We reported yesterday that Ferrovial Construction has been awarded a £107m contract to design and build the Norwich western link road. It will build 6.1 km of new dual carriageway between the A1270 and A47, including a new viaduct over the River Wensum.
We also reported that estimated total costs had gone up from £153m two years ago to £198m. We now know the reasons why. A detailed explanation of the cost increases was contained in Norfolk County Council cabinet meeting minutes for 7th June.
It sets out how the original estimated £152.7m budget contained in the strategic outline business case (SOBC) two years ago for the construction of 6.1 km of dual carriageway has now become £198.4m.
The biggest factor is enhanced environmental mitigation measures, adding £22.2m to the cost.
The second biggest factor is cited as Covid-19 issues, adding £17.7m to the budget. The cost of compliance with the site operating procedures was included in the prices of bidding contractors – even though no one knows what regime will be in place come November 2023 when construction work is scheduled to start.
A further £11.4m cost increase is attributed broadly to ‘market forces’ within the construction industry and £2.0m is blamed on the inflationary effect of delays to date.
On the plus side, £7.6m of savings have been found as designed have been refined (a reduction in bridge structures and changes to design and construction methodology of a viaduct); and revised estimates from statutory undertakers have come in lower than earlier indications.
As to whether the contractor’s price would be reduced if Covid operating restrictions have been removed by November 2023, or whether it would simply enhance Ferrovial’s profit margin, a council spokesperson explained: "For stage one (design) of the contract liability for Covid-19-related matters, including any increase or decrease to costs as a result of the pandemic, rests with the contractor. In stage two (construction), as this is not programmed until late 2023 and to reduce pricing uncertainty, the liability has been taken by the council and an allowance has also been included in its risk budget. Any savings linked to this would be realised by the council if the impacts are less significant than budgeted for."
Here's some more detail on those extra costs for the Norwich western link (NWL), as quoted directly from the council’s cabinet meeting minutes.
Environment (£22.2m increase):
One of the elements of cost that has significantly increased since the SOBC budget was developed is in respect of environmental mitigation, compensation and delivering biodiversity net gain. There is a significant increase in provision and this has developed further as we have more details following ongoing survey work and discussions with stakeholders. Given the prevailing concerns about climate change and conservation of biodiversity, the project is being developed on the basis of adopting a highly robust approach to the council's environmental responsibilities and this approach has driven the need to consider further mitigation measures. The project proposals now include more green bridges, now three in total, as well as bat underpasses, along with other allowances for significant improvements to woodland and wetland habitats and other potential mitigation measures in respect of Barbastelle bats and other European protected species. To provide an indication of the magnitude of this commitment, the budget for environmental elements is almost double that for the Broadland Northway project, which to put in context is three times the length of the NWL project.
Covid-19, inflation and external factors (£17.7m increase):
Covid-19 has affected the construction industry. Compliance with the site operating procedures issued by the Construction Leadership Council in conjunction with guidance from government and the Health & Safety Executive has manifested itself in increased site welfare, site running costs, increased travel requirements, accommodation costs and reduced productivity leading to programme delays and additional costs.
The Stage 2 works (construction phase) are not due to commence until November 2023 and it would be reasonable to conclude that many of the effects of Covid-19 should have passed before construction starts. Notwithstanding this, the timing of the current NWL procurement and the uncertainty surrounding Covid-19 at this time will have impacted on contractors' tender pricing, with key supply chain members providing quotations at current rates which will be impacted by the effects of Covid-19.
In addition to the indirect effects noted above, Covid-19 has had a direct effect on the project to date, including impacting site investigation and survey works, with delay and additional costs associated with travel arrangements and landowners’ permissions affecting seasonal surveys and additional specific Covid-19 sensitivity analysis/modelling being required for the outline business case (OBC) and final business case (FBC).
The impact of Covid-19 to the future year economy is generating significant uncertainty in terms of allowances for inflation and therefore an increased provision has been included.
Uncertainty related to labour and material supplies will impact and influence contractors' risk pricing. This will also include considerations of exchange rate uncertainty, where applicable, and delays that could occur due to changes in border controls and customs.
Market Forces (£11.4m increase):
There is currently considerable work within the construction sector (e.g. HS2), which is also fuelled by the government’s response to the coronavirus pandemic (Covid-19) and the stated delivery of investment in infrastructure projects to boost the economy.
Significant recent events within the construction industry, such as the collapse of Carillion in January 2018, the collapse of Interserve in March 2019, and losses incurred by major contractors on the A465 (design and build project) and on the Aberdeen bypass, as well as repeated profit warnings issued by multiple contractors in prior years, appears to have driven contractors to introduce more robust corporate governance measures. These are directly related to their tendering processes, with specific focus on contractual provisions that could affect their financial performance through the delivery of the associated contract.
Contractors' managerial, supervisory and general running costs (preliminaries) are greater than anticipated, with the indicative costs being notably in excess of preliminaries costs seen on previous projects such as the Broadland Northway (which is directly comparable) and the Great Yarmouth Third River Crossing. Whilst increases are primarily driven by the events outlined above, increases can also be attributed to increased rigour to manage major projects from a corporate level, the contractual risk allocation, the nature and extent of temporary works required for a sensitive site and the associated environmental mitigation measures required in the Wensum Valley, given the designated status of the river as a Special Area of Conservation (SAC).
The contracting strategy and transferring of risk to contractors has resulted in risk pricing that is higher than anticipated, as described above.
Programme and other effects (£2.0m increase):
The events set out above introduce delay, prolongation and disruption by comparison to the programme contemplated in the SOBC. The primary effect is a delay to the commencement of construction by 12 months.
Notwithstanding this, the delay to construction starting can be mitigated (in part) by adopting a traditional construction methodology for the viaduct to reduce the construction period. The overall delay is therefore around 9 months. The delay and prolongation of the works attracts an increased inflationary burden.
Other impacts relate to traffic model updating and development of the design resulting in readjustments to the project to take account of changes/impacts by third parties, including for example the Highways England A47 project.