The cost of Section 1 met the 1998 revised estimate

2.13  The contractual target cost for Section 1, set in 1998, was £1,930 million (cash out-turn). The basis of the target, as prepared by Union Railways, was a base or 'point' cost estimate, which was the sum of 'point' cost forecasts for all the component works comprising the section. For such a large and complex project, the 'point' cost estimate inevitably accommodated assumptions about a large number of project risks, e.g. ground conditions; some of which would subsequently turn out differently. To address the uncertainty, Union Railways added to its estimate a contingency that was itself an estimate of costs that will arise from a reasonable proportion of risks that might arise. The contingency allowance was £180 million. The actual cost for Section 1 was £1,920 million (cash out-turn), (Figure 6).

2.14  Achieving an out-turn very close to the target occurred despite a number of unforeseen events that were not anticipated within LCR's contingency allowance, including:

■  exceptionally high rainfall during autumn 2000 and winter 2000/01 when many of the contractors were still engaged in major earth moving operations. The estimate of the associated loss was £80 million (2001 prices) of which Union Railways recovered approximately half through insurance claims, but had to absorb the remainder;

■  scarcity of specialist rail industry resources because of concurrent activities on the West Coast Main Line and increased maintenance work on the rest of the national rail network following the Hatfield accident;

■  activities of asylum seekers on the French side of the Channel Tunnel caused a temporary halt in deliveries of railway materials that put the project's budget and completion date at risk of overruns and delay respectively; and

■  disruption of site activities during the fuel crisis in September 2000; 

2.15  In the views of LCR and Union Railways, the success in bringing Section 1 in on budget reflects a number of key factors:

■  extensive use of target-price contracting (Figure 7);

■  a design based on tried-and-tested technology;

■  the stability of the design brief, which was held fixed throughout the construction phase;

■  continuity of management personnel during the pre-construction and construction phases; and

■  Union Railways' use of contingency to recognise that some costs would be incurred even if they could not be ascertained exactly at the outset. This approach makes allowance for uncertainty rather than ignoring it, and together with a management commitment to spend the contingency as risks materialise militates against the risk of attempting to manage a project to an unrealistic budget.

2.16  Rail Link Engineering was also incentivised to keep the project on course. It either would share savings if the cost of construction was less than the target it had agreed with Union Railways in 1998, or was at risk of losing part or all of its fee of £32 million (1997 prices) if the target was exceeded. The maximum potential bonus from its share of savings was £95.6 million (1997 prices).

2.17  In May 2003, Union Railways and Rail Link Engineering concluded negotiations on the extent to which client changes had impacted on the target construction cost. The parties agreed to increase the target, but it was, however, exceeded and as a consequence Rail Link Engineering paid Union Railways £12 million (January 1997 prices).15

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15  In cash terms, Rail Link Engineering paid Union Railways £17 million (Figure 6).