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Section 2 - Value for Money

Key Points

• Scottish Government procurement policy is to achieve Value for Money (VFM).

• Opportunities should be taken to encourage innovation that should not be stifled through rigid adherence to mechanistic procedures, although accountability for public funds remains extremely important and should not be compromised

• Key features of achieving VFM in construction procurement are:
• integrating value management and risk management techniques within normal project management
• defining the project carefully to meet user needs, allowing sufficient time for the pre-planning processes
• taking account of whole life costing and long term sustainability
• adopting change control procedures
• avoiding waste and conflict through teamworking and partnering arrangements, integrating the design and construction processes as much as possible
• not appointing consultants and contractors on the basis of lowest initial price alone
• A VFM process should be followed for each project which ensures a structured approach to planning and managing a project from inception to completion
• All capital projects with a total budget exceeding £5 million (inclusive of professional fees and VAT) must be assessed in terms of their level of risk; if they are assessed as being high risk or mission critical, a formal Gateway Review (co-ordinated by the Scottish Government's Centre of Expertise) must be undertaken at each key decision stage. In addition, high risk or mission critical projects below £5 million in budget should also be considered for formal Gateway Review
• Privately financed projects using the non profit distributing model are generally subject to the Key Stage Review process rather than Gateway Review
• All medium and low risk projects should be subject to Peer Group or Self Assessment Reviews, the latter in line with the described procedures to be carried out at key planning stages ('approval gateways') in the project

What is Value for Money ( VFM)?

The prime objective of the Scottish Government's procurement policy is to achieve VFM - the optimum combination of whole life cost and quality to meet the customer's requirement. Quality may relate to a number of relevant factors including functionality, durability, aesthetic appropriateness to surroundings, long-term adaptability and maintenance, environmental implications and ability of consultants and contractors to innovate, improve buildability and work as a team.

Why is it important and how is the process monitored?

Every opportunity to achieve VFM should be evaluated properly and informed decisions taken. In this way, management can have confidence in answering any subsequent questions on the entire decision making process and provide full justification for the decisions taken.

When internal or external audit carry out reviews of works projects, it can be expected that consideration will be given to how resources have been used, what influenced the decisions that were taken, whether the best advice available was obtained and implemented, whether risks were managed properly and whether informed judgements were made.

Is lowest always best?

VFM does not necessarily mean accepting the lowest bid as quality, as well as price, must be considered when appointing consultants and contractors. Innovation should not be stifled through rigid adherence to mechanistic procedures, although accountability for public funds remains extremely important and should not be compromised.

The Scottish Government and certain other public sector organisations must comply with the EC procurement rules as implemented by the Public Contracts (Scotland) Regulations 2006. They are entirely consistent with the policy objective of achieving VFM.

How is VFM achieved?

The greatest opportunity for achieving VFM occurs at project inception. Correct project definition is essential to meet the users' needs while achieving VFM. Project definition and subsequent planning should not be constrained by preconceived ideas.

1. To plan and manage a project from inception to completion, the VFM process described in Annex A incorporates a series of management tools that provide a model structured approach. This model ensures that projects provide VFM by:

• defining the project carefully to meet the user needs and ensuring that sufficient time and resources are allowed to fully pre-plan the project execution
• fully assessing and managing the risks involved with different procurement routes and, where necessary, making recommendations to the responsible Minister
• integrating value and risk management techniques within normal project management
• adopting a change control procedure
• taking account of whole life costing and long term sustainability issues including the need to maintain, repair, replace and dispose responsibly of components
• avoiding waste and conflict through team working and partnering, seeking opportunities wherever possible to integrate design and construction
• appointing consultants and contractors on the basis of VFM rather than lowest initial price

How rigidly does this model have to be followed?

Adopting the model in a mechanistic manner is unlikely to produce the best results; neither will distorting it to fit existing construction procurement procedures. Sound judgement, constant questioning of what is being done whilst ensuring that nothing is left to chance are also essential requirements to achieving VFM. The details of the process may be modified to suit the needs of individual users and different procurement strategies. For example, the precise timing of appointments and approval gateways (or Gateway Reviews) may vary.

