Review of major capital 
projects in Scotland
How government works

Key messages prepared for the Auditor General for Scotland
June 2008

Introduction

1. Public investment in infrastructure touches most aspects of Scottish life. It provides new and upgraded facilities, such as hospitals, schools, museums, prisons and major IT projects. In recent years, capital investment by the public sector has hugely increased.

2. Between 2002 and 2007, the Scottish Government and its agencies, non-departmental public bodies (NDPBs), and the NHS completed 43 publicly-funded major capital projects valued at £811 million.1 

3. The Scottish Executive’s 2005 Infrastructure Investment Plan identified some £7.8 billion capital investment over the period 2004/05 to 2007/08, including many large projects. The Scottish Government’s 2008 Infrastructure Investment Plan identifies another £10.5 billion to be invested between 2008/09 and 2010/11.

4. There are currently 104 major projects, valued at £4.7 billion, in progress. Most of these are in the transport and health sectors. Of these 104 projects, there are:

•	seven large transport projects and two large health projects, valued at between £120 million and 
£692 million each (combined value of £2.8 billion)
•	thirty-seven medium projects, mainly in the transport, health and justice sectors, valued at between £15 million and £85 million each (combined value of £1.4 billion).
•	fifty-eight smaller projects, valued at less than £15 million each, covering all government portfolios (combined value of £0.5 billion).2 
5. The scale of expenditure, and the importance of the investment in supporting good public services, puts a premium on ensuring projects are well managed and provide value for money.

About our study

6. This report is the first systematic review of major capital projects in Scotland. It considers the progress of all 43 projects completed in the five years between April 2002 and March 2007, and a sample of current major projects.3  It looks at progress against cost and time estimates, quality specifications and project management in general.

7. It builds on our June 2007 report Edinburgh transport projects review, which examined the Edinburgh tram and Edinburgh Airport Rail Link (EARL) projects.4  

8. We examined only major projects which are publicly-funded by traditional capital investment. We did not examine the progress of projects funded through Private Finance Initiative (PFI) contracts (14 projects completed and in progress valued at £902 million). The Scottish Government is not using standard PFI for new projects and is developing an alternative method to help fund major capital projects. 

9. In the course of the study, we:

•	surveyed the public bodies that completed 43 projects between 2002 and 2007 
•	conducted case study reviews of 20 projects (five completed and 
15 current) to provide further detail on performance against cost, time and quality targets, and assess their project management against good practice. These projects cover 36 per cent of recent and current projects by value, and include projects from each main government portfolio. 
Key messages

1. In general, the achievement of cost and time targets improved significantly as projects progressed.
 
10. Exhibit 2 presents a high-level summary of our findings on the performance of all projects completed between 2002 and 2007 against cost and time targets. It shows initial estimates of cost and time were often too optimistic. But there is a general picture of improvement in both cost and time estimating after contracts are awarded. At this stage, although some projects do not achieve cost and time targets, the degree of variation is significantly smaller. 

11. Exhibit 3 sets out our criteria for assessing cost, time and quality. Exhibits 4 and 5 summarise our findings on the achievement, or progress towards cost, time and quality targets, for the 20 projects we examined as case studies.

2.  Early cost and time estimates at project approval stage were too optimistic for many major projects.

12. It is important that early cost and time estimates, on which initial project approval is given, are as accurate as possible. Inaccurate estimates undermine decision-making, accountability and managers’ ability to deliver the projects.

13. Only around two-fifths of projects were completed within the cost estimated at initial approval:

•	Twenty-five projects had initial cost estimates that were too low, in most cases by a significant margin. The final cost of these projects shows an average overrun of 39 per cent against the initial cost estimate.
•	The combined final cost of 41 projects was £730 million, £84 million (13 per cent) more 
than their combined initial estimated cost of £646 million.5
14. For most projects the forecast project completion date at the initial approval stage was also too optimistic. Only a third of projects were completed on time and most projects overran by between 16 and 200 per cent of the initial time expected. 

3.  Performance against cost and time estimates is better after contracts are awarded, as plans are more certain and risks clearer. 

15. Although initial cost estimates are important, a key decision point for any project is shortly before a contract is awarded. Once a contract is agreed, significant changes to a project are likely to be costly and disruptive, and may not represent value for money.

16. We found that 31 of 38 projects were completed within five per cent of the contract price. The combined final cost for these 38 projects was £754 million, £8 million (one per cent) more than the combined approved contract price of £746 million. 

17. Two-thirds of projects were completed on time or within ten per cent of the total forecast time when the contracts were awarded. 

4. Most completed projects have successfully delivered the required roads, hospitals and other assets, and all current projects are forecast to do so. However, few projects have been evaluated to demonstrate that they have delivered the expected wider benefits which originally justified the investment.

18. There are no simple and universal measures of the achievement of quality which can be applied to all projects.

19. In our survey of 43 completed projects, we looked at whether the required project outputs were delivered without significant defects. Eight completed projects (almost one in five) reported significant defects in the first year after completion.

20. With the exception of one project, where the problem is now resolved, none of the defects represent a fundamental failure.6 In all cases, project teams have pursued or are pursuing remedies for defects. The project costs have been protected by retaining some contract payments pending resolution of the defects.

21. Technical quality control, such as defects reporting, is not enough to ensure that a project delivers the maximum benefit. It is also good practice to specify criteria against which the finished project can be assessed to ensure it provides good quality design, is functional and meets the business requirements. Few projects reported using detailed quality measures, and fewer could provide documents to evidence this.

22. The Scottish Public Finance Manual requires project teams to complete post-project evaluations, but there is no requirement to report the results back to the Scottish Government. Twenty-one projects had not been evaluated to assess if they had delivered the expected wider benefits which originally justified the investment.

