Introduction

The Parliamentary Standing Committee on Public Works (known as the Public Works Committee (the Committee)) was established in 1913. It is constituted by the Public Works Committee Act 1969 (the PWC Act). The Act empowers the Committee to inquire into and report to the Parliament on each public work referred to it. The Committee's terms of reference are contained in section 17(3) of the Act. Essentially, these are to consider:

• the stated purpose of the proposed work and its suitability for that purpose;
• the need for, and advisability of, the work;
• the cost-effectiveness of the proposal;
• the amount of revenue the work will produce if that is its purpose; and
• the current and prospective public value of the work.

The PWC Act provides that a public work with an estimated cost¹ exceeding a $15 million² threshold shall not be commenced unless:

• it has been referred to the Committee; and
• the House of Representatives has resolved, following examination of the report by the Committee, that it is expedient to proceed with the work (that is, an ‘expediency motion' is passed).

Under the PWC Act, a public work the cost of which exceeds the threshold may only be commenced without such referral under certain specific exemption conditions, namely that:

(a) the House of Representatives has resolved that, by reason of the urgent nature of the work, it is expedient that it be carried out without having been referred to the Committee;

(b) the Governor-General has, by order, declared that the work is for defence purposes and that the reference of the work to the Committee would be contrary to the public interest (for example, for security reasons); or

(c) the work has been declared, under the Act, as being a repetitive work (for example, general maintenance work).³

The agency that is carrying out or contracting public works that are required to be referred to the Committee prepares a submission (also referred to as a ‘Statement of Evidence'). The submission includes information on why the work is necessary, other options considered, estimated cost, and any plans or drawings that will help the Committee understand the purpose and scope of the work. At the same time as providing the Statement of Evidence, agencies are required to provide the Committee with a separate table showing a breakdown of the major cost components of the proposed work (referred to as the Confidential Cost Breakdown). In order to protect the integrity of the tendering process and assist the Commonwealth in maximising its value for money in funding the project, the practice of the Committee is that only Committee members and secretariat staff view the Confidential Cost Breakdown.

Subsequently, the Committee holds public hearings in relation to public works projects referred to it. Members of the committee intending to attend the hearing on a particular project will generally inspect the proposed construction site prior to the hearing.⁴ At the public hearing, officers from the proponent agency appear before the Committee and any organisation or person who has sent in a submission to the Committee on the particular project may be invited to give evidence. Private hearings, involving the Committee members and the proponent agency, are also held to allow discussion about cost details of the work, and may include sensitive tendering information.

After the public hearing and responses have been made to any questions on notice, the Committee prepares a report to present to the Parliament. The Committee is able to make any recommendations it sees fit within the bounds of the Act, and may recommend the proposed public work does not proceed.

Once the report is tabled in the Parliament, a motion is made by the Minister for Finance and Deregulation (or delegate) to proceed with the work. This is the ‘expediency motion' and usually supports the Committee's recommendations. The Act provides that work may not commence on a public work referred to the Committee until the House of Representatives has ‘resolved that it is expedient to carry out the work.'⁵

The Committee's Manual

The Committee has published a Manual of Procedures for Departments and Agencies (the Committee's Manual).⁶ The Manual is intended to be a guide to inform stakeholders of the Committee's processes and provide practical information. It outlines the process and timeline for referrals, the role of the Committee Secretariat and of the Department of Finance and Deregulation (Finance), and the recommended content and format of submissions to the Committee. The Manual also outlines the process of inquiry, site inspection, hearings and subsequent reporting by the Committee.

Audit scope and objective

In 2007, the Joint Committee of Public Accounts and Audit advised the Australian National Audit Office (ANAO) that a priority⁷ of Parliament was for the ANAO to conduct a performance audit of the processes associated with the development by agencies of public works proposals that fall within the scope of the Committee. Against this background, ANAO decided to undertake two related audits.

