Warning over first big Olympic contract after Wembley experience

[Fiona]

Details of the first big contract to be tendered for the 2012 Olympics will be revealed on Monday, amid warnings that organisers must immediately absorb the lessons of the Wembley Stadium fiasco.

The interim Olympic Delivery Authority will unveil the scope of the contract for the delivery partner, who will be responsible for managing delivery of the planning, design, construction, commissioning and maintenance of the Olympic venues and park.

Construction companies with a turnover of at least £100m will be invited to tender and Balfour Beatty and Amec have indicated they intend to put in a joint bid.

The contract details will give clues as to how the ODA plans to avoid the construction pitfalls that hit Multiplex, the Australian company working on a £757m fixed-price contract to build Wembley.

Multiplex's estimated losses on the project are £180m, including provisions of £14m for penalties paid to the Football Association for any delay and another £8m for extra work on the project.

The FA announcement this week that Wembley would not be ready for the FA Cup final has reignited fears that the construction industry is not equipped to deliver flagship projects on time and on budget.

Hours after the announcement, a spoof e-mail circulated showing the London 2012 logo doctored to read "London 2013". Below it read: "From the city that brought you Wembley Stadium". According to Nick Raynsford, a former minister and chairman of the Construction Industry Council, the Wembley failure was a classic example of the "old-style relationship - a prime contractor playing hardball with sub-contractors".

But the FA should also be faulted, he said, for not insisting on the kind of partnering arrangement among contractors that BAA, the airports group, put together for the £4bn Terminal 5 project at London's Heathrow airport.

One senior project manager at a top 10 construction company put it more bluntly. "We have seen on a number of occasions that fixed-price lump-sum contracts for major schemes do not work," he said.

"A client who thinks he can transfer all the risk down and expect the contract to be completed on time and on budget is living in cloud cuckoo land."

The fixed-price contract left Multiplex vulnerable to unpredictable events. Problems included "unexpectedly high winds", extortion threats against staff, rising steel prices, labour disputes and a legal battle with subcontractor Cleveland Bridge.

But James Tuckey, UK executive chairman of Multiplex, said Multiplex had successfully delivered hundreds of other construction projects round the world "mostly on a fixed-cost basis", including the Sydney Olympics stadium. "The fact that it was a fixed-cost contract meant a lot of bills ended up on our table. If we had done it on a different structure such as a fee basis or cost-sharing, the pain would have been shared with others," he admitted.

"But the main reason for the problems was that it was the technical complexity of the project."

Mr Raynsford said partnering arrangements enabled a team of dozens of separate suppliers to be put together from the outset.

"If you have got a team together who know what they are doing, they hit the ground running," he said. "If you get into problems, if there is a partnering ap-proach instead of reaching for the lawyer they try and find ways round it."

Terminal 5 has a team of up to 50 suppliers project-managed by BAA. Mike Peaseland of Balfour Beatty, one of the main contractors, said BAA's project management freed up contractors from risk. At the outset, contractors presented an anticipated final costs but they share in any savings made.

Their margins are ring-fenced, so if the project does end up costing less, they actually make more profit. If they go over budget, they are paid less. "The incentive is very much to reduce the cost," said Mr Peaseland.

Mr Tuckey conceded Multiplex's main mistake might have been to enter the UK too aggressively.

He said: "I think that what was completely not properly costed was the complexity of the project and the design application of the initialconcept, I think most of the problems stemmed from that."

ft.com

[Fiona]

THE SKEPTIC: Multiplex's Lesson For 2012 Olympics

By Howard Wheeldon

A DOW JONES NEWSWIRES COLUMN

Multiplex's failure to keep Wembley Stadium costs in line with the ridiculous GBP445 million fixed-price contract it signed sends an important message to other would-be infrastructure contractors: get your prices right.

By the time it's finally finished later this year Wembley will have cost GBP775 million to build, with Multiplex forced to pick up most of the difference.

And you can bet your bottom dollar that those angling for contracts to build similar feats of engineering down the road in Stratford for the 2012 Olympics will use Multiplex's pain to vastly inflate the price of their bids.

Still, Mayor Ken Livingston and London's taxpayers have all got deep pockets, haven't they? So they'll surely be happy to pay for all those zillions of pounds set to be wasted on the London 2012 Olympics.

Of course, Multiplex could rightly put some of the blame for Wembley overruns on the Football Association, for changing specs. And it could certainly have a go at planning authorities and others for causing some of the delays. But there's no getting away from the fact that Multiplex seriously underpriced the contract, and failed to contain costs.

The lesson for would-be Olympic builders is don't go into fixed-price contracts. After all, when it comes to construction in Britain it often takes fifteen years to achieve what most countries seem able to manage in two or three.

Take Terminal 5 at Heathrow Airport. Though the builders have done very well despite suffering strikes, by the time the project is complete it will be eight years late.