5.  Nine current projects examined had awarded the main construction contract, which should increase cost certainty. However, four projects had significant increases in estimated cost before reaching this stage.

23. We reviewed 15 projects in progress, which have an estimated cost of £1.8 billion (38 per cent of the £4.7 billion value of all current projects).

24. The largest increase in estimated costs before contract affected two transport projects.7 In these cases, the estimated cost has more than doubled and completion has been significantly delayed. 

25. The remaining current projects we reviewed are on schedule to achieve the initial completion date. 
26. It is too early to assess the quality of projects in progress. Three are at a relatively early stage of development, which increases the possibility of changes in scope. One has experienced significant changes in scope since inception.

6. Project management and governance arrangements within individual projects are broadly effective, although room for improvement remains. A more strategic approach to managing the programme of capital projects could improve value for money.

27. From our case study reviews of 20 projects, we assessed project management and governance arrangements against good practice. On a scale ranging from basic to advanced, we found most projects were adequate or better.  

28. In most cases, projects were addressing the strategic aims of Scottish Government and demonstrated this in their business cases. However, four projects had no authoritative business case and there is scope to improve the quality of project appraisals more generally.8

29. Effective governance structures were in place in most projects, with good engagement with external partners and stakeholders, and clear sponsor commitment. 

30. Most projects had appropriate personnel in key positions and there was generally a culture of positive project management.

31. The overall approach to estimating costs, including the treatment of risk and uncertainty, and consideration of whole-life costs at the project appraisal stage, could be improved. Explicit consideration of whole-life costing within project appraisals and benchmarking project costs remains relatively unusual.9 

32. There is evidence of a sound approach to competition in most cases, but not all projects got a high degree of competition from the outset. This is partly due to increasing national and international demand for contractors. Projects are also experiencing higher levels of construction inflation, reflecting high demand for construction services.10 The current market means that suppliers may be less willing to compete for capital projects. This increases the risk to value for money.

33. Gateway reviews provide an independent assessment on the state of projects. The Scottish Public Finance Manual requires that high-risk projects undergo gateway reviews. However, only nine current projects had used the process or any other form of independent testing, reducing the scope for positive assurance. 

34. The NHS, Transport Scotland and the Scottish Prison Service are responsible for large capital investment programmes and use their own systems for monitoring and overseeing projects. But across the Scottish Government there is no standard system for monitoring and appraising the current status of projects and how they are forecast to perform against cost, time and quality requirements.

35. For the Scottish Parliament and the public there is no consistent published information about either major project performance or the wider effectiveness of the investment.

36. The Scottish Government has a strategic group with a remit to improve project delivery. However, there is a case for additional leadership and more deliberate coordination and management of the investment programme across government, to ensure that it matches market capacity and capability. This would promote good competition and value for money in the medium and long term.

37. In May 2008, the Scottish Government proposed the further development of the Scottish Futures Trust initiative. This includes plans to provide a focal point for coordinated public sector infrastructure planning and investment. If approved and implemented, this coordination may help address our recommendations below. 

Recommendations

The Scottish Government should:

•	  collect information on all projects and get explanations for cost, time and quality changes, and lessons learned. It should report performance publicly
•	  strengthen strategic direction and investment planning through a senior, government-wide, investment coordination and challenge function
•	  ensure robust procurement strategies and cost estimates have been developed prior to awarding funding to projects
•	  take account of market conditions and construction inflation when developing its capital programme.
Public bodies should:

•	  prepare robust business cases for every project. These should be clear about the project aims and benefits, and include assessment of: risks; the range of options to be considered; and a clear basis for assessing, reviewing and reporting
•	  build whole-life costs into business cases and subsequent project reporting
•	  ensure cost, time and quality targets are clear from the outset, and properly recorded
•	  improve early-stage estimating of the cost and time of projects. They need to ensure better assessment and quantification of risk and uncertainty, and should include a specific risk allowance, optimism bias allowance and take account of construction cost inflation in early cost estimates
•	  develop an appropriate procurement strategy which considers all procurement routes, competitiveness and capacity within the construction industry. Ensure that risk management strategies explicitly consider and mitigate the risk of changes in scope after the contract has been awarded
•	  make more use of tools available to assess and confirm both the quality of design and environmental sustainability to get the best benefits from the available funding 
•	  ensure appropriate project management and governance arrangements are put in place for every project
•	  from the outset, ensure they have project managers with appropriate experience and knowledge of effectively managing major projects
•	  ensure project budgets are sufficient to allow for post-project evaluation in all projects 
•	  carry out post-project evaluations within a reasonable timescale to determine whether projects have delivered the benefits intended. Evaluations should consider performance against cost, time and quality targets
•	  set a clear plan with regard to the need for independent gateway or similar reviews at key stages in projects 

Footnotes

1	 We define a major project as having a capital cost of £5 million or more.
2	We have defined small, medium and large projects as less than £15 million, £15-100 million and over £100 million respectively.
3	The review covers direct Scottish Government and NHS investment but does not cover local authorities, further and higher education or Scottish Water.
4	Edinburgh transport projects review, Audit Scotland, June 2007.
5	We could not get definitive estimates of cost or time for all 43 completed projects, as detailed in our main report.
6   	A significant defect appeared in the Clyde Arc Bridge, in January 2008, 16 months after opening. 
7 	M74 completion, Stirling-Alloa-Kincardine Rail Link.
8  	 M74 completion, eCare, Scottish Crime Campus and Erskine Bridge maintenance.    
9  	Whole-life costing is an economic appraisal, which considers all costs and benefits from installing, owning, operating, maintaining, and ultimately  disposing of an asset.
10   	Construction inflation measures the change in the underlying costs of labour, raw materials etc, required in construction and it often rises faster than general inflation.

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ISBN 978 1 906752 06 4      AGS 2008/6