The first audit examined, from a procedural perspective, whether the Department of Defence's (Defence's) capital works projects have been submitted in accordance with the Committee's requirements for notification and review prior to entering into financial commitments for the works.⁸ The report of that audit was tabled in the Parliament in April 2008.⁹ The second audit, which is the subject of this report, is a broader and more in-depth cross-portfolio audit. Its objective was to assess:

• the planning and delivery of capital works projects by proponent agencies;
• the extent to which projects have delivered on what was intended; and
• the extent to which proponent agencies have complied with the requirements of the Public Works Committee Act 1969 and approved procedures.¹⁰

A focus of the audit was examination of six projects from the 58 reports released by the Committee during the tenure of the 41st Parliament (between December 2004 and September 2007), as set out in Table 1. The six projects included in the audit sample were selected to give a cross-section of agencies, project values, and project types of projects that were at or near completion. Based on the Statements of Evidence provided to the Committee, each of the six projects should have been completed before the end of calendar year 2007.

In order to set the work of the Public Works Committee in a wider context, the audit also considered some other approaches that have been adopted internationally, and included a review of other relevant approvals processes (including the two-pass/two- stage approval processes¹¹, the Gateway Review Process¹² and agency processes adopted by the proponent agencies included in the audit).

Table 1 Projects examined in detail

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Contemporaneous with this audit, ANAO also commenced an audit of the construction of the Respecified Christmas Island Immigration Detention Centre (IDC).¹³ The methodology¹⁴ for both the 'Approval of Funding for Capital Works' audit and the audit of the 'Construction of the Christmas Island IDC' included assessing the rigour of the project cost estimates and budgets as well as the management of projects in terms of their cost, timing and scope.

Conclusion

Australian Government public works and property functions take place in a largely devolved environment, where individual agencies manage their own property requirements and the delivery of public works projects. Under this devolved model, proponent agencies play a leading role in the PWC approvals process, including providing the Committee with information of the proposed works and their estimated cost. Finance plays a role in assisting agencies to have their works referred to, and considered by, the Committee. Finance also has significant responsibilities in relation to the planning,¹⁵ budgeting and Government approval of projects by Budget funded entities. In addition, on a case by case basis, Finance may undertake (on behalf of proponent agencies) the delivery of non-Defence capital works.

Factors such as different agency operating and budgetary environments, together with diversity in project deliverables and locations, means it is reasonable for project planning and delivery practices to vary. The audit found that variances in agency approaches also reflected, to various degrees, inconsistent standards in project planning.

A key area of variability in agency practices has related to the development of project estimates. In addition to determining which projects require referral, the project estimate is an important input to the Committee in its statutory role of considering and reporting on the cost-effectiveness of the proposed work as well as the current and prospective public value of the work. However, financial information being provided to the Committee has been of variable standard. As a consequence, for some projects:

• budgets and estimates have excluded amounts relevant to the project addressing the identified business need;
• there have been inconsistencies between the financial information included in the internal business cases supporting
• the project and the information provided to the Committee in the Confidential Cost Breakdown;
• there has been insufficient clarity about the level of confidence attaching to estimates; and/or
• insufficient allowance has been made for risks (through a provision for contingencies) and price and cost increases over time (through a provision for cost escalation).

In recent years, two processes (namely two-stage funding approval processes and Gateway reviews) have been introduced aimed at providing improvements in cost certainty and to facilitate greater scrutiny of projects. These processes have yet to have a significant effect on the planning and delivery of public works. This reflects the relatively short period of time the new processes have been in place (compared with the long lead times for the planning and delivery of modern infrastructure developments), as well as the need for the administering agencies to apply greater rigour to their scrutiny of infrastructure projects.

