1 The Department could have reduced the project risks

1. The Department chose to procure the contract for redeveloping the National Physical Laboratory (NPL) using the Private Finance Initiative (PFI).2 The procurement was based on the delivery of specified outputs.3 The intention was to transfer the design risk to the private sector.4

2. The redevelopment involved the construction of over 400 laboratories, many of which had to meet exacting environmental requirements, such as for temperature and sub- audible noise control.5 The specification for the development was drawn up between the prospective contractors, engineers and scientists on the basis that the new facilities would replicate the specification of the existing laboratories in terms of their performance, but with increased reliability and over a greater volume of space.6

3. Expressions of interest in the project were initially received from ten consortia. The Department short-listed four of these to bid for the contract, but two subsequently withdrew.7 The two remaining bidders were Laser, a special purpose company jointly owned by Serco Group plc and John Laing plc, and a consortium called Osborne.8 Following an assessment of the bids, a twenty-five year PFI contract was let to Laser in July 1998, under which the company would redevelop the NPL facilities and provide property management services.9 The planned cost of the new buildings was £96 million. The Department would pay a unitary charge of £11.5 million a year once the buildings were complete.10

4. At the time the contract was let the NPL redevelopment included the most technically demanding requirements yet specified under the PFI.11 Nonetheless, the Department did not consider that the project was too complex for the PFI, and believed that it would be possible to achieve the output specification since it was being met in the existing NPL buildings and at the American National Institute of Standards and Technology.12

5. Concerns regarding the suitability of the project designs were first identified during the evaluation of the two bids received by the Department. The bid evaluation team's assessment of the bids concluded that neither bidder had demonstrated how they would meet the requirement for stringent temperature controls in certain laboratories. The evaluation team suggested that the bidders should work up their designs by constructing a pilot laboratory but the Department did not follow up this idea because of potential costs and delays, the risk that the potential contractors would walk away from the project, and the confidence it had in John Laing Construction Ltd (JLC Ltd) as the building contractor.13

6. The bidders were also encouraged to consider opportunities to develop surplus land made available by the consolidation of the NPL facilities on a smaller site.14 The Department's intention was that the cost of the project would be reduced by the amount of the proceeds from the sale of the land.15 However, the Department's concerns that Osborne's proposals for the development of the surplus land might not be acceptable to the planning authority effectively ruled Osborne out of the bidding, and Laser was left without strong competition to encourage it to improve its proposal.16 The Department now accepted that better cultivation of the market to secure more bidders would have been helpful.17 At the time, however, it had believed that Laser could deliver the project, and that the low number of bidders did not bring the feasibility of the project into question.18

7. The Department had felt able to proceed with Laser because John Laing Construction Ltd had extensive experience of constructing specialist laboratories and part of the Serco Group plc had been running the science facilities at the NPL, and because by the time the contract was signed it had designs from Laser which gave it the necessary confidence.19 The Department's due diligence enquiries gave it no reason to doubt JLC Ltd's technical or financial capability to deliver the project.20 The appointment of Laser as preferred bidder was considered preferable to re-tendering in an effort to increase the number of bidders.21 The Department also considered that by transferring design and construction risk to Laser, the financial and reputational consequences of failure would provide an incentive for Laser and JLC Ltd to meet the requirements of the output specification.22

8. In the event, construction encountered serious delays and difficulties in meeting the specification.23 Although the best and final offer from Laser showed that some of the suggestions made by the Department's advisers had been incorporated in the designs, when later a pilot was built it became clear that the design of the pilot did not reflect the designs that had been discussed. By this time construction of the main facility had begun, making it difficult to change course.24 John Laing plc told us that JLC Ltd had grossly underestimated the technical complexity of the job and had failed to test rigorously its own competence, and that of its sub-contractors, to deliver the project.25 The Department also now thought that it should have scrutinised more thoroughly the technical capabilities of the contractors.26

9. The structure of the contract meant that JLC Ltd received payments based on progress with building work rather than meeting the output specification. By 2001, it had been paid £76 million against an agreed fixed price contract of £82 million, although only nine out of the sixteen modules were finished and further work was required to meet the specification.27 At this point JLC Ltd estimated that the cost of completing the project would be at least £45 million, while it could only earn a further £6 million. JLC Ltd also estimated that its future losses would greatly exceed its £31 million contractual liability to Laser.28

10. Although the facilities are being delivered many years late, the Department believed it would not have had sufficient capital to develop the facility using traditional procurement methods. To have followed the traditional procurement path would have resulted in a piecemeal development and a high level of disruption to the ongoing scientific work at the NPL.29 The availability of the existing facilities had allowed the NPL to continue its scientific work despite the delays in construction.30

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