What are they?

Gateways occur at key planning stages to ensure that risks are being managed and that the project remains affordable. Generally, they should be carried out by the project management team on all major projects. This staged approval process helps to ensure that VFM is achieved at each stage and that the project overall provides VFM.

Each review should comprise:

• a VFM review
• a financial review
• a review of the project delivery management systems

Approval to proceed to the next stage is given by the investment decision maker when he/she has considered, and acted upon, the review report.

What is a VFM review?

This assures the investment decision-maker that the project provides VFM for the Directorate's business as a whole. In particular, it should ensure that:

• the project objectives and project brief meet the users' needs
• risks have been properly identified, evaluated, allocated and are being managed actively
• all options (whether for funding, design, procurement etc) have been evaluated properly and the recommended option justified
• the design takes full account of maintenance, operating and disposal costs to produce a VFM whole life solution

What is a financial review?

This should ensure that:

• a risk management procedure, appropriate to the particular nature and circumstances of the project, is in place
• the base estimate for each element of the project is reasonable and up to date
• the risk allowance for each element of the project is reasonable and up to date (the risk allowance should be for identified risks only and not an assumed contingency provision)
• the latest estimate for each element is made up of the base estimate and the risk allowance
• the project is affordable
• funds are available for the planned expenditure up to the next approval gateway
• appropriate capital, life cycle and whole life cost management and reporting procedures are in place and being followed

What is a review of the project delivery management systems?

This aims to make sure that:

• an appropriate management structure is in place and named individuals have been appointed as the project owner and project sponsor
• the investment decision maker, project owner and project sponsor have received the recommended training, are suitably competent for their roles on the particular project and are carrying out their duties effectively
• appropriate quality, cost, time and change controls are in place

What are they?

The Gateway Review process was introduced by the Office of Government Commerce (OGC) as a means of providing independent assurance, to a wide variety of procurement projects, at up to six key decision points in their lifetime. The Scottish Government carries out Gateway Reviews on a number of major projects and programmes, making use of the process and tools devised by OGC. However, Privately financed projects using the non profit distributing model are generally subject to the Key Stage Review process rather than Gateway Review.

Which projects are eligible?

All capital projects with a total budget exceeding £5 million (inclusive of professional fees and VAT) must be assessed in terms of their level of risk. For those which are high risk or mission critical (irrespective of size, value, complexity), a formal Gateway Review must be undertaken at each key decision stage.

Projects below £5 million in budget (and also non-capital projects), which are determined as high risk or mission critical, should also be considered for these Reviews. Tools have been developed for assessing the risk level of projects, and definitions of mission critical and high risk projects are set out in the Introductory Note to the Construction Procurement Manual and in the Major Investment section of the Scottish Public Finance Manual; for the purposes of Gateway Review, any project which meets the definition of mission critical is automatically considered as high risk.

Who carries out the Reviews?

Coordinated by the Scottish Government's Centre of Expertise for Programme, Policy and Project Delivery (which is an official OGC Gateway "hub"), formal Gateway Reviews are carried out by a small team of up to four independent members, drawn from a variety of disciplines and skills across the Scottish Government and supplemented by private sector experts. They interview key stakeholders and look at key documentation at each stage of the project before providing the senior owners of the project with a confidential report and recommendations to improve successful project delivery.

When, during a project, are they carried out?

Gateway Reviews are generally carried out at the following stages:

• Gate 0 - strategic assessment
• Gate 1 - business justification (after options appraisal)
• Gate 2 - delivery strategy (prior to competitive procurement)
• Gate 3 - investment decision (prior to contract award)
• Gate 4 - readiness for service (asset ready for delivery)
• Gate 5 - operational review and benefits realisation (after service delivery)

Gates 1 to 5 apply to individual procurement projects

What happens during a Review?

