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4. Design and Construction

4.1. Design

4.1.1. Design quality

Authorities are generally happy with design quality .

73 percent of authorities who responded rated the design of their project as good or very good (see Figure 9 ). There was only one project, in the water sector, where the authority rated the design as poor; this was due to technical performance failures and difficulties in operating and maintaining the plant as designed. In this case payments were deferred until the issues resulting from the poor design had been resolved; the public sector might not have had the same protection under conventional procurement .

Figure 9: Authority perception of design quality, at evaluation and now.

There has been little change in authorities' positive opinions about the quality of design between bid evaluation and the operational phase. This might reflect the fact that many authorities were closely involved in scrutinising the designs and commenting on them at the bidding stage. Indeed, it is worth noting that the responses to this question from both authorities and contractors are likely to be biased, and a wider survey including users and professional architecture and design bodies might have given different results.

In interviews, some contractors commented that design briefs were becoming increasingly prescriptive. But this should be set against the increasing experience of authorities in commissioning new buildings and the impact of standardising design on reducing bidding and procurement costs. Contractors have the opportunity to submit variant bids if they believe that an alternative design solution will offer better value for money.

It was not possible to judge what the impact of PPP procurement as opposed to conventional procurement had been on project design.

User feedback

User feedback is generally positive, but more user surveys could be carried o

20 projects reported that they had evidence of feedback from users. Feedback mechanisms included formal surveys, comments from user groups, anecdotal feedback from employees and users, and complaints procedures. In some cases, positive feedback was inferred from a lack of complaints. The majority of feedback about design was positive.

Recommendation: Authorities should ensure that formal feedback systems, for example user surveys, are in place.

4.1.2. Building performance compared with non- PPP projects

PPP projects are perceived to perform the same as, or slightly better than, non- PPP projects with respect to aesthetics, functionality and environment.

Figure 10 shows authorities' views on the relative performance of PPP projects. Most authorities did not perceive a difference in aesthetics, functionality or environmental performance between PPP and non- PPP projects, although some believed that PPPs perform better.

Figure 10: Comparison of PPP and non- PPP projects with respect to aesthetics, functionality and environment

Where authorities believed that PPP had delivered a better solution, they ascribed this to the impact of life-cycle maintenance and hand-back requirements on the design approach, the impact of transferred utilities risk on energy efficient design, and the output-based specification allowing greater scope for imaginative and individual aesthetic design. Where authorities did not perceive a difference, they commented that building standards and the environmental and functional specification provided to the contractor would be the same whatever the procurement method, and that they would have expected to have had the same input into the design whether PPP had been used or not.

4.1.3. Design tools

Formal design evaluation tools were not used.

Only one project reported that the Quality Indicators in the Design of Schools ( QIDS) tool had been used for evaluation, the remainder of projects had used expert panels to evaluate the design but had not used generic design tools. The majority of projects surveyed were evaluated before formal evaluation tools were developed. Several authorities commented that the involvement of users, for example clinicians in hospital projects, had helped to develop the functionality of designs and to improve user satisfaction once the asset was operational.

4.1.4. Innovation

There is evidence that PPP stimulated innovation, although contractors are more positive than authorities about the impact.

Contractors were more positive than authorities about the innovation demonstrated in the projects surveyed: 39 percent of contractors believed that they had shown considerable innovation, only 25 percent of authorities agreed. 31 percent of authorities thought that there was no evidence of contractor innovation. In part this reflects the authorities' considerable involvement in the development of designs, and their view that they should share the credit for some innovations claimed by contractors.

Innovations noted included energy efficient designs driven by the transferred risk around energy performance and, in the schools and further education sectors, flexible layouts, and innovative location of and access to community facilities. Also in the schools sector, one contractor delivered a new building in place of the refurbished building proposed by the authority, while remaining within the affordability budget.

There was little evidence of innovation in building techniques in accommodation projects. By contrast, in the water sector there was considerable evidence of technical innovation with the introduction of techniques new to Scotland (for example "bendy channel" grit removal, Cambi sludge treatment and tertiary UV treatment) and of rigorous options analysis resulting in redesign of the authority's proposed systems - in some cases combining treatment plants, in others carrying out more treatment locally.

4.2. Construction timescales

The proportion of projects delivered on time shows an improvement over historical experience in traditional procurement but there were more delays than reported in the NAO's 2003 study.

In the NAO's 2003 study, ' PFI: Construction Performance', 76 percent of the projects surveyed were ready to use on time or early and 92 percent were delivered within 2 months of the target date, an improvement over historical experience ¹². In our survey, of the 40 projects where data for the construction phase was provided, 28 (70 percent) were delivered on time or early and a further 3 were delayed by 2 months or less.

Timely construction completion is particularly important in the schools sector, where the target date is generally arranged to ensure that the new asset is ready at the start of a school term. In the case of 7 of the 9 schools PPP projects that responded to the survey, all of the assets were available for use on time. In relation to the 2 projects where there was a delay, one was due to the authority's change of requirements. In the case of the other project, half of the schools in the portfolio had been completed by the required date and the remainder were completed within three months.

Of the 9 waste water projects included in the survey, 3 were delivered late and another, although delivered on time, did not initially meet its performance test requirements. Some of the longest delays (7 and 8 months) were observed in this sector. In the majority of cases the facilities were working to some extent during the delay period.