The Committee Manual requires that, if there are significant changes to a project after it has been considered by the Committee and approved by the Parliament, proponent agencies are to report these changes and, if necessary, seek the Committee's concurrence. This feedback ‘loop' can provide incentives for agencies to be rigorous in developing project proposals before they are presented to the Committee, as well as providing valuable information to the Committee on agency performance in delivering projects that the Committee has previously considered. Existing arrangements have not resulted in timely advice of project changes being provided to the Committee.¹⁶ Accordingly, benefits would be expected to result from a more active role by Finance in monitoring and coordinating advice to the Committee, whilst recognising that under current frameworks and resourcing arrangements proponent agencies are responsible for the planning and delivery of capital works projects.¹⁷

In addition to non-adherence by agencies to the requirement in the Manual for significant project changes to be reported to the Committee, shortcomings were also identified as particularly common in relation to agencies not preparing a Confidential Cost Breakdown that included all items outlined in the Manual.

Overall, the audit has demonstrated that greater discipline is required on the part of agencies in ensuring that the Committee's requirements are met, and that the Committee is kept appropriately informed about significant changes to projects after the Committee has presented its report to the Parliament. A key issue to be addressed in these respects is balancing the benefits that can be expected from a devolved approach to delivering public works with central agencies having a stronger role in promoting greater consistency in project planning, budgeting and delivery practices by proponent agencies. An example worth considering in this respect is the United Kingdom's Achieving Excellence in Construction initiative which was instituted following time and cost overruns on various construction projects and has involved the Office of Government Commerce (OGC):

• driving forward improvements in the management of large, complex or novel projects involving procurement as well as seeking to assist public sector organisations in the successful delivery of projects (through a program of Gateway Reviews); and
• developing operational guidance and providing advice to support construction and property procurement and management. The guidance reflects lessons learned from Gateway Reviews and covers areas such as risk management, whole-of-life value for money and partnering.

Key findings by chapter

Agency roles and responsibilities (Chapter 2)

Prior to amendments to the PWC Act made in the late 1980s, the Commonwealth operated a large centralised property and public works system with in-house delivery of works programming, building design and project management. Australian Government public works and property functions now take place in a largely devolved environment, where individual agencies manage their own property requirements and public works.

Nevertheless, as a central agency, three of Finance's seven Business Groups continue to play a role in the planning, budgeting, approval and/or delivery of certain public works projects. Specifically:

• Budget Group provides advice on the policy merits and financial implications of all New Policy Proposals prepared by portfolio agencies;
• Financial Management Group administers the Gateway Review Process; and
•  Property and Construction Division (within Asset Management Group) delivers certain non-Defence capital works, and provides specialist advice on request to agencies proposing and/or delivering capital works.

In recent years, two processes (namely two-stage funding approval processes and Gateway reviews) have been introduced aimed at providing improvements in cost certainty and to facilitate greater scrutiny of projects. These processes have yet to have a significant effect on the planning and delivery of public works. This reflects the relatively short period of time the new processes have been in place, as well as the need for the administering agencies to apply greater rigour to their scrutiny of infrastructure projects. In particular:

• for Defence projects, attention in the staged approval process for military equipment procurements is focussed on the military equipment component rather than any infrastructure component. This is because the military equipment invariably requires a significantly greater proportion of the project budget than that required to provide the infrastructure necessary for the capability to be made operational. In addition, a second branch within Finance's Budget Group has an overview of infrastructure projects undergoing two pass approval via its role as chair of the Defence Estate Interdepartmental Committee and its membership on the Defence Infrastructure Subcommittee (DISC);
• a small number of non-Defence projects have been subject to the staged approval process. More broadly, Finance scrutiny of new policy proposals relating to non-Defence capital works projects has been focused largely on the expected accounting effect of project expenditure on the Australian Government's budget position, rather than the robustness of the proposed works from financial and other perspectives;¹⁸ and
• the operation of the Gateway risk assessment process (specifically the current selection ‘cut-off') means it is likely that the majority of construction projects will not be subject to Gateway¹⁹ and no construction project has yet completed the full Gateway review process.

Improvements in these areas depend on the availability of specialist skills in areas such as project budgeting and estimating. Achieving improvement would also be aided by better coordination and/or integration of the various approvals and review processes Finance administers with its existing in-house experience and professional expertise in the planning, management and delivery of infrastructure works (through its Property and Construction Division).