At each Gate, the project is generally examined and reported on under some of the following headings:

• the business case and stakeholders
• the policy and business context
• assessment of the delivery approach or proposed solution
• review of the current phase
• risk management
• plans for ongoing improvements in VFM, performance and innovation
• readiness to proceed to the next phase (or plans for future service provision)

Where can I find out more?

Further advice and guidance on the Gateway Review process, including the use of risk assessment tools, is available from the Centre of Expertise for Programme and Project Management which forms part of SPD Construction Advice and Policy Division. The CoE has also developed procedures for Peer Group and Self Assessment Reviews in the case of medium and low risk projects respectively. Self Assessment Reviews of construction projects should follow the procedures described for approval gateways.

A.1 Introduction

A.1.1 The VFM process, described in the 'traditional' model here (containing consecutive design and construction stages), contains a number of approval gateways at which reviews must be undertaken. The process can be modified to suit the needs of individual users, specific projects and procurement strategies, resulting in reviews being undertaken and/or appointments being made at slightly different times from those in the model. The acronyms are explained in the notes that follow the diagram. Sections A.2 to A.7 of this annex provide more detailed information about particular activities.

A.1.2 During the works contract phase and prior to delivery of the project or assets, a further review may be needed to confirm "readiness for service" and the basis for evaluating the performance of any continuing service e.g. operational tasks.

A.1.3 After delivery of the project, further reviews should be carried out at the appropriate times to assess if the project has delivered the planned benefits. These reviews should complement, and coincide with, post-project evaluation (PPE) (of the procurement process) and later post-occupancy evaluation (POE) (of the performance of the finished product). The PPE report should be carried out within six months of completion and the POE at least 12 months after occupation.

A.1.4 If continuing services are being provided, periodic reviews should be undertaken during the operational phase to confirm the delivery of value for money and "in-service" benefits, or if the scope of the services is to be altered.

A.1.5 In the case of those major projects which should be subject to formal Gateway Review (generally those categorised as high risk or mission critical), the review stages coincide with some of the "approval gateways" shown on the VFM process diagram overleaf but also may occur at other decision points, as follows:

• if the project is part of a larger programme, a Gate 0: Strategic Assessment of the programme may take place immediately after identification of user (or business) needs i.e. after Box 2
• the Gate 1: Business Justification review coincides with "approval gateway" 1
• the Gate 2: Delivery Strategy review coincides with "approval gateway" 2
• the Gate 3: Investment Decision review coincides with "approval gateway" 4
• the Gate 4: Readiness for Service review takes place after completion of the construction phase but prior to delivery i.e. after Box 17
• the Gate 5: Operational Review and Benefits Realisation review(s) take place after delivery of the project i.e. after Box 18. These should complement, and coincide with, initial feedback and PPE of the process (within 6 months of completion) and later POE of the finished product (at least 12 months after occupation)
• in the case of Traditional Lump Sum Contracts (with consecutive design and construction stages, as illustrated overleaf), an intermediate "decision point" between Gates 2 and 3 may be appropriate to coincide with "approval gateway" 3, i.e. after design completion and contract preparation but prior to inviting expressions of interest from contractors
• in the case of procurement routes which integrate and overlap the design and construction phases, there is no equivalent of "approval gateway" 3 but there may be a need for intermediate "decision points" between Gates 3 and 4 e.g. after Outline Design and after Detailed Design

• is the total cost to the client likely to be reduced?
• will the recipient be able to bear the full consequences if the risk occurs?
• could it lead to different risks being transferred back to the client?
• would the transfer be legally secure (will the transfer be accepted under common law)?

Risk retention

A.4.17 Risks that are not transferred or avoided are retained by the client organisation although they may have been reduced or shared. These risks must continue to be managed by the client to minimise their potential impact.

