2.49 The estimated average PSC cost of £746.2 million had £643.3 million of base costs and £102.9 million of risk built into it (at 2000 prices). It is not possible to predict conventional procurement costs with absolute accuracy as historically there have been cost overruns of varying magnitudes and there are many risks involved in a 30-year project which may or may not materialise over the duration of the contract. There is therefore a need to estimate the likelihood of these risks occurring and their associated costs, and build these into the calculation. The £102.9 million of risk built into the PSC, represented 17 per cent of the total PSC base costs (Figure 9).
9 |
| PSC broken down by category | |||
|
| NPV (£ million at Q1 2000 prices) | Base costs | Risk | Risk as % of base costs |
|
| Capital Expenditure | 208.6 | 61.5 | 29.5 |
|
| Replacements | 101.7 | 15.7 | 16.0 |
|
| Operating costs | 202.4 | 8.0 | 4.0 |
|
| Rent, Contribution in Lieu of Rates, and Leasehold risks | 133.1 | 0.0 |
|
|
| Disposals and dilapidations | -12.8 | 0.2 |
|
|
| Legislative Change | 0.0 | 4.6 |
|
|
| Latent defects | 0.0 | 2.9 |
|
|
| Loss due to fire etc. | 0.0 | 4.2 |
|
|
| Inflation different to base case | 0.0 | 5.8 |
|
|
| Cancellation charge | 10.3 | 0.0 |
|
|
| Total | 643.3 | 102.9 | 17.2 |
|
| Total PSC |
| 746.2 |
|
|
| Source: National Audit Office | |||
2.50 The costing of risk is a subjective process and relies on assessments of what risks may materialise during a project. Historic data can assist the costing of risk although this varies from risks that are well known where there is much comparative data, to those where there is little or no comparative data. In its PSC, MOD made use of comparative data from various reports on conventionally procured public sector capital projects. These reports included The Cabinet Office Efficiency Unit Report 1995, a Progress report to the Prime Minister on Government procurement, and the NAO's MOD Major Projects Report 1996. The data in these reports contained little comparative data specifically for redevelopments. In particular, available data included only two MOD refurbishment projects and these had been subject to very different degrees of cost overruns. This lack of comparative data on redevelopments added, therefore, to the degree of uncertainty in the PSC.
10 |
| ||
|
| Risk Category | Modelling period |
|
| Capital expenditure |
|
|
| Capital risks during decant | Decant capital costs period |
|
| Capital risks during redevelopment | Redevelopment capital costs period |
|
| Risk of overrun in capital works during decant | Decant capital costs period |
|
| Risk of overrun in capital works during redevelopment | Redevelopment capital costs period |
|
| Operating costs |
|
|
| Premises services risks during decant | Decant services costs period |
|
| Business and staff support services during decant | Decant services costs period |
|
| Premises services risks in the long-term (post-decant) | Long-term premises services costs period |
|
| Business and staff support services risks in the long-term (post-decant) | Long-term premises services costs period |
|
| Replacements |
|
|
| Replacement risks | Replacement costs period |
|
| Rent and CILOR |
|
|
| Rent and Contribution in Lieu of Rates (CILOR) | No risk included as risk retained by MOD |
|
| Disposals |
|
|
| Dilapidation risks for Metropole | Year 2004 only |
|
| Northumberland House property sales risk | Year 2004 only |
|
| Salvage risks | Year 2004 only |
|
| Legislative change |
|
|
| Legislative risk during decant | Decant services costs period |
|
| Legislative risk in the long term | Long-term premises services costs period |
|
| Latent defects |
|
|
| Latent defects risk | Year 2008 only |
|
| Loss due to fire risk |
|
|
| Fittings insurance risk | All years |
|
| Other insurance risk | All years |
|
| Inflation different from base case |
|
|
| Tender price inflation risk | All years |
|
| Services inflation risk | All years |
|
| Source: PricewaterhouseCoopers |
|