The authority deeply regrets that the error occurred in a key process relating to the implementation of the national road improvement programme and that there should have been such serious consequences for public funds which clearly could have been used to better effect in upgrading the road network. In view of the gravity of the matter, I will set the matter in context and outline in some detail the relationships between the public bodies involved, the tender award process and the compensation award as well as the steps that have been and are being taken by the authority to strengthen procedures and ensure that public funds are not exposed to similar risks in future.
The committee will be aware that, under the Roads Act, 1993, the National Roads Authority is responsible for ensuring the provision of a safe and efficient network of national roads. The Act places a legal obligation on the authority to arrange as far as possible for many of its functions, including project planning and design and construction and maintenance works, to be performed by the relevant local authority. This is provided for in section 19(2) of the Act. The authority generally operated on this basis.
The scale and pace of activity and the size of national road projects have expanded greatly since the establishment of the authority in 1994 with implications for the extent and complexity of work to be delivered by local authorities. Pressures have intensified because of the emphasis on accelerating the planning and delivery of road projects at a time when local authorities are experiencing difficulties in seeking to maintain their staff complements at authorised levels. The trend towards larger projects is set to continue against the background of the conclusions of the national roads needs study which was published in 1998 and the Government's policy and funding commitments for national roads as set out in the National Development Plan 2000-2006.
The authority recognised that the traditional reliance on the in-house resources of individual local authorities could not ensure efficient delivery of an expanded road programme. An alternative approach involving the establishment of national road regional design offices was accordingly developed. The regional design office structure has been actively promoted by the authority as a mechanism to deliver the national roads improvement programme in anticipation of the significant expansion in the roads programme as provided for in the NDP. To illustrate this, expenditure on improvement works over the period 2000-2006 will be £4.4 billion in 1999 prices compared with just under £1.5 billion between 1994 and 1999. The authority moved to augment the four original offices by establishing a further seven offices in the past 12 to 18 months. In addition, the role of the offices has been altered so that the emphasis is now on project management with planning and design work largely carried out on behalf of the offices by consultants.
Local authorities have responded positively to the authority's promotion of the concept of national road regional design offices. Each office caters for a number of local authorities. For example, as the Comptroller and Auditor General said, the Mungret office has served Clare, Limerick and Tipperary North Riding county councils as well as Limerick Corporation. The personnel of the offices are local authority personnel and are formally part of the staff complement of the participating local authorities. The staff concerned are seconded to the lead local authority for each of the regional design offices, and it is that local authority which is primarily responsible for staff matters and day-to-day operations within the design office. These arrangements are underpinned by agreements entered into by the local authorities concerned under section 59 of the Local Government Act, 1955. Salaries and operating costs of the regional design offices are financed in full by the National Roads Authority to the extent to which work relates to national road projects.
The authority, together with senior officials of the participating local authorities, is represented on management committees that oversee at a strategic level the implementation of the work programme of each regional design office. In this way, the authority is in a position to promote alignment of work programmes and the priorities of the national road improvement programme as established under the NDP in operational programmes or, as appropriate, by the authority itself.
Tenders for major road projects are submitted to the client local authority. There is a variety of procedures in place in different local authorities for opening the tenders submitted, for example, at a full meeting of the elected council or in the presence of selected elected members and officials. Regardless of the procedure used, there is a tendency for details of the tender prices to come into the public domain. The tender documentation is then sent for checking, evaluation and recommendation under the supervision of the responsible project engineer in the local authority concerned or by consultants where they are engaged on the project. The process is undertaken to ensure that tenders are in compliance with the rules set down in the instructions to the people who tender for jobs known as CONDOC. The authority and the Department of the Environment and Local Government liaise closely on the operation of CONDOC which is used for civil engineering works in the roads and sanitary services area. For its part, the authority has promulgated CONDOC to local authorities since its establishment in 1994 and insists on its use for national road projects in the interests of consistency in the tendering process.