That wasn't the fault of the builders. It was mainly the fault of obsolete planning laws that enable a myriad of do-gooders to delay plans while costly inquiries are held.

The new proposed new runway at Stansted airport is another case where by the time the go-ahead is finally given after several public inquiries costs will have spiraled from those originally planned.

Just a few days ago the London-based interim Olympic Delivery Authority, which is organizing the 2012 games, issued what's perhaps the most important tender of all: the one that will appoint the partner charged with delivering permanent venues and all the infrastructure required for the games, and for managing delivery, construction, maintenance and virtually everything else.

Whoever wins will need very thick skin to cope with being blamed for anything that goes wrong. That may sound negative, but it's only because experience tells us that big infrastructure projects always get delayed in the U.K.

If it isn't workers holding out for more pay, it's staff shortages or things not being delivered on time. You only have to look at the new Wembley Stadium for the best example.

(Howard Wheeldon was a senior equities analyst for 20 years, and has been a columnist at Dow Jones for the past three years. He can be reached at +44 207-842-9251 or by e-mail: howard.wheeldon@dowjones.com)

[steveb]

You missed one Fiona. Shouldn't you add the massively over budget white elephant Scottish Parliament building to the poll of excessive and over spent buildings, all of course, funded by good old Scottish taxpayers

[ian]

wembley is doing fine

[richard]

Hi Ian,

Thanks for your comment, I think Wembley will be fine, just not on time.

As to the 2012 London Olympics, the organisers do not have the luxury of being able to delay the completion by a further year, 2013 just doesn't have the same ring to it!

Having noted that work has indeed begun and the comments made by the engineers involved I think we have as good a chance as any to complete on time.

As to the financial over-spend, if the management team keep a close eye on costs and organise the order of assembly I see no reason for not keeping to the original costings.

The only thing likely to bump up the estimated costs spiralling into the atmosphere is if changes are made and remade throughout the build, this will slow down the construction and cause severe cost increases - Everyone involved needs to sit down now and sort out whats going where, not in 3 or 4 years time.

If the UK construction industry does pull off the build, just think what a status symbol the 2012 London Olympic games will become for years to come.

Well it's either that or it becoming the biggest 'White Elephant' in history, and we don't want that to happen!

[Joelwhite81]

Hello friends in London,

My name is Joel White, I am from Australia and came accross this forum a few days ago while looking at articles about the construction of the Olympics.

I had the pleasure of living and working in London back in 2004/2005 in the construction industry.

I own a construction company based in Australia called IPM Pty Ltd. We project manage large disaster area contracts and also have a construction wing of the company that completes the physical work. We are currently rebuilding 130 homes in a town called Innisfail in North Queensland that was hit by a cyclone in late March.

This brings me to my point, we work for a few insurance companys. The most succesful arrangement to date has been a charge plus arrangement where we complete the work and bill the insurance company directly with our project management and construction fee added on in the form of a percentage.

From my experience, the jobs that we have taken on in a charge plus format are now nearly complete four months after the cyclone. Where as work that we have had to provide a fixed cost pricing are just begining. Also the cost of the charge plus work has come in 25% cheaper than any of quotes that we have been awarded.

In summary, if the governing body overseeing the olympic construction can forge stong partnerships with the right company's and take on a profit sharing policy we will all see construction coming in on time and on budget providing the original budget was accurate to changed circumstances such as the building of an olympics or in my case the re-construction of a natural disaster affected area.

[divingbrit]

Hi Joel welcome

charge plus arrangement where we complete the work and bill the insurance company directly with our project management and construction fee added on in the form of a percentage.

In theroy this works fine, but there is no incentive to keep to a budget, its an open ended 'spend what you like', If you make a mistake, just redo it and who ever is paying the bill will pay for your mistake. With hundreds of construction firms working on the project, the tax payer must be assured that his money is not 'feather bedding' an ineffiecinat company.

So a simple, thats the job, thats the specifications required, now who is going to build it for us at the lowest price, and if it goes wrong don't ask for any more money because we have a contract which we all agreed too.

Will take longer to organise but then everyone should know what is wanted, how its to be built, and the final cost.

Then if the builder can come in under budget, under time, and still supply the finished project as required, he makes more money and so has an incentive.

[richard]

Hi Joel, and welcome to our unofficial 2012 London Olympics forum, it's good to have you come on board

Thanks for the information over the ways to provide a means to ensure that the construction of the 2012 London Olympic project not only comes in on time, but also on budget...I don't think we have the luxury of an extra year as in the Wembley stadium scenario.

London 2013 doesn't have the same ring to it

I've had a look at your website and can I say you do seem to have racked up some mighty impressive awards over the years, IPM Pty Ltd Awards Well done to you and your team.

If you have any other information that would be of value to the future contruction of the games, or any other ideas please feel free to post your ideas on here - Remembering of course that the whole world is watching