Examination of Witnesses (Questions 1-19)
SIR WILLIAM MCKAY KCB, MR ANDREW WALKER, MR MICHAEL BARRAM, MR HENRY WEBBER AND MR ANDREW MAKEPEACE
WEDNESDAY 15 MAY 2002
1. Good afternoon, and welcome to the House of Commons Public Accounts Committee. Today we have what I suppose is rather an historic hearing on the construction of Portcullis House, which I think will prove extremely interesting. We are very pleased to welcome Sir William McKay. Welcome to our Committee, Sir William. Would you like to start by introducing your colleagues?
(Sir William McKay) Thank you. On this side of the table is Mr Andrew Walker who is Director of Finance and Administration. Next to him is Mr Michael Barram, Director of Finance Policy, Mr Henry Webber who is Director of Estates, and Mr Andrew Makepeace who is Project Sponsor for the building.
2. Thank you very much. Perhaps I could ask you to start, Sir William, by looking at page 18, in particular looking at paragraph 2.12. I really want to start by asking you about London Underground, because they told you in June 1996 that they would not be able to hand the site over to you on the planned date of 2 February 1997. What was done, Sir William, to monitor London Underground's progress in building the underground station so that you had early warning of any delays?
(Sir William McKay) Chairman, there were constant, regular hearings before the Accommodation and Works Committee which is one of the Domestic Committees of the House, which was anxious to know when we were going to get on site. It was consistently told that the initial estimate would be adhered to and was suddenly, I think, told that it would not. So the work on monitoring London Underground's ability to keep to its word was undertaken by the Accommodation and Works Committee.
3. Did you do anything to test the assurances given to you, by some sort of independent review?
(Sir William McKay) I think it would have been difficult independently to challenge the assurances given to us by London Underground at a very high level indeed. It was their site and we were aware of all the concern felt about this by Members and LUL whose interests were, in a sense, convergent with ours.
4. Could I ask a question now on costs of the scheme? If you turn to page 1 of the Comptroller's Report and look at paragraph 2, you will see that the final cost of the building is likely to be 18 per cent over the forecast made when it was approved in 1993. Do you think that you gave enough attention to keeping costs under control?
(Sir William McKay) I think we did, Chairman. The 1992 figures were uprated for inflation when we knewbut we could do that only when we knewthat building was about to start. There followed some changes made by the proper authority of the House, namely on the authority of the House of Commons Commission, which we can go into, but in general I would not wish the Committee to get the impression that this was a project the parameters of which were constantly changing or the costs of which were constantly going up. I do not think that would be the case. Wherever changes were made with a cost consequence, the authority was given first before any work was undertaken.
5. Perhaps I can look at these costs in a bit more detail. If you now turn to page 30 and you look at paragraph 3.32, this is again concerning the late handover of the site from London Underground. Obviously the House incurred significant costs as a result of this. What proportion of the cost of the London Underground delay do you hope to recover?
(Sir William McKay) We hope to recover as liquidated damages something approaching £3/4 million.
6. I thought that would be the answer, but the total cost to you is approaching £9 million. Is not the problem that you entered into an agreement that you would limit the amount of damages you could recover from London Transport, and as a result the House has lost up to £8 million?
(Sir William McKay) Chairman, as the Report itself shows, we did take legal advice which was clear to the effect that liquidated damages could be established only for future events that could reasonably be anticipated at the time, rather than all conceivable events, and so the critical element in determining all of this is the time at which the London Underground delay occurred in relation to our programme. If that delay had occurred earlier on in the procurement programme, then we could have adjusted the programme, but because it came at the end of their construction work and the start of our work, we had less chance to reduce the impact on our costs.
7. But the fact of the matter was that it was only because you had actually signed a contract limiting how much you were entitled to reclaim or claim from London Transport that you met this problem. If you had not signed this contract, you would be in a position to claim up to £9 million back from London Transport; that is right, is it not?
(Sir William McKay) As I say, I think the legal advice was that the liquidated damages which we were signing for were all related, I suppose, to anticipated trouble of the kind that transpired, could not cover anything else other than the anticipated events.
8. All right, we can perhaps come back to that later, if we need to. Can I ask you now to turn to page 46 and look at paragraph 5.27. I would like to ask you about the Harmon case which was a failure to use correct procedures in the procurement of fenestration, which cost the House £10 million in legal fees and out-of-court settlements, did it not?
(Sir William McKay) Yes.
9. Why were not correct procedures used?
(Sir William McKay) There was, I think, Chairman, a misjudgement at a period when the regulations in question were not so familiar to everyone in this business as they are now. The House was advised by its construction managing firm, and the House, Laings and Schal simply, I think, collectively made an error of judgement in using certain terminology in a certain way which was at odds with the requirements of the Public Works Regulations, and that was a fault. We had no optionthere would have been no alternative otherwisethe fault was admitted.