In all 12 cases where there was a delay in the asset being available for use (other than where the delay was due to an authority change of requirements), the authority was able to delay payment of the whole or part of the unitary charge and, in a few cases, claim compensation for the delay. (In the water sector bonuses were paid in 3 cases for early completion.)

Although, under PPP, the public sector does not normally pay for assets until they are ready for use, it is still important that agreed delivery dates are met, both to fit in with any plans for transition from previous assets, and so that the economic benefits of the project are realised as envisaged in the business case. While the results of our survey demonstrate an improvement over conventional procurement, it is disappointing that the proportion of projects delivered on time in Scotland is lower than reported in the NAO's study. Despite this, and although around a third of projects were late, the contract incentives to deliver on time do appear to be working, with the mean delay only 5 months, and the maximum delay 11 months, which compares favourably with overruns in traditionally procured projects.

It is not clear though that these improvements are unique to PPP projects, and it might be possible to achieve similar results using Design and Build contracts, if upfront specifications were developed to the same level as in PPP projects and an element of the payment were linked to timely completion. There might also be greater scope to include liquidated damages for delays, which are standard in Design and Build contracts, in PPP projects.

Resolution of minor snagging caused frustration for authorities.

In interviews, several respondents discussed frustrations over minor snagging, which had not prevented the asset being deemed available for use but nevertheless needed to be resolved. If minor snags had not been resolved before the SPV's construction contractor had left the site, then authorities found that it was difficult and time-consuming to get them remedied. We understand that there are contractual remedies, in current contracts at least, which (i) allow the authority to serve a notice on the contractor requiring the works to be carried out; and (ii) after a certain period, if the works are still outstanding, enable the authority to make payment deductions and / or carry out the works itself and claim costs from the contractor. Nevertheless, given the number of authorities that raised this issue, we think that it would be useful to review whether the latest contracts provide appropriate incentives to resolve snagging issues.

Recommendation: Further research should be carried out to review whether the contractual remedies relating to snagging provide appropriate incentives to contractors to resolve these issues.

4.3. Construction related price changes

PPP projects delivered increased price certainty compared to traditional procurement but there were more price movements than reported in the NAO's 2003 study.

Of the 37 projects for which data was available, 18 (49 percent) had experienced no price change for any reason during the construction phase of the project. This represents an improvement over historical performance ¹³ with conventional procurement but price certainty had reduced compared with the 2003 NAO survey ' PFI: Construction Performance' which found no price change in 70 percent of projects.

Figure 11 and Figure 12 below show the reasons for the changes and who initiated them.

Figure 11: Changes to the contract price during construction

Changes were only initiated by the contractor in 2 cases. Most of the time the Authority led the change or it was jointly agreed.

Figure 12: Who led the change?

Note that several respondents stated that there was a price change but did not state who led the change

PPP aims to give the public sector price certainty in construction projects. Although the survey results indicated that there were changes in around half the projects, interviewees commented that the PPP contract encouraged minimisation of changes, and forced better up-front specification. Some authorities expressed concern that changes were being pushed out into the operating period, even where it might have been more efficient to amend the construction programme. That this is happening was confirmed in interviews with contractors who stated that, given the penalties for late completion, they resisted any changes that would delay the completion date. Although contracts contain mechanisms that allow the contractor to reclaim the additional bank interest incurred by late completion (and hence delayed payments for services) due to an authority initiated change, contractors are very keen to avoid any delay to the completion date. Authorities commented that the formal processes in the contract for agreeing changes enabled the contractor to slow down change requests. Interviewees also noted that changes were typically paid for using one-off payments rather than changes to the unitary charge because of the complexity of agreeing a change to the project financial model.

Where authorities had successfully requested changes during the construction period, they raised some concerns about their ability to demonstrate value for money, given the lack of competition for the additional works ( see section 6.2 on value for money).

Recommendation: Authorities should continue to focus on developing the up-front specification to minimise any changes during the construction period, particularly in the light of concerns about value for money. However there may be a case for streamlining the change procedure for relatively minor changes.

4.4. Construction cost risk transfer

Construction cost risk was effectively transferred to the private sector.

Very few authorities knew the actual construction costs incurred by contractors; only 3 authorities were aware that the contractor's actual costs had been higher than envisaged at financial close. 8 out of the 13 contractors who were prepared to disclose information about outturn costs stated that costs had increased. The most common reasons for construction cost increases were unforeseen ground conditions, environmental issues, weather, public interventions and supply difficulties. Note that these risks were not always transferred under other forms of procurement.

The PPP process is designed to transfer almost all construction cost risk to the private sector and avoid increases to the construction price after contract signature. This was perceived to be a weak area for previous procurement methods. While the survey results indicate that very little open book accounting is taking place ¹⁴, they provide good evidence that the construction cost risk transfer envisaged in the contract is working.

4.5 Impact of PPP procurement on construction timescales and budget

PPP provides strong incentives to deliver the asset on time and to budget.

Respondents were asked for their views on the impact of PPP on construction timescales and budget. The most frequently repeated comment was that PPP projects are more likely to be completed on time and within budget, because of the powerful incentive of withholding payments until completion of the asset.

Several respondents commented that the total time for procurement and construction was longer for PPP projects.

Several respondents said that they thought the bid price for PPP projects tended to be higher than for non- PPP projects, but that this reflected the risks transferred. Some commented that the total outturn price of PPP projects was lower or the same as non- PPP projects (taking into account budget overruns on traditionally procured projects).

It was noted that the pressure to meet the agreed timetable in PPP projects led to reduced flexibility to changes during the construction period.

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