Spending watchdog queries soaring fees on £241m PFI deal to build social security headquarters.
The National Audit Office has strongly criticised the Department of Social Security’s handling of the £241m private finance initiative deal to build a headquarters on Tyneside.

The NAO report, published yesterday, shows that costs for external consultants soared from an initial estimate of £250 000 to nearly £3m by the time the deal was signed in January 1998. Overall, project procurement costs, including non-staff costs and in-house costs, rose from £397 000 to £4.4m.

Law firm Masons’ fees rose from £70 000 to £2.3m and those of financial adviser Kleinwort Benson from £123 000 to £404 000.

The PFI consortium, which includes Amec, Building and Property, consultant Mace and architect Michael Hopkins and Partners, was not criticised.

The report says the client underestimated the amount of legal and financial advice that it would need on the project, which is due for completion in 2002, because it had no precedents. It added that all projects should use a public sector comparator, in accordance with Treasury guidelines.

Susan Owen, a partner in Masons, said the client received good value for money. She said the company had worked at a discounted fee of less than £200 an hour. “We feel our fees were quite reasonable. All increases in fees were agreed by our client.”

The report also says fees for financial advice from Kleinwort Benson compared reasonably with similar rates previously negotiated by the department.

The report also criticises the time the deal took to put together. At first, the client expected the deal to reach financial close in nine months. But the timetable was extended six times and, in the end, it took 38 months.

The report urges PFI clients to:

  • Produce flexible “output specifications” rather than a more prescriptive brief. For instance, a client could say it needs office space for 500 people and allow the PFI consortium to provide any solution. Traditional briefs tend to specify how many buildings are needed and what floor space they must have.

  • Review their own businesses thoroughly before entering into negotiations. This helps to prevent expensive late changes.

  • Make better use of consultancy to refine the brief, creating more settled timetables and budgets.

  • Ask for “variant bids”, as these give clients more options.

The recommendations are in line with what the industry has been lobbying for in recent months. A previous NAO report on Tarmac’s Dartford and Gravesham Hospital, which was completed in July 1997, also criticised the client’s naïvety.