The checking and evaluation involves completeness of tender documentation, correctness of any arithmetical errors found in the submitted tenders, examination of abnormally low rates and so on. In an open tendering procedure, it is also necessary to establish that the person whose tender is under consideration has the necessary resources and is competent to undertake the works. Project managers within the NRA are closely involved in this process offering advice on precedent, interpretation and so on. Advice may also be sought from other authority personnel, including our senior project managers, contract specialist, or head of project management and engineering. Internally, advice is sometimes taken from the authority's legal advisers, but generally local authorities are encouraged to engage their own advisers when contentious issues are identified.
Once an understanding is reached between the project engineer and the NRA project manager on the specific issues requiring attention or clarification, a tender report prepared by the local authority or the national road regional design office goes to the relevant county engineer for endorsement and recommendation in relation to the award of the contract and is subsequently submitted to the county manager for acceptance and signing of a formal manager's order. The approval of the NRA usually follows quickly given the involvement of authority personnel in the process.
In September 1998, Limerick County Council, with the approval of the authority, entered into a contract with Pat Mulcair civil engineering and building contractors for the construction of a section of the N20/N21 route between Adare and Limerick. The value of the contract as awarded was slightly in excess of £33 million. The award of contract was made on the basis that the Mulcair tender was the most economically advantageous tender submitted. In reaching that conclusion, account was taken of the fact that the firm's tender was the lowest available following correction of mathematical errors in the tenders as received in accordance with standard practice. Arithmetic checks and correction of errors were carried out in the Mungret regional design office. The checking process involved a total of more than 5,200 calculations in respect of each bill of quantities. Each bill contained 899 pages.
When the tenders were initially opened by Limerick County Council, the tender total of SIAC Construction Ltd. was approximately £26,000 lower than Mulcair's based on uncorrected tender amounts. However, during the checking process, it was discovered that an amount entered by Mulcair in respect of flexible surfacing materials on the summary page of a part of the bill of quantities differed from the page total. The error amounted to £40,320 and its correction in the Mungret office had the effect of reducing the Mulcair tender total by that amount, so that Mulcair's tender total became the lowest.
During the period of checking, authority personnel were advising Mungret personnel on particular items as brought to their attention. Mathematical corrections and abnormal rates were discussed and reviewed, including the correction that had the effect of reversing the respective placing of SIAC and Mulcair. Based on the outcome of the checking process the Mungret office prepared a tender assessment report signed by senior office personnel and senior officials in Limerick County Council as the project would be constructed in County Limerick, recommending the award of the contract to Mulcair. The report constituted the basis for the Limerick county manager's decision to award the contract to Mulcair and to seek NRA approval for this.
The authority's consideration of the proposal primarily involved checks to confirm the capacity and competence of the people who tendered to undertake the project, that issues arising in relation to CONDOC had been properly addressed and that, on this basis, the council proposal to award the contract to Mulcair was in order. As a matter of standard practice, the authority relies on arithmetic checks made by local authorities in respect of bills of quantities for the purpose of ranking those who tendered in order of corrected tender totals and consequently does not carry out arithmetic checks itself.
SIAC's tender was lower than Mulcair's, based on the uncorrected tender amounts. In these circumstances the company would have had expectations that its tender would have been accepted. When it became apparent that this was not the case I queried the position. The matter was subject to a meeting with Limerick County Council officials. There was also contact at the time between the company and the authority's senior project manager for the project in relation to the well established practice of correcting mathematical errors found in the submitted tenders.
SIAC's interest in the matter appeared to end at this point. However, in March 1999 SIAC initiated High Court proceedings against Limerick County Council because they were not awarded the contract. SIAC indicated its intention to seek a review of the award process, alleging the council had failed to fully comply with EU Directive 93/37, known as the Works Directive, as amended. Court declarations were sought to the effect that rejection of SIAC's tender was null and void and the award of contract to anyone who tendered other than SIAC was null and void. Among the points relied upon by SIAC in its court action was one alleging that the correction of the bill of quantities was done in a manner not envisaged or provided for by the instructions to people who proposed to tender. SIAC also lodged a claim for damages in the sum of £12.5 million.