In 2007–08, the Property and Construction Division reorganised its branch structures to better align its service delivery of assigned non-Defence capital works to the project lifecycle. Finance advised ANAO that these changes were modelled on the UK OGC initiatives. Finance further advised ANAO that its Property and Construction Division is resourced around supporting specific capital projects and property outcomes but that it is not resourced to provide whole of government guidance material or analysis of New Policy Proposals for works that are not being delivered by Finance.²⁰ Nevertheless, there would be benefit in Finance examining opportunities to allow the better sharing of information and expertise within the department, given the existing organisational arrangements for discharging Finance's various roles in relation to the planning, budgeting, approval and delivery of infrastructure projects.

Project budgets and estimates (Chapter 3)

In the context of capital works, distinguishing between budgets, estimates and costs is important. A ‘budget' refers to a funding allocation to deliver the proposed works. By way of comparison, the ‘cost' of those works will not be known until they have been delivered.

Although the final cost is not known until after completion of works, at any point an 'estimate' can be made of the final cost. Any such estimate has a level of uncertainty attached to it, and that uncertainty should reduce as the project advances through planning, into delivery, and towards completion. In this respect, it is desirable that budgets and estimates be established with sufficient rigour such that, subject to sound project management and cost planning, the overall estimate is able to be maintained during the various stages of project design development—while detailed estimate items may increase as a consequence of improved definition, the allowance for risk (contingency) should also be able to be appropriately reduced, allowing the overall project estimate to be maintained.

The Confidential Cost Breakdown provided by proponent agencies to the Committee is a key input to the Committee's assessment of the cost-effectiveness of proposed works. For the six projects in the audit sample, the level of detail provided through the Confidential Cost Breakdown varied, as did the format and contents. In respect to two projects, there were also significant inconsistencies between the financial information included in the internal business cases supporting the project and the information provided to the Committee in the Confidential Cost Breakdown.

In addition, reflecting the absence of any cost estimating standards applying to Australian Government public works, proponent agencies have taken different approaches to the inclusion or exclusion of costs, including those relating to:

• the acquisition of land on which construction activities are to be undertaken; and
• agency internal planning, management and oversight costs. Where these costs are not included in budgets and estimates, they will not be visible. Not including such costs can also have adverse consequences when there are choices to be made about whether to in-source, or contract for, the delivery of important project management roles.

Estimating practices have also not been to a consistently robust standard in relation to allowances for risk (contingency) and cost escalation.²¹ For some of the projects examined by ANAO:

• agencies did not consistently adhere to the requirement in the Committee's Manual that the allowances made for risk (contingency) and cost escalation be identified in the Confidential Cost Breakdown;
• the proponent agency had combined allowances for risk and cost escalation;
• while the factors that determine contingencies mean it is reasonable for allowances to differ among projects, sufficient allowance for known risk was not made in the estimate for some of the audited projects; and
• the audited agencies did not demonstrate a consistent approach to calculating, allocating or reporting against escalation with insufficient allowance made in some instances given the prevailing market conditions and the expected delivery timeframe included in the project's Statement of Evidence to the Committee.

Variable approaches to preparing project estimates have also been found to exist in other areas of public administration, and this has been found to be one factor in actual costs exceeding initial estimates. One approach that has been commonly adopted to address this situation has been the development of cost estimating standards or guidelines, and requiring confidence levels attached to the estimates to be clearly disclosed.

More broadly, obtaining value for money in construction projects involves optimising the combination of whole-of-life facility costs and quality to meet anticipated user requirements. As future costs associated with the use and ownership of an asset are often greater than the initial acquisition cost, it is important in planning the construction of major facilities to consider the utilisation, ongoing maintenance and whole-of-life cost of those facilities. However, notwithstanding that the Committee is required to consider the present and prospective public value of the work, and the Commonwealth Procurement Guidelines require subject agencies to be preparing whole-of-life cost estimates, this information is not commonly being provided to the Committee even when agencies have undertaken the necessary analysis.