10. Why were the two bidders asked to bid on a different basis, because that is what happened in the end?
(Sir William McKay) That is true. It was the judgment I think of the PWD at the time that this was the best way to meet the House's need in terms of procuring a roof and a fenestration which we wanted.
11. If you look at page 55, Appendix 4, which deals with this case, you will see what happened isand tell me if I have this wrong, but I think this explains this case in simple termstenders were originally asked for, then you retendered and basically only Seele/Alvis in the end was given a second opportunity to tender, an opportunity not given to Harmon, and that is why I asked you why the two bidders were bidding on a different basis. That is basically broadly correct, is it not?
(Sir William McKay) Yes, I think it is.
12. That is why, unfortunately, if you turn to page 56, you will see the judge in this case said that the House was guilty of the civil offence of dishonest abuse of the powers given to a public officer, which is a fairly serious matter.
(Sir William McKay) Indeed, but I think, Chairman, that was a considerable development from the technical fault of using wrong contractual language in terms of the regulations. The part of the judgment which you mention came as a considerable surprise to us. We anticipated that we would be held at fault for the breach of the regulations; we did not anticipate that the interpretation of that breach would be, as you have said, misfeasance in public office.
13. Mr Makepeace, were you under pressure from any Members to buy British?
(Mr Makepeace) No, Chairman.
14. There was no discussion during these events about the desirability of buying fenestrations from a British or largely British company?
(Mr Makepeace) No, Chairman. There had been discussions in the Accommodation and Works Committee about buying British, and discussions about what was a British company, which is very hard to define, but the Committee was made fully aware that we had to comply with the EU regulations.
15. But the fact of the matter is you did not comply with the EU regulations, indeed good procurement practice. That is correct?
(Mr Makepeace) That was found subsequently, yes, Chairman, but it had been open to competitive tendering the whole way through the
16. I will not pursue this any further. If colleagues wish to, they can come back to it. Can we look to the future on this case, Sir William, because we want to be positive about this. How confident are you that the mistakes of Harmon have not been repeated in other contracts?
(Sir William McKay) In other contracts on this building?
17. Yes, or other contracts in the future. In particular, can I ask you to refer to page 47 in the context of my question, and look at paragraph 5.29, where the NAO say, "We asked House officials what steps they had taken to assess whether any other contracts may have been subject to the same deficiencies. They told us that no such assessment had been undertaken ...", have you now undertaken that assessment?
(Sir William McKay) We have certainly taken steps, Chairman, first of all, to bring in a director of procurement with a central procurement advisory function. We have devised and circulated a standard procurement manual across the House and, after a thorough survey of the structure of the Serjeant-at-Arms Department, we have realigned the responsibilities so as to divide the purchaser and provider.
18. Can I briefly turn to the fees now. If you look at page 29, paragraph 3.23, you will see that professional fees increased by £11 million compared with the 1993 forecast. It was £32 million in 1992 prices. That is 18 per cent of the total building costs. Why were these costs not better controlled, the costs of the professional fees?
(Sir William McKay) Chairman, the fact is the original estimate for fee costs and the fee costs at the end were not on a comparable basis. The original forecast of fee costs was drawn up on the basis of a traditional approach to contracting but the 1998 forecast, which reflects the use of construction management, shows the balance has changed and the spend was in the end very much in line with those forecasts, as you will see I think from Figure 15. The explanation for this is that in construction management, fees are always higher simply because that is how construction management works. On the other hand, construction costs are proportionately lower. There is an offset. That was part of the judgment about costs and benefits we had to make, and which the NAO have acknowledged had something to be said for it in terms of choosing construction management rather than any other.
19. I have flagged that up, I have no time to follow it up, colleagues can come in if they want to. Briefly, on page 36, paragraph 4.7, the use of the bronze roof added about £12 million to the forecast cost of the building. What consideration did you give to using other materials which would have saved you £12 million?
(Sir William McKay) The consideration was given by the House of Commons Commission. The Commission were aware that over the life of the building we had a choice between aluminium-bronze and steel. They were told that if they used steel over the life of this building, the usable life of which is far, far longer than most comparable buildings, the higher maintenance costs of steel would add substantially because, unlike steel, bronze is a very durable material, develops over time with age, does not require regular repainting, does not require occasional replacement, in other words, offers a lower lifetime cost. The House of Commons Commission on that sort of evidence took the view that they preferred to have a material with a lower lifetime cost which was also extremely attractive.