Editor’s comment:
In our last issue, Rail Engineer published various articles highlighting the ever-increasing cost of rail infrastructure projects. Over recent years, this has been addressed by initiatives such as Project Speed. We have also reported how lessons have been incorporated in future projects as shown by the ‘Cost-effective electrification’ feature in the last issue.
Despite this, costs continue to rise. Indeed, this was a recurring theme of the Railway Industry Association’s Annual Conference. A personal view of what should be done about rising costs is presented below by Michael Byng who has many years’ experience as a quantity surveyor within the industry.
Michael’s feature is critical of the processes for developing and managing infrastructure projects. However, as he points out, his feature is not intended to be critical of individuals within the industry.
Although Rail Engineer is a friend of the industry and glad to promote its many achievements, we also consider it important to address issues that threaten the industry’s long-term future. Hence the publication of this article.
Let us know your thoughts about current project costs and this feature by emailing [email protected].
An anniversary of railway construction
This year, as we celebrate the 200th anniversary of the railway industry, we reflect on the postponement and cancellation of much-awaited major projects and severe cuts to Network Rail’s maintenance budgets. A sad situation indeed.
We do not appear to have learned from the experiences of George Stephenson who preferred the employment of direct labour to control costs nor those of Isambard Kingdom Brunel or Robert Stephenson, both members of ICE, who favoured the concept of general contracting to manage construction costs.
The anniversary will be enjoyed and will pass into memory, though the absence of investment in the rail industry will not be enjoyed nor will it escape our minds. The future of the railway industry and its supply chain depends on getting the costs of new construction and maintenance under control.
Excessive costs
But why are costs so high and what can we do to reduce them?
We must first accept that they are too high and agree that they must be reduced, without these acceptances, nothing will happen, the lack of effective action to reduce costs over the past 25 years will result in ever increasing costs.
Within the railway construction industry, the reasons are clear:
- Shortage of professional staff with adequate construction technology experience.
- Dearth of quantity surveyors with adequate measurement and construction valuation skills.
- Insufficient sharing of best construction practice within the industry.
- The use of forms of engineering construction contracts which work against public interest and escalate costs.
- The disconnect between the supply side of contracts with those responsible for delivery and use.
- The separation of those preparing the business case for investment and those responsible for delivering it.
There are other problems such as the difficulties with the planning system in Great Britain, but they fall outside the scope of this article.
Need for change
Aside from reducing costs and times taken for project delivery, there are other pressing reasons why the industry must change.
Since the inception of the HS2 project in 2013, it has attracted a generation of young people who have put themselves through further education at considerable expense to themselves in time and financially. They have graduated and joined professional institutions only to find themselves working on projects using methods and processes created in the last century. There appears to be considerable resistance to the use of the IT skills learned in further education, as well as project delivery processes that make good use of them.
My perspective
I approach these problems from the perspective of a simple quantity surveyor, but my experience, over more years than I care to remember, has provided me with a detailed insight into cost and its exponential increase, in real terms excluding inflation, over the past 25 years. By kind permission of Network Rail, I was employed to draft and write the Rail Method of Measurement (RMM) and then to help introduce it, encourage its use, and monitor its development.
The content of RMM took account of the modern methods of construction in use in the railway industry and the emergence of technology which did not exist 50 years ago.
The principal changes have involved the increased use of IT processes for railway control systems and operational telecommunications, which, over the past 25 years, have altered the balance of project cost. With the emphasis on higher line speeds and the need to obtain greater use of available capacity, the percentage of project costs of these works has increased, in new works, to almost 65% of total construction costs. In works to enhance existing railways the percentage is even higher.
Those on the purchase side of the industry have not come to terms with these increases and do not appear to have made any real attempt to understand them.
Shortage of competent staff
Introducing RMM was a revelation, and it quickly became apparent, in 2015, that the number of quantity surveyors and cost engineers who understood the concepts of approximate estimating and cost planning was extremely limited indeed. My best assessment, at the time, was that only 15% of those engaged on commercial project appraisal had the necessary level of competence to do so. With the advent and continuation of the HS2 project, the situation has not improved. If anything, it has become more dire.
Failure to learn from best practice
Where there have been successes, such as the ability of Transport Scotland to deliver overhead line electrification quickly and economically, and the analysis of costs of similar works in the ‘Electrification Cost Challenge’, published by the Railway Industry Association in 2019, there has been insufficient transfer of lessons learned into proposals for new projects.
The industry is paying lip service to the abundance of cost data held by Network Rail going back to Railtrack days, which should be incorporated into an industry-available cost library. This database would be like the Building Cost Information Service (BCIS) created by RICS in 1961, which has allowed generations of quantity surveyors working in the building industry to learn from experience and avoid problems with future work. Network Rail has made a start with its Benchsmart system, which could be shared with the industry.
Forms of construction contract
So far, I have discussed the appraisal of projects but what happens when contracts are let to deliver them? In 2005, the publishers of the NEC Form of Contract, claimed that it was not only a new form but created a much-needed project management tool. Who, on the client side, had asked for it? Why was there a need to introduce this form, when there were perfectly adequate existing contracts – adequate that is – if the preparation of designs and definition of scope of work was done properly?