Project outcomes (Chapter 4)

Measuring construction projects' performance is essential for ensuring that planned improvements in cost, time and quality are achieved, comparing achieved performance with that of similar projects and identifying potential for doing things better. Measurement also provides valuable feedback on the extent to which initiatives such as staged approvals and Gateway reviews have assisted to improve the on-time and on-budget delivery of major projects. In addition, providing information to the Committee where the project budget, cost, timeframe or scope has changed significantly from that which has previously been considered by the Committee can serve a number of important purposes, including:

• helping to promote compliance with the referral requirements of the PWC Act because fundamental changes to a project may mean that a further referral to the Committee is required;
• encouraging more consistently rigour in agency development of the project scope, timing and estimate that is advised to the Committee; and
• drawing the Committee's attention to areas that might warrant closer scrutiny in future inquiries.

The six projects included in the audit sample were selected to give a cross-section of agencies, project values, and project types of projects that were at or near completion. Based on the Statements of Evidence provided to the Committee, each of the six projects should have been completed before the end of calendar year 2007.

Two of the six projects (the Reserve Bank's Business Resumption Site project and the project to fitout 29–31 Brindabella Business Park for DEEWR) were fully delivered on time and within the original budget. In respect to the other four projects in the audit sample:

• completion of three projects had been significantly delayed (with delays ranging from four months to at least two years);²²
• savings against budget in the order of $10 million were made in the letting of trade packages for one project²³ (which had a project estimate of $86.7 million), allowing additional works to those advised to the Committee to be undertaken;
• the budget for another project was increased from $20.3 million²⁴ to $24.1 million (a 19 per cent increase, with actual final costs being 1 per cent above budget) to meet additional costs of latent building conditions and (largely) to provide for enhancements to the quality of the works. The proponent agency has advised ANAO that, if additional funding²⁵ had not been available, it would have stayed within available funding; and
• in addition to being significantly delayed (see the first dot point above), for one project significant changes were made to the project delivery method from a lump sum construction contract to a contract management contract (as a result of the lump sum construction tender prices received being well in excess of the available budget) and parts of the refurbishment works for two buildings that had been included in the Statement of Evidence provided to the Committee had not been commenced at the time of ANAO's audit fieldwork.²⁶

Notwithstanding that the PWC Manual requires significant changes to a project to be reported to the Committee, the Committee was not provided with advice in respect to any of the four projects in the audit sample where significant changes had occurred. In addition to the benefits that may be expected from a more effective feedback ‘loop', other approaches observed that would aid the delivery of project outcomes to a consistently high standard were:

• increased adoption of value management techniques by proponent agencies. Value management is a systematic review of the essential functions or performance of a capital project to ensure that value for money is being achieved. The principles and techniques of value management aim to achieve the required quality at optimum whole-life cost during the process of developing and delivering a project. The principles centre on the identification of the requirements that will add demonstrable value in meeting the business need, often through workshops led by trained value management facilitators; and
• use of post implementation reviews to assess the extent to which the expected business benefits have been achieved or are expected to be achieved, user and/or client satisfaction and any project management lessons that should be used.

Improvement opportunities

ANAO has made four recommendations. A central tenet of the recommendations is to encourage the application of greater discipline to the planning, budgeting, scrutiny and delivery of public works projects. Finance, which advises the Finance Minister on the administration of the PWC Act, plays a role in the referral of each project to the Committee, in addition to its broader roles and responsibilities. This role provides Finance with a degree of authority over the nature and quality of the referrals made to the Committee. Accordingly, a number of recommendations are focused on Finance working more closely with proponent agencies, drawing upon overseas experience where such an approach has been found to offer benefits in reducing time and cost overruns on individual projects.

Agency responses

Finance and the Reserve Bank provided a response to the audit recommendations and made other comments on the draft report, but did not provide any formal comments on the report as a whole. In addition to responding to the audit recommendations and making other comments on the report, the Australian War Memorial, DEEWR, Defence and CSIRO provided the following formal comments.