Risk and procurement strategies

A.4.18 Risk and procurement strategies are interrelated. The chosen strategy and the forms of contract influence the allocation of risk, the project management requirements, the design strategy, the employment of consultants and contractors, and the way in which the client's project team and the various designers, consultants, contractors and suppliers work together. The risks and benefits associated with procurement strategies should be fully identified, considered and evaluated prior to selection and, in the case of mission critical or high risk projects, this information and the recommendation should be presented to the responsible Minister for decision.

A.5 Project Execution Plan

A.5.1 The project execution plan is the key management document governing the project strategy, organisation, control procedures, responsibilities and, where appropriate, the relationship between the users' project sponsor and the project manager. It is a formal statement of the users' needs, project brief and of the strategy agreed with the project manager for their attainment. The scope of that statement will depend on the size and nature of the project. It is a live active management document, regularly updated, to be used by all parties both as a means of communication and as a control and performance measurement tool.

A.5.2 Preparation of the project execution plan is a key responsibility of the project sponsor. Its content may be roughly divided into two areas: matters relating to organisation and responsibilities within the client body and those of the project execution team. Broadly, the project sponsor will develop those elements relating to the client body and establish and define the roles and responsibilities of the key personnel involved. Except where preliminary versions are issued before appointment, the project manager will have the primary role in developing those elements relating to the project team's activities and the project execution strategy.

A.5.3 The project sponsor must be satisfied that the project execution plan represents a viable and realistic plan for implementing the project and achieving its objectives. The sponsor must review it in detail with all parties to the project to ensure that they understand both the plan as a whole and their own responsibilities under it and that they have the capability and the resources to discharge their responsibilities.

Project execution plan checklist

A.5.4 A project execution plan checklist is below. Its scope will depend on the size and nature of the project.

General description

• brief description of the project
• location
• progress to date

Project objectives

• user needs

Project brief

• purpose/function of the project
• schedule of accommodation
• quality requirements/standards
• operational requirements
• equipment and special services
• maintenance requirements
• environmental needs, both internal and external
• disposal criteria
• statutory requirements

Constraints

• external factors limiting or controlling the design, construction or execution of the project:
• planning conditions
• other statutory requirements, including building regulations and those relating to the Disability Discrimination Acts
• listed buildings/conservation areas
• neighbouring buildings
• site conditions
• availability of utilities
• internal constraints, arising from decisions or policies of client organisations:
• confidentiality
• procurement policies
• safety standards
• undertakings made

Cost controls

• budgetary control
• current capital and whole life cost estimates
• risk allowance

Programme

• overall timescale
• fixed deadlines
• pre-construction programme
• construction programme
• occupation programme
• milestone activities
• risk allowance

Change control

• proposed changes
• approved changes

Prioritisation

• cost vs. time
• quality vs. cost
• time vs. quality

Internal management

• personnel
• responsibilities
• authority
• delegations

Procurement

• procurement route
• form of contract

Roles and responsibilities

A detailed statement, related to the procurement route, of the roles and responsibilities of external parties, to be (or as) incorporated in their contracts, covering:

• project manager
• designers
• cost consultant
• specialist consultants, including health and safety
• contractor(s)
• supplier(s)

Co-ordination

• delegations
• communications
• cost controls
• quality controls
• change control
• health and safety procedures
• commissioning procedures
• reports

Occupation

• facilities management
• maintenance
• commissioning
• staff recruitment
• staff training
• programme
• costs

A.6 Control Procedures

Change Control

A.6.1 Changes to design, especially after contract award, are one of the major causes of cost overruns and of not achieving VFM. Changes arise mainly as a result of unclear or ambiguous project definition, inadequate time spent in project planning, risk analysis and management or due to changing circumstances. The consequences of changes during the construction stage can be many times greater than the direct impacts of the changes.

A.6.2 Change is handled most effectively through sound project planning and review. Where there is a possibility of change for whatever reason, it should be treated as a project risk and addressed in the risk management plan. A robust change control procedure incorporating VFM criteria should be adopted to evaluate and manage change when it occurs. Delegated powers and authority should be established.

