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 costs | Cost of not defending
the claims
| Financial benefits
to the NHS |
| £000s | £000s
| £000s |
| | |
|
| Total cost of Phase III1 | 151.8
| 151.8 | |
| Additional fees2 |
| 5.7 | |
| Less fees included in main contract |
| -1.8 | |
| | |
|
| Sub-total | 151.8 | 155.7
| |
| less | |
| |
| Fees Waived3 | -1.8
| | |
| Cash settlement | -3.0 |
| |
| Costs recovered | -4.8 |
| |
| | |
|
| Total cost of Phase III | 147.0
| 155.7 | 8.7 |
| Cost of litigation | 3.6 |
40.7 | |
| | |
|
| Total costs | 150.6 | 156.4
| 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
| 