Australian War Memorial
The Memorial's Redevelopment of the Post-45 Galleries and Discovery Room project was complex and extended well beyond a straightforward construction and fitout work into the creation of high quality, cutting-edge galleries. The creative development of exhibitions cannot be construed to be or treated as either a construction ‘work' or a building ‘fitout'. The project cost advised to the PWC was $17.8 million and at the same time the PWC was advised that the Memorial would be seeking additional funding through sponsorship. In the event, such funding totalled $3.8 million.

The PWC was informed that the $17.8 million was exclusive of internal agency overhead costs,²⁷ which were regularly monitored by the Memorial's Council. The total outturn cost was $24.12 million, with the project being delivered successfully within 1 per cent of the budget.²⁸

The Memorial is of the opinion that there was no requirement to report either the amounts of sponsorship funding or internal agency overhead costs beyond the information detailed in the Statement of Evidence to the PWC, the Confidential Cost Estimate and the evidence recorded in the Official Committee Hansard. The project experienced a legitimate funding increase of $3.8 million and the PWC was aware of the Memorial's intention to seek this additional funding through sponsorship, and to apply it to the project. It was not a change to the project scope but an enhancement of the quality of the displays and further reporting to the PWC was not warranted.²⁹ The Memorial's Council was delighted with the project's total management and the outstanding galleries that were produced. As far as it is concerned, the project was on time and on budget.

DEEWR

DEEWR appreciates the opportunity to participate in the performance audit of Approval of Funding for Public Works.

DEEWR welcomes the ANAO's finding that the project to fitout 29–31 Brindabella Business Park was delivered on time and within the original budget. DEEWR accepts all relevant ANAO recommendations and notes those directed to other agencies, and is of the view that these will bring strengthening of processes in relation to the planning, budgeting, scrutiny and delivery of capital works projects.

Defence

Defence welcomes the report on the Approval of Funding for Public Works which assessed the processes associated with the development of public works proposals across a number of agencies including Defence. Defence agrees with Recommendation No. 3 which recommends agencies undertake post implementation reviews.

While the report is well targeted, Defence does not agree that there are inconsistencies in the cost information for its projects,³⁰ nor does Defence agree with the concerns raised about combining projects or that significant project changes have occurred that should have been reported to the Public Works Committee. Defence believes that the latter of these findings does not acknowledge the large number of Defence submissions to the Public Works Committee, unique Defence project complexity and challenges or the continuous development of Defence's infrastructure management policy and procedures.³¹

Both of the Defence audited projects were early examples of projects completed under the project development and approval process implemented in 2004. Defence has made a significant effort to refine this process since 2005 and this work has included refining the way cost information is presented in business cases and to the Public Works Committee. Defence undertakes to use its considerable recent experience in project development, approval and delivery to assist the Department of Finance and Deregulation in its response to the other recommendations of the report.

CSIRO

CSIRO notes the report is the outcome of the ANAO review of six projects, one of which relates to CSIRO. The CSIRO Entomology Biosciences Laboratories at Black Mountain, ACT was reviewed by the ANAO during 2008. The ANAO met and corresponded with CSIRO on a number of occasions. The proposed ANAO Report on the Approval of Funding for Public Works encompasses those discussions.

The Report in general reviews processes undertaken by agencies in delivering capital works and their compliance with Public Works Committee procedures. The Report addresses and recommends the application of sound project management practices and highlights areas where improvements could be made.

The primary concerns expressed with the CSIRO project relate to the potential cost overruns, inadequate allowances for contingencies in the original project estimate, delayed completion and failure to advise the Public Works Committee of changes to the scope of work originally presented to the Public Works Committee. ANAO has recognised that internal CSIRO reviews of its capital works program in 2006 had significantly delayed the project. By the time construction tenders were received for the project, the local construction market was extremely buoyant, resulting in prices far in excess of that anticipated when the project was presented to the Public Works Committee. Accordingly, CSIRO adopted a construction management procurement strategy to control costs and modified the scope of some components of the project to provide facilities fit for CSIRO's purposes within the project budget. Construction of the project is still in progress. CSIRO notes that the ANAO report has indicated that CSIRO should have applied more rigorous risk analysis to counter such issues.