In February of this year the authority was notified by Limerick County Council that in the context of its preparation for the High Court proceedings an error was discovered in the Mulcair tender which had gone undetected at the time of the award of contract. The error occurred in part 28 of the bill of quantities which dealt with public lighting. This consists of two sections: section 05 which deals with civil works and section 28 which deals with electrical works. The section 05 total was not carried forward and included in the overall part 28 total thus understating the amount of the Mulcair tender. The amount involved, £42,700, was sufficient to reverse the placing of the Mulcair and SIAC tenders making the latter the lowest. A further independent check of both the SIAC and Mulcair tenders confirmed that the tender totals, as then established, were accurate.
The authority's legal advisers were consulted and the view was given that while SIAC would be unlikely to obtain exemplary damages they would, in all probability be awarded substantial compensation for not having won the contract to which they were entitled. Preliminary calculations undertaken at this stage indicated that an award in the range of £3 million to £4 million would be realistic. The additional cost associated with such a case would be of the order of £500,000. A detailed risk assessment was undertaken independently on behalf of Limerick County Council. The SIAC annual accounts were examined as were trends in profit margins among other factors and the likely compensation was identified as being in the range £1.8 million to £3.8 million. Again, costs could have amounted to an additional £500,000.
Against this background NRA advisers and executive as well as Limerick County Council considered it prudent to have the damages assessed by way of a conciliation procedure conducted by a recognised expert in construction litigation. Such an option had the advantage of being less expensive than recourse to the courts while any emerging recommendation could be rejected by either party if considered unacceptable. A UK construction specialist and Queen's Counsel was appointed as conciliator. The conciliator's recommendation was for the sum of £3.15 million to be paid by Limerick County Council to SIAC Construction Limited, in full and final satisfaction of all its claims in the conciliation and in its High Court action arising out of and/or in any way related to the failure of Limerick County Council to award the Adare to Limerick Contract No. 2 to SIAC.
The amount recommended was determined on the following basis. Under the heading of loss of profit the conciliator concluded that SIAC was entitled to loss of profit as damages for breach of statutory duty. In arriving at the award amount the conciliator used a profit figure of 5.7% on the agreed likely project outturn cost of £43.5 million. Under the heading of overheads the conciliator calculated that a sum of £435,000 should be paid to SIAC to compensate for the contribution which the contract would have made to the company's overheads. In relation to interest the conciliator decided that it was fair and equitable to allow interest at 8% on the total award for loss of profits and overheads. That combined total was £2,914,500 for five months, giving an interest element of £97,150. The period involved took account of the fact that only 20 months of the road contract period had elapsed since the award of the contract and that a contractor would not have begun to generate profit until some time into the work. In relation to legal costs the parties to the conciliation agreed that £100,000 would be paid to SIAC in respect of its legal costs up to the decision to go to conciliation. In relation to other SIAC costs the conciliator awarded £38,350 in respect of the costs of the managing director and a director of SIAC in dealing with the case. He described the award as modest in all the circumstances. The foregoing elements account for the conciliator's total recommended award of £3.15 million. The conciliator decided not to make any award in respect of other elements of SIAC's claims. These concerned loss of profits on the estimated value of contracts which the company would have been in a keener position to price if it had been awarded the Limerick contract, other estimated consequential losses and exemplary damages.
In considering the recommended award the conciliator observed that it was a matter for both parties to have regard to the time and any recoverable costs involved in the event of the matter being pursued through the courts. He concluded that the loser would have to pay costs of at least £1 million. In the context of the costs associated with a continuing High Court action and the conciliator's clear statement that his quantification and recommendation was arrived at by "applying law and logic and not speculation" and that "both sides would be unwise to reject the recommendation" the NRA executive was satisfied that the figure of £3.15 million was reasonable and that it would be unwise for Limerick County Council not to accept it.
