I thank the committee for inviting us to attend this morning.
In August 2013 I was truly honoured when asked by the then Minister for Health, Senator Reilly, to chair the National Paediatric Hospital Development Board. The board’s remit is to design, build and equip the new children’s hospital for the island of Ireland. The proposed new children’s hospital development is the most significant capital investment project ever undertaken in healthcare in Ireland, bringing together three children’s hospitals in a modern custom-designed building to deliver the best care and treatments for Ireland’s sickest children.
I was joined on the board by 11 other dedicated members with the collective skills and experience of major projects to deliver on the responsibility with which we were entrusted, namely, to build a world-class children’s hospital on the site of St. James’s campus. The urgent need for a new children’s hospital for the country has been recognised for decades. Acknowledging the importance of the challenge ahead of us and the realisation that we were building a hospital that will care for sick children and their families for many generations to come, we set out a bold vision for the project.
The project aims to deliver one of the finest children’s hospitals in the world and specifically a hospital that provides a truly supportive and therapeutic environment for children and their families. It will also provide a safe and stimulating environment for staff, recognising the importance of wellness. It will be a hospital sensitive to and positively enhancing of its urban setting and the quality of life of the local population.
Its layout, detailed design and construction quality will facilitate the optimum delivery of all aspects of leading current and developing clinical practice. It will be a leading edge fully digital hospital. It will be cost effective in terms of capital and whole-life costs, with sustainable solutions integrated into all stages of the project life cycle. In that regard, we have targeted a Building Research Establishment environmental assessment method, BREEAM, rating of "excellent" and BER A3 standards.
On design team selection, with a clear vision for the project and an experienced executive team in place, the board put in place a structure and process for design team procurement, securing planning permission and the procurement of contractors to ensure the timely delivery of the new hospital, while working closely with St. James's Hospital in decanting buildings from the 12-acre site identified for the new children’s hospital. Following a comprehensive procurement process, we reached our first major milestone with the appointment of the design team in August 2014. Thereafter, the design for planning was produced in a most expeditious manner. A planning application was lodged in August 2015 and An Bord Pleanála granted planning permission in April 2016. This represented the crossing of a major hurdle for the project in the light of the previous experience with the Mater site. The decanting of buildings from the 12-acre site identified for the children's hospital commenced immediately and an enabling works contract focused on demolition commenced in July 2016.
Importantly, shortly after receipt of planning permission, the procurement process for contractors began in June 2016. A procurement sub-group had earlier been established to define the most appropriate approach to contractor procurement. The group included our board, HSE estates and members of the Government construction contracts committee. Given the history of cost overruns and adversarial behaviour on public sector projects, it was decided to consider alternatives to the traditional form of tendering. Reference was made to lessons learned and evolving best practice in the UK and internationally. The universal challenge in all was to replace adversarial cultures with collaborative ones. The construction of terminal 5 at Heathrow airport is held up as a prime example of collaborative working. Prior to its construction, the British Airport Authority, BAA, conducted a two-year study in which every major UK construction project of over €1 billion completed in the previous ten years was investigated. The two main areas identified by the BAA as contributing to the general poor performance across all projects were a lack of collaboration among project partners and the clients' reluctance to assume responsibility for project risk.
The procurement model for the national children's hospital had to align with EU procurement rules and work closely with established government construction contract forms. Following deliberations over several months, which included presentation of the proposed option to the Government construction contracts committee, the strategy group recommended a two-stage tender process for procurement of contractors. This process was and remains the accepted best international practice for procurement of large-scale complex projects such as the children's hospital. Among the clear and defined benefits of the two-stage approach are that it attracted the desired calibre and number of local and international contractors to bid competitively for the project and it enabled tendering to occur prior to the completion of full detailed drawings for phase B, meaning that phase A construction could start two years earlier than if a traditional procurement strategy was deployed, thus allowing the bulk of costs to be secured at 2016 levels, that is, when they were tendered. It also facilitated early involvement by contractors in the design development process, with critical input on buildability, contractor and supply chain integration, risk management and innovation resulting in the completion of a fully integrated design. Critically, prior to commitment of expenditure on the main building works there is now certainty on cost and programme, with client and contractor risks reduced or eliminated. The programme includes delivery of a fully commissioned and quality assured building. The two-stage tender process has and will continue to foster a collaborative culture, eliminating traditional adversarial and opportunistic behaviour.