CSIRO intends to advise the Public Works Committee of changes to the project scope, cost and program in the second quarter of 2009, following completion of the current construction contract works. CSIRO has developed and implemented project management procedures to address the issues highlighted in the ANAO report.

Footnotes

^[1] The Act defines ‘estimated cost', in relation to a public work, to mean an estimate of cost made when all particulars of the work substantially affecting its costs have been determined.

^[2] The threshold was increased from $6 million in November 2006.

^[3] See sub-section (8) of section 18 of the Act. There is no guidance or examples provided of what constitutes an urgent, defence purpose or repetitive work in the Committee's Manual of Procedures for Departments and Agencies, although it does note that when an exemption is sought, officers of the agency should attend a meeting of the Committee to explain the background to, and need for, the exemption.

^[4] The public hearing is usually conducted either at or close to the site, following the Committee members' inspection.

^[5] This requirement is set out in subsection (7) of section 18 of the Act.

^[6] The Manual has no recognised status under the PWC Act (for example, it is not given legal force under the Public Works Committee Regulations 1969).

^[7] Each year, the Joint Committee of Public Accounts and Audit consults with all other Committees of the Australian Parliament to identify the priorities of the Parliament for performance audits to be undertaken in the following financial year by the ANAO.

^[8] Between 25 March 1998 and 18 March 2008, the PWC examined 48 Defence projects (not including Defence Housing Authority projects), representing 38 per cent of all projects examined during that period.

^[9] ANAO Audit Report No.28 2007–08, Defence's Compliance with the Public Works Committee's Approval Processes.

^[10] ANAO Audit Report No.28 2007–08, examined Defence's compliance from a procedural perspective whereas this current audit has examined the substance of the six individual projects included in the audit sample.

^[11] The strengthened ‘two-pass' approval process for major Defence capital equipment projects was introduced in 2003 with a two-stage approval process for major non-Defence capital works projects announced in the 2007–08 Budget. ANAO's is currently undertaking a performance audit of the implementation of the strengthened ‘two-pass' approval process.

^[12] Gateway is a project assurance methodology that involves short, intensive reviews at critical points in the project's lifecycle by a team of reviewers not associated with the project. The intention is to provide an arm's length assessment of the project against its specified objectives, and an early identification of areas requiring corrective action.

^[13] This audit is expected to table in the Winter 2009 Sittings.

^[14] Day-to-day management and conduct of both audits was undertaken under contract by Arup Pty Ltd, a global design, engineering, management and business consulting practice. Arup was selected following a competitive tender process.

^[15] For example, the documented Budget processes require agencies to provide Finance with a business case (in accordance with a prescribed format) for construction projects costing more than a set threshold.

^[16] For four of the six projects in the audit sample, ANAO analysis was that significant changes in the budget, estimated costs, project timeframe and/or scope of works required reporting to the Committee. In no instance had this occurred. In addition, in respect to the Christmas Island Immigration Detention Centre project being separately audited by ANAO, in September 2008 the Committee reported on its consideration of increases to the project budget, raising concerns that advice from the proponent agency (Finance) concerning the increases was not timely.

^[17] This role would be an additional responsibility for Finance, but similar to that Finance undertakes in respect to the reporting of medium works, where Finance's internal procedures note that the Committee has requested that agencies provide details of medium works through Finance.

^[18] In November 2008, Finance advised ANAO that, current New Policy Proposals often focus on budget as a risk when it is more correctly a consequence of realisation of a risk event. Finance further commented that, for capital works projects, risk categories generally have consequences on time, cost, reputation and quality and that these categories include: scope certainty; user changes; land requirements; design complexity; time pressure; buildability; contracting environment; contract strategy; environmental (flora, fauna, indigenous and European heritage); geotechnical; geographic; social impact; political (local and State government, community agitation); market forces; logistic support; and architecture.

