.
(Mr Hoyle) We would not wish to advise the contractor what the best solution to the problem was because then we would be taking the risk from the contractor. What they would do is advise me that what the contractor was proposing would probably not do the job come 2004 when we move back into the building.
52. This is the point I am trying to understand better. What is the relationship then between yourselves as the project manager and PricewaterhouseCoopers and the contractor? How do you manage that?
(Mr Hoyle) PWC are my advisers on technical aspects of the project to me direct. They have no direct relationship with Modus and their contractors.
53. To come back to the example I was using, if there were a problem, where do they fit into it?
(Mr Hoyle) They advise me that there could be a problem. I take it up with the contractor.
54. They are very much removed from the day to day conduct of the contract.
(Mr Hoyle) Yes.
55. It is said that two things are certain in this life, taxes and death and you can perhaps add a third to that: consultants of one description or another always cost more than the original estimate. I think that is probably an iron law, certainly in my limited experience. I know the NAO Report has a positive heading, "MOD appointed its advisers through a competitive process and controlled their costs", but in practical terms how did you do that? Do you accept that costs are bound to escalate because that is an iron law of consultancy, or do you try to keep them to the original sums?
(Sir Kevin Tebbit) We do keep a close eye on it. We can check the way in which we are being billed at any stage, whether it is through a PFI contract based piece of advice or whether it is from conventional procurement. These costs are broadly speaking in line with the sorts of costs which we traditionally find with major projects. It is about 1.2% in this case of the net present value of the contract which is pretty well at the lower end of the range you expect advisers to cost. If you compare this with other projects of a similar size or nature, you would find that these fees are well within what you regard as the norm, rather than the high end of the scale. That is the sort of measurement we make, as well as being able to drill down if we really need to, if we had some really serious doubts about the bills.
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1 Note by witness: I can confirm that the 10% retention relates to the fees for PricewaterhouseCoopers (£6.82 million) for each phase of the Project. This was retained by the MOD until each phase was completed to the Department’s satisfaction.