Stage 1 of the two-stage tender process involved the works being bid on on the basis of a preliminary design and an approximate itemised bill of quantities based on that design. The contractors provided rates for all elements of the works. Stage 2 included the designers and contractors working together to develop the design to completion. The tendered rates were then applied to the final bill of quantities produced by our quantity surveyor. The actual cost is determined by multiplying the final quantities by the tendered rates. Where there is disagreement between our quantity surveyor – Linesight – and the contractors, it is resolved by the independent expert whose decision is binding on both parties. First stage tenders were returned on 21 October 2016. The lowest bid - €637 million - was received from BAM and very competitive. It was €131 million lower than the second place bid. Following a detailed tender assessment, preferred bidders were identified in February 2017. BAM was the main contractor. H. A. O'Neill received the mechanical installation contract; Mercury Engineering received the electrical installation contract, while Schindler was successful regarding the lifts. The final brief and definitive business case were approved by the Government in April 2017, enabling the board to commence phase A of the build, namely, the works below ground, including the basement excavation and construction, while the adjusted contract sum was being determined. The total capital cost identified in the project brief was €983 million. As the tenders returned were substantially above the quantity surveyors' pre-tender estimate, there was pressure for cost reductions. The capital cost - €983 million - included a target amount of €66 million for cost reductions or value engineering. An additional cost - €61 million - was reported, mainly related to fire officer requirements, including sprinklers, and costs associated with programme alignment between the main contractor and specialists. The contract was signed with BAM on 3 August 2017 and work commended on site on 3 October 2017. At that stage we recognised that a major procurement exercise had been completed successfully and that it was a significant milestone for the project. We had begun construction. Let me give more detail on the second stage. At the same time works commenced on site, the contractors began the engagement on the design and development of phase B with the design team. The two-stage procurement process transfers the risk to contractors in regard to cost, quantities, co-ordination issues and project delays, unless caused by client changes or a lack of design information. As the design development progressed from October 2017, the design of earlier packages such as the concrete frame, the steel frame, stone cladding and internal walls was completed and costed and trending within expected costs. This trend changed by mid-2018 as the design of the very complex mechanical and electrical systems – there are 24 in total – was completed and it became clear that there was a very significant gap developing between the estimated quantities at tender stage and the quantities now required to deliver the completed design. With this very significant increase in project scope came the requirement for an extended programme and the costs associated with the programme extension and the additional scope. Working closely with the project team and external advisers, we scrutinised all costs as they became clear, dealing, first, with the increase in the construction cost which ultimately came to €320 million. The process of determining the cost of the various packages was fully interrogated and independent reviews were commissioned, validating the fitness for purpose of the mechanical and electrical design and reviewing the adherence to agreed procedures during stage 2. The contract allows the board, if it sees fit, not to proceed with phase B building works with the main contractor. Therefore, we explored the alternative options for project delivery, including not proceeding if it were deemed to be the correct option. It became clear after this exercise that the option of awarding phase B to BAM would result in the lowest cost and fastest completion by a significant margin. This is covered in slides Nos. 18 and 19 in the pack issued to members. On completion of the various exercises, the board was satisfied that, despite the great disappointment at the outcome, proper procedures were followed throughout the stage 2 process in determining the final contract sum. The correct option to complete the children's hospital was to proceed with phase B.
Following our meeting in November 2018, the board made a recommendation to the HSE and the Department of Health that the works should proceed as set out in the agreed tender process and that BAM should be instructed to proceed with phase B, the main building works.