^[19] Most Gateway reviews to date have related to Information Technology projects rather than infrastructure and facility construction projects, with Finance advising ANAO that this reflects the large number of Information Technology projects coming forward to Government in recent years.

^[20] See further at footnote 18 in relation to the current focus of analysis of New Policy Proposals on budget as a risk rather than as the consequence of the risk event.

^[21] Escalation can be defined as the increase in the cost of a specific good or service over a defined period of time. Cost escalation should not be included in, or confused with, contingency. Contingency is an allowance to cover risk. Cost escalation, by way of comparison, is the forecasting of price and cost movements over time.

^[22] The Committee's Manual does not require significant changes in the project timetable to be advised to the Committee but it is often the case that delays in a project will, due to cost escalation, result in the project budget and estimate increasing and/or a reduction in the scope of works. Changes in cost and/or scope are required to be reported to the Committee.

^[23] Which was also one of the three projects that has experienced a significant delay.

^[24] At the time the project was presented to the Committee, the internal project budget was $20.3 million (14 per cent higher than the $17.8 million estimate provided to the Committee), with that difference relating primarily to the budget allowance for the proponent agency's own staffing costs and related overheads. The Committee was advised that the $17.8 million estimate excluded amounts for GST, relocation costs, the proponent agency's internal costs of managing and oversighting the project and stakeholder consultation costs, but the evidence provided to the Committee did not quantify these exclusions.

^[25] $2.05 million of the additional funds came from third party sponsorships, with the remaining $1.75 million obtained from a New Policy Proposal.

^[26] Whilst the proponent agency advised ANAO it is committed to these works, as at October 2008, the forecast cost to complete was $0.5 million greater than the $14.5 million project budget, with neither the budget nor the forecast cost to complete including any allowance for these particular works.

^[27] The information and advice provided to the Committee did not quantify internal agency staffing costs and related overheads, which were budgeted at $2.52 million. By way of comparison, the estimate for the construction of the Christmas Island Immigration Detention Centre provided to the Committee included $3.3 million relating to Finance's internal resourcing costs of managing the delivery of the project.

^[28] The final project budget of $24.12 million was $6.32 million higher than that advised to the Committee with final actual costs of $24.38 million. The budget increase was as a result of the original project budget and estimate of costs advised to the Committee not including $2.52 million in the Memorial's internal costs in relation to the project, and funding allocated to the project being increased by $3.8 million (comprising $2.05 million in sponsorship support and $1.75 million in additional Australian Government funding provided in the 2006–07 Budget for the Brisbane Bridge display).

^[29] The need to report approved budget increases to the Committee was illustrated by the Christmas Island Immigration Detention Centre project, with Government-approved increases to the project budget in December 2004 and August 2006 reported to the Committee in January 2008. In June 2008, the Committee announced that it would receive a briefing on the project, the main focus of which was the cost increase for the project.

^[30] For the two Defence projects examined in detail, ANAO identified inconsistencies between the cost breakdown provided to the Committee and the underlying agency cost plans. The two Defence projects audited by ANAO were early examples of projects being completed using the project development approval process introduced in 2004. In December 2008, Defence advised ANAO that, since 2005, it had put considerable effort into developing refined scope and cost information for inclusion in the project business case, for subsequent project approval, and for consideration by the PWC.

^[31] ANAO has assessed changes in terms of the projects individually referred to the Committee (the Act and the Committee's Manual do not provide a basis for assessing project changes other than on a project-by-project basis). The significant changes for the two Defence projects examined related to: for the RAAF Base Amberley Stage 2 Redevelopment, a delay from December 2007 to late 2009 to the expected completion date for the simulator facility associated with the Multi Role Tanker Transport relocation; and, for the Kokoda Barracks Redevelopment, cost savings in the order of $10 million which had allowed additional works to be undertaken.