Select Committee on Public Accounts Minutes of Evidence


Memorandum by the Comptroller and Auditor General

INTRODUCTION

  1. The Guy's Phase III capital project had a long and complex history. It was completed in April 1997, some three years and four months late, at a total estimated cost of £151.8 million—£68.7 million more than the approved budget cost, and with a funding gap of £26.5 million. The full history is detailed in the Comptroller and Auditor General's Report (HC 761, Session 1997-98 dated 10 June 1998).

  2. In his report, the Comptroller and Auditor General set out the extensive difficulties experienced during the project. However, he did not seek to apportion blame as these matters were by then the subject of litigation.

  3. This memorandum summarises the results of the litigation and the terms of the out of court settlement, and updates information in the Comptroller and Auditor General's Report on the total cost of the project and the funding gap.

BASIS OF LITIGATION

  4. At the time of the Comptroller and Auditor General's Report:

    —  P&O Developments had issued a writ for £3.4 million against the Guy's and St Thomas' Trust for additional/unpaid fees on the project.

    —  Austen Associates were pursuing a fee claim of around £2.3 million against the Trust.

    —  The Trust had issued a Defence and Counterclaim against P&O Developments and Austen Associates for damages of upwards of £20 million.

    —  In terminating the appointments with effect from October 1996, the Trust withheld £1.8 million estimated as the outstanding fees due to P&O Developments and Austen Associates (compared with the £5.7 million they claimed was due).

PROCESS OF LITIGATION

  5. The process of litigation, in cases involving commercial disputes of this nature, is lengthy and complex. Court proceedings began on 25 April 1997, with P&O Developments seeking a decision that the Trust had no defence and the action should be decided in their favour immediately. In the event P&O Developments dropped this claim, and the time in front of the judge was used to explore preliminary issues.

  6. The trial was due to start in January 1999 and was expected to take 8-10 weeks. The processes—for pleadings to be made; further and better particulars explored, the discovery of documents; amended defence and counterclaims; witness statements to be exchanged; and expert "without prejudice" meetings to narrow the issues—proved very time consuming. This led to significantly increased fees for the Trust and increased the estimated length of the trial to 22-26 weeks.

MEDIATION

  7. The Trust's original claim for damages in 1996 was based on legal advice that it's claim was a reasonable negotiating position, but that a realistic estimate of recovery was a maximum of £7.5 million. However, the advice of the Trust's lawyers, Rowe and Maw was always that there was merit in reaching an out of court settlement, provided such a settlement was within reasonable parameters. After protracted legal processes, a process of mediation was established and meetings were held in October and November 1998.

OUTCOME OF MEDIATION

  8. The outcome of the mediation was a provisional offer to the Trust of £3 million (£2.1 million payable by Austen Associates and £0.9 million by P&O Developments) to settle the action. Austen Associates and P&O Developments also agreed to withdraw their fee claims of £5.7 million. However, each party would meet their own legal fees. The value of this negotiated settlement to the Trust was £8.7 million: offsetting this were the additional costs of defending and counter claiming, estimated at £2.9 million, giving a net financial benefit to the Trust of £5.8 million.

APPROVAL TO AGREE TERMS OF SETTLEMENT

  9. In November 1998, the Trust informed the NHS Executive, on the basis of legal advice, that taking into account the higher legal costs of a full hearing, the £3 million cash offer was within the range of likely outcomes (from zero to £6.5 million) from litigation. In addition, not proceeding to trial would save substantial uncosted amounts of management time within the Trust thereby enabling it to concentrate on the core tasks ahead. These tasks include the management of a further capital redevelopment for which the full attention of the most senior managers within the Trust was required.

  10. The NHS Executive approved the proposed settlement and sought authority from Treasury to settle at the £3 million cash figure. Treasury accepted the expert advice and NHS recommendations and gave verbal approval to the proposed settlement on 10 December 1998. This was subsequently confirmed in writing.

FINAL COST OF GUY'S PHASE III

  11. The estimated cost of Guy's Phase III, as reported by the Comptroller and Auditor General in June 1998, was £151.8 million. The settlement, including the agreement to waive fees, reduced the cost of building Phase III to £147 million (Annex A, column 2) plus £3.6 million of litigation costs. Had the Trust not defended the litigation the cost would have been £5.8 million more (Annex A, column 3) than the total costs of £150.6 million.

IMPACT OF THE SETTLEMENT ON THE FUNDING GAP

  12. The final project cost of £150.6 million is still £25.3 million more than the agreed funding of £125.3 million. This gap has been met from under-spends on capital programmes elsewhere in the NHS (EFL brokerage).

  13. The Trust is currently negotiating with the NHS Executive to reach a final agreement on how to account for this shortfall.

OVERALL IMPLICATIONS OF THE SETTLEMENT FOR THE GUY'S PHASE III PROJECT

  14. After mediation, the final cost of the Guy's Phase III project is still £67.5 million more than the approved budget cost.

  15. The reasons for the cost increase and the three years and four months delay remain as detailed in the Comptroller and Auditor General's Report. However, as the litigation was resolved through mediation, there was inevitably some measure of compromise and it is not possible to apportion full responsibility for the time and cost over-runs. While the settlement does not exonerate the NHS from their own failures in managing the project, particularly in the early planning and financing, it does demonstrate that some responsibility lay with the private sector.

  16. The conclusions reached and the action recommended in the Comptroller and Auditor General's Report still apply. Overall, the scale of the cost over-runs and the length of the delays illustrate graphically the need for very firm control of major publicly funded building projects.

ANNEX A

COSTS OF GUY'S PHASE III
Comparison of the benefits of the Trust pursuing the litigation compared with not defending the claims against the Trust
Actual costsCost of not defending
the claims
Financial benefits
to the NHS
£000s£000s £000s
Total cost of Phase III1151.8 151.8
Additional fees2 5.7
Less fees included in main contract -1.8
Sub-total151.8155.7
less
Fees Waived3-1.8
Cash settlement-3.0
Costs recovered-4.8
Total cost of Phase III147.0 155.78.7
Cost of litigation3.6 40.7
Total costs150.6156.4 5.8
Notes:
1 The out-turn cost as reported in the Comptroller and Auditor General's Report HC 761.
2 P&O Developments and Austen Associates issued writs for additional unpaid fees of £5.7 million which was £3.9 million more than the £1.8 million that the Trust had included in their estimated costs of the project as legitimately due to the two parties.
3 P&O Developments and Austen Associates agreed to waive their fee claim of £5.7 million, which include the £1.8 million that the trust had accepted was legitimately due to them.
4 The trust calculated that £0.7 million in legal costs would have been incurred in deciding whether to pursue the litigation.
Source: Guy's and St Thomas' Trust and NHS Executive.


  The benefits of pursuing the litigation were £5.8 million, after allowing for the costs of the litigation.

National Audit Office

March 1999


 
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Prepared 2 September 1999