The incorporation of project management into the NEC Forms created another level of bureaucracy, which was unnecessary. It led to contractors having to man-mark the client’s professional advisors, with the resulting increase in expensive overhead costs. The NEC also offered ‘Target-Cost’ and ‘Cost-reimbursable’ options both of which removed much of the traditional risk from contractors, without providing clients with any better cost certainty with what they had enjoyed with previous forms.
Successful use of these contract options, attached to any form of contract, require a level of competence in quantity surveying and estimating that has been declining for years. With the decline in measurement and estimating competencies amongst quantity surveyors and cost engineers, the result has been ever-increasing cost, which clients are not able to afford – witness the saga of the HS2 project.
The problems with railway projects are like those of the highways and power generation sectors – the works are only of use to the purchasers, when they are available to deliver the services for which they were planned. The forms of contract, used in each sector, especially the NEC Form, do not recognise that need. The result is that the purchaser, usually the state, is bound to continue paying the supplier, when it has no certainty of outturn cost, and not certainty of when the works will be delivered for successful operational use. There is a basic disconnect.
This disconnect is calamitous if the Government seeks to attract private investment into the railway construction market and to other infrastructure sectors.
Separation of project appraisal and delivery
Any review of the cause of these excessive costs must consider the project creation and delivery processes. Unlike HS1, those advisors who worked on the project appraisal process for HS2 also became involved in its delivery. Given the shortage of competent professional staff available to the industry, this was inevitable. The immediate conflict of interest is clear. The temptation, when preparing the project appraisal, to ensure the project gets the ‘go-ahead’ with the guarantee of future fee income is irresistible.
Effects on Department for Transport and HM Treasury
With all these problems, the much-criticised spending departments of Government and HM Treasury, the provider of funds, face tough decisions when writing business cases for projects. They have little confidence in estimates of cost given to them and the assessment of risk included in them, and they acknowledge the conflicts of interest in project appraisal, leading to the use of the ‘Optimum Bias’ process in which large additions are made to estimated project costs, whether they are adequate of not.
The result? The monies set aside for approved projects are dramatically overstated at the expenses of other worthwhile projects for which there are no funds left.
So far, I have looked at the problems leading to this cost problem, but what are the solutions and who can deliver them?
What are the solutions?
The shortage of competent professional staff needs to be addressed immediately. Organisations, which have critical mass in the employment of staff and the appointment of advisors must insist that all are fully competent in measurement and estimating. The requirement must be part of the conditions of employment for staff employed by client organisations and by independent consultants alike.
This is the first step. The second comes in the training given at universities to would-be quantity surveyors and cost managers. Universities wanting their course to be accredited by the professional institutions must include ample and sufficient periods of their courses to teaching measurement and estimating skills.
The onus to ensure this happens falls on the professional Institutions, ICE, RICS, CICES, and CIOB. Of all of them RICS has the largest burden, as it is the only Institution which is “Designated Regulatory Body” with the power and obligation to monitor and regulate its members providing these services.
Regulatory standards needed
To regulate, there are readily available transparent standards for measurement. ICE and RICS are set up to produce and publish them. RICS alone can regulate their use. Providing adequate measurement and valuation standards by RICS is essential if we are to separate services of project creation from those providing project delivery.
Contracts emphasising project delivery
Finding suitable forms of contract, which link supply and delivery, is a matter for the industry. The NEC forms have had their day, to be replaced by lump sums forms of contract, which link payment to the supplier to the delivery of useable assets to the purchaser. This change assumes greater importance if HM Government is to persuade private investment to fund public projects.
Conflicts of interest
Addressing the issue of conflict of interest in project appraisal and delivery is partly solved by the creation of a wider pool of competent professional resources who prepare feasibility studies. For future projects there must be a clear requirement that businesses preparing appraisal or assisting in their preparation are excluded from delivering the project, once created.
Moving from the analogue to the digital age
Why is need for these reforms so urgent? Without them the industry remains overpriced and under-productive. In free market terms, experience has shown us that if a product takes too long to deliver, is too complicated to deliver, or is too expensive, then market forces will create the change to remove the product.
Without major change, projects in Great Britain will be unaffordable or the number commissioned will be small due to the limited funds available. Private investors are unlikely to be attracted to projects which are to be delivered on the processes we use today.
The processes we have in use and the manual way in which we use them, belong to the analogue age. Accepting the changes I have suggested and using modern AI-derived IT to deliver them, would see the industry move to the 21st century and the digital era.
The prize for change?
There are several prizes – main prizes, in fact. The first is that the industry delivers more projects for more regions of the country and, by avoiding the type of cutback suggested recently in the press, we continue the transfer of practical knowledge to the next generation. We shouldn’t overlook that by improving the industry’s delivery success rate we reward the new entrants to industry, joining in the last 15 years, with rewarding careers that make best use of their modern expensive education.
Although my suggestions are far-reaching, there is no criticism aimed at any part of the industry.
Guest writer: Michael Bying
Michael Byng is chartered quantity surveyor, practising internationally in the rail sector. He is managing director of MBPC Infrastructure Ltd. His focus is developing Total Cost Management services on the basis of 30 years’ experience as a construction economist and quantity surveyor. His work includes developing a standard for the valuation of railway construction works for Network Rail, acting as an expert witness in contract litigation, and preparing evidence for the HS2 Oakervee report.