A.6.3 The need for changes should be minimised by:

• ensuring that the project brief is comprehensive and has the users' agreement
• taking account of proposed legislation
• having early discussions with outside authorities to anticipate their requirements
• undertaking site investigations and condition surveys
• ensuring that designs are fully developed and co-ordinated before construction contracts are committed
• good project management, including forward planning
• identifying and managing risks

A.6.4 A change control procedure should consider all of the following factors for each proposed change before approval is given for the change:

• the reasons for the change
• its source
• the whole life cost, time and performance consequences of the change
• the risks associated with the change and their impacts
• properly evaluated alternatives to the proposed change
• proposals for avoiding or mitigating time over-run
• source of funding of any cost over-run
• Impact of planning constraints, building warrant and other statutory approvals

A.6.5 Approval for the change should normally be given by the project sponsor when a detailed evaluation of the change shows that it provides VFM. Where additional funding is required, approval for the change should be obtained from the investment decision maker.

Cost Control

A.6.6 Cost control is dealt with in Section 4.

Time Control

A.6.7 The programming of the activities necessary to complete a construction project is usually carried out using standard computer planning software. Such systems are no more than a tool and are effective only if they are both properly used and fully understood by the people whose activities they control.

A.6.8 The project sponsor should insist that, however sophisticated and comprehensive the networks of activities and the inter-relationships between them, the final programmes on which decisions are to be made (and against which performance of the consultants and the contractor(s) are to be monitored) should be simple and straightforward; certainly no more complicated than can be readily understood by the sponsor.

A.6.9 The project sponsor must be able to identify clearly those tasks which lie on the critical path. Time for the assurance and other processes, including Gateway Reviews and Mandatory Standstill Periods, must be included as specific activities in the time plan for the project. They invariably lie on the critical path.

A.6.10 The process of time control is in many ways analogous to that of cost control. Thus a time control system can embrace:

• time budget - the overall project duration as fixed either by specific constraints or by the contract strategy; the period which, once fixed, becomes a key parameter for management of the project
• time plan - a division of total time into inter-linked time allowances for readily identifiable activities with definable start and finish points; the overall project programme
• time checking - monitoring closely actual time spent on each activity against the allowance in the time plan; reporting divergence as soon as identified

A.6.11 If the time taken for an activity exceeds its time allowance there are essentially only two forms of corrective action available;

• the re-sequencing of later activities
• shortening the time allowance for future activities by increasing the resources to be made available for them (this option will normally result in extra costs)
• If neither is done, the overall time budget will be exceeded and the project will finish late

A.6.12 The project sponsor must recognise that time control is as important during the planning stages of the project as the construction stage. Designers should work to a series of deadlines at which different elements of the design must be agreed (i.e. frozen) if costs and the overall programme are to be kept under control.

A.6.13 The project sponsor should ensure that the programme allows for the time impacts of identified risks occurring.

A.6.14 The project sponsor must take account of the relationships between time, quality and cost:

• any extension of the overall timescale for a project always generates additional costs; who carries such additional costs depends on the detailed contractual arrangements between the parties; it is likely that some of them will be borne by the client; and
• making up lost time by re-sequencing later activities may compromise quality and could result in extra costs.

Quality control

A.6.15 The final quality of the project is governed, progressively, by:

• the project brief - a clear statement of the standards of quality required
• the design - the adequacy of the components selected; the interface between related components and systems; the integration of mechanical and electrical systems into the overall design; the readiness of design before construction starts
• specification - the conversion of the quality standard demanded by the project brief into precise requirements for both the supply and the installation of materials, components and systems; the setting out of the criteria against which the standard of the finished work will be judged, e.g. by reference to standards, codes of practice, or the like; testing requirements to verify compliance with the specification
• quality control - setting up control mechanisms to apply to the execution of the work on site; the detailed on-going supervision by the contractor; the programmes for testing; the procedures for rectifying defective work
• inspection and testing - the independent inspection, testing and verification of the contractor's work

A.6.16 Key aspects of quality control on site are:

• a clear specification of the testing and verification regime that is required, as a minimum, to provide assurance of compliance with the specification
• confidence in the quality control activities carried out by the contractor

A.6.17 Independent inspection, testing and verification is a means of providing confidence in the contractor's quality control system but should not be used to replace it.