Limerick County Council applied to the authority in June of this year for assistance in view of the size of the conciliator's recommended award and taking account of the limited insurance cover held by the council, which amounted to £250,000. The authority considered the position at its board meeting on 20 June of this year. The board accepted the executive's view that the conciliator's recommendation was reasonable in the circumstances and that it would be unwise not to accept it. The authority took into account the opinion of its legal advisers that the award represented more economically advantageous settlement terms than were likely to be available from the courts. Having regard to all the circumstances including the important role of Limerick County Council and the Mungret NRA regional design office in the delivery of the authority's road improvement programme, the establishment and operation of the Mungret office with the support of and ongoing input from the authority, the unprecedented scale and pace of the current national roads programme, the established practice whereby all costs associated with the national roads programme are met in full by the authority, the multiplicity of local authorities involved in and served by the Mungret office, that is Limerick, Clare and Tipperary North Riding county councils and Limerick Corporation, the inadequacy of the insurance cover held by Limerick County Council and by other local authorities generally and the role of the authority in the tender award process in this case, the authority concluded that a contribution of £2.88 million should be made towards the conciliator's recommended settlement of £3.15 million and the county council's costs of about £50,000. The proposed contribution reflected consideration of the totality of the issues involved as outlined.
As the authority's proposed contribution towards the conciliator's award and related costs did not come within the standard remit of subhead C1.1 of the Department's Vote and the funding allocated thereunder to the authority for the improvement of national roads, the approval of the Minister for the Environment and Local Government was sought to the proposed payment. This was conveyed on 4 July 2000 following the issue of Department of Finance sanction the previous day.
The failures in the Adare-Limerick road improvement contract award process by the Mungret office are a matter of serious concern to the authority. The authority has raised the matter with the Limerick county manager given that council's lead role and responsibilities in staffing and operation of that office. The county manager has been asked to address the question of disciplinary or other action which may, in his judgment, be appropriate to the individuals involved in this case having regard to the relevant circumstances and to ensure effective checking procedures are followed in the future. I understand the county manager's investigation is ongoing. Based on the investigation of the tender award process, the authority considers that the failure of the Mungret office to properly check the Mulcair tender can be ascribed to human error.
In the light of the experience in this case, the authority has taken steps and is pursuing other matters to strengthen practices and procedures and to further clarify roles and responsibilities of local authorities, national road regional design offices and the NRA. These measures include the assignment on a full-time basis of a senior project manager within the authority to deal with procurement and contractual matters; clarification and strengthening of procedures used by local authorities in tender checking and award procedures, including attention to competence and previous experience and-or training needs of personnel involved; introduction of independent checks to verify checks of tenders made by local authorities; uniform adoption of electronic rather than manual checks of tenders; accelerated introduction of electronic tendering - the process is being tested and will shortly be piloted on a project on the N5 with a view to adoption as standard practice as soon as possible; greater standardisation of local authority practices regarding any publication of information relating to uncorrected tenders; the putting in place of indemnity cover where services are provided for the authority by local authorities and regional design offices, and the review and clarification of operational arrangements, responsibilities and relationships as between the local authorities involved and between local authorities and the authority in respect of national road regional design offices. The lead local authorities for these offices are working with the authority in this.
I thank you for this opportunity to put the facts on record and to outline the steps taken to avoid further compensation awards in respect of national road contract procedures which could constitute a demand on public funds. I reiterate the authority's sincere regret that failures in the process for checking tenders in this case had such consequences for the Exchequer. We are determined that improvements in procedures will prevent a similar failure in the future. The steps taken and those being pursued will be effective in meeting the challenge presented to the authority and local authorities in this regard.