I will go through some of the detail on the cost but we can go into greater detail later on. I will switch the two around in the sense that I will deal first with the construction costs at a high level. The sum of €570 million, which was included in the approval of the overall €983 million in early 2017, increased by €320 million up to €890 million. As I mentioned earlier, we had targeted savings of €66 million. At the end of the day we achieved €20 million. That added €46 million to the project. Statutory issues, such as fire regulations following the Grenfell fire and additional sprinklers, added €27 million to the project. Engagement with clinicians on the final design added a further €21 million. Between those three elements, €94 million was added to the figure of €570 million. In essence, the result of the stage 2 process, that is, the design and development element, accounted for an additional €94 million. There were omissions in the design at tender stage that were brought into the final design during the design and development process at a cost of €20 million. The impact of the nine-month extension of the programme and the additional scope added €90 million. Then, as happens in construction contracts, there were additional claims from the contractors to reflect the changes in scope. At the end of the day, through the intervention of the independent expert, they were settled and agreed at €22 million, which takes us up to €890 million. We can go into greater detail on that later.
As well as an increase in construction costs of €320 million, there were additional costs of €130 million. These included €50 million in VAT, additional costs on the satellite centres at Tallaght Hospital and Connolly hospital, staff, site supervision, design team, medical equipment and risk and contingency costs. The final project cost is now €1.433 billion, which is €450 million higher than the figure of €983 million approved by the Government in 2017.
Following the Government's approval of the investment decision, the phase B works and the main building works have now been instructed to BAM, with construction works of the main hospital on the St. James's Hospital campus to be completed in mid-2022. Close to the end of my submission I address benchmarking. In early 2014, the paediatric hospital board prepared a preliminary budget. That is detailed on slide 11. It showed project costs of €800 million. This was based on advice from AECOM, the quantity surveyors for the Mater children's hospital proposal. The estimate included construction costs of €2,500 per square metre, which was the appropriate cost at the time. We were in a deep deflationary period at the time. We allowed an inflation allowance of 3% per annum in accordance with the trend at the time. In the AECOM estimate, which totalled €800 million, there was an overall cost of €2,875 per square metre. An international benchmarking report completed by AECOM in October 2018 concludes that the average construction cost for an international hospital project similar to the national children's hospital is now €5,951 per square metre, more than twice the estimated cost of construction in 2016. Indeed, this is borne out by information from the industry on the decade up to 2022, which indicates that construction costs for large, complex projects in the Dublin area will have increased by up to 100%.
The cost per square metre for the children's hospital is €6,500.
It is above the average of €5,951 per sq. m but not above the maximum costs.
The timeline to deliver the new children's hospital from the appointment of the board in August 2013 to project completion in mid-2022 is a total of nine years. I am satisfied that the board and executive team have set about the task in a competent and professional manner, putting in place the most appropriate structures and processes based on best international practice. If we were to start again on a project of this scale and complexity we would adopt the same procurement approach. Notwithstanding this we are deeply disappointed and acknowledge the very significant cost increases and the challenges these pose. There are lessons to be learned regarding the wisdom of pursuing cost reductions on competitive tenders and ensuring the sufficiency of tender information, in particular, mechanical and electrical services at tender stage. This would have ensured a more accurate prediction of actual quantities and costs at the tender stage and, to a large extent, would have reduced the under-estimation of costs at stage 1.
With cost and programme certainty now achieved, our focus is on ensuring that all parties work safely and collaboratively and deliver a hospital of outstanding quality in a project of which we all will be proud, namely, one of the finest children’s hospitals in the world providing unsurpassed care for the nation’s sick children for generations to come. At the same time, we are mindful of the Government's concerns to ensure the project is indeed delivered within the agreed time and within the revised budget. We welcome the planned independent review of board’s processes and procedures. Any issues identified will be dealt with speedily and comprehensively in the interests of successful completion of the project and the effective management of public funds.
I thank the members of the committee for their attention. My colleagues and I will be delighted to answer any questions they might have.