A.6.18 Quality assurance systems assist in maintaining quality standards. A detailed review of any quality system is necessary before it can be relied on to provide sufficient assurance about the quality of a specific activity.

A.7 Project Reports

A.7.1 These are regular reports issued to the project sponsor, prepared by the project manager on the basis of personal knowledge, data and reports received from the design team, the quantity surveyor and the contractor(s).

A.7.2 Their purpose is to report formally to the project sponsor the current status of the project, key issues and/or problems requiring resolution and the steps being taken to resolve them. The project sponsor will normally forward copies or summaries of them to the project owner for information and will draw the project owner's attention formally to any matters of serious concern to the client.

A.7.3 Project reports should have three sections:

• a short (one page) executive summary confirming the general status of the project and listing the key issues and/or problems currently requiring resolution
• the general text of the report, reporting fully but concisely on the project status, issues and problems using graphical presentations where appropriate
• appendices containing detailed information on which the report has been based

A.7.4 Reports serve three purposes:

• the process of preparing a report forces the reporter to undertake a full review of the project status
• the issue of a report provides information to the parties to whom it is issued
• it triggers action on reported problems

Typical project report format

A.7.5 A typical format is given below, with indicative, rather than exhaustive, headings.

Executive Summary

Quality

• a statement of how the design and/or construction of the project relates to the requirements set out in the project execution plan
• a listing of potential non-compliance and the steps being taken to correct it
• where options exist for correcting non-compliance, description of and comparison between the options and recommendations for action
• supporting data to be in an appendix to the report

Time

• a comparison of progress against programmes with graphical presentations
• list of non-compliance with programmes, parties in delay, reasons for delay and steps being taken to mitigate it
• details of agreed extensions of time and revised completion dates
• where options exist for correcting non-compliance, description of and comparison between the options and recommendations for action
• design development and completion and the extent frozen
• supporting programme data in an appendix to the report

Cost

• a comparison between total predicted cost and cost budget with graphical presentations (costs should include fees, fit-out, VAT, etc, as well as construction costs)
• risk analysis
• a listing of divergence from budget, reasons for it and steps being taken to correct it
• where options exist for correcting divergence, description of and comparison between options and recommended action
• statement of risk allowance expenditure with graphical presentations
• comparison between actual cash flow and predicted cash flow, identification of divergence and the reasons for it e.g. project in delay/in advance of programme, project costs over budget, errors in original prediction etc
• statement of contract claims submitted and estimate of settlement cost
• supporting cost data should also be in an appendix to the report

Changes

• description of each change
• risks associated with each change
• reasons for change
• time and capital/whole life cost consequences
• source of funds for extra costs
• method of accommodating extra time
• unavoidable changes required:
• budget
• overall programme

Project manager's statement

• subject overview by the project manager of the status of the project - may include such matters as:
• success/failure of corrective actions taken under previous report(s)
• health and safety - number of accidents/reportable injuries etc
• review of performance of consultants and contractors
• weaknesses in control procedures and recommendations for improvements
• client-side failings e.g. late decisions, excessive changes, etc
• potential problems and means of avoidance

Appendix

The following may be included to supplement information in the report:-

• risk register
• risk management plan
• test reports or summaries
• commissioning report or summaries
• design problems met and resolved
• quality assurance audits carried out
• programmes
• progress reports
• progress photographs
• activity lists
• comparative bar charts
• overall project cost reports
• cash flow analyses
• risk allowance spend analysis
• detailed lists of past and potential client changes
• calculations and assumptions made in support of time and cost predictions

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