HS2 contracts rushed into while client needed to make more use of ‘negotiating levers’ such as retendering jobs, official review finds

HS2 Ltd should have created ways to make it easier to terminate under-performing contractors or retender contracts that were missing key milestones, a new report into the project has said.

A report by James Stewart, former chief executive of New Labour PFI quango Partnerships UK and now chair of infrastructure consultant Agilia, was published on the same day the government confirmed another delay to the scheme.

His 131-page assessment makes a series of recommendations and says the client should have been prepared to terminate contractors not up to scratch or retender contracts that were under-performing.

It says “the public sector client [has] to recognise that it will need negotiating levers. These can come from termination options or the right to retender part of the contract. These are often considered to be ‘nuclear’ and too difficult to implement, so the threat and therefore the negotiating leverage that they might bring, is reduced materially.”

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And it adds: “Establish [a] contract such that retender is the default option at a milestone point and the onus is on the supplier to demonstrate that continuing with the contract is the best option and ensures value for money.”

If a main contractor is removed from the job, Stewart’s report says, “the public sector client has the right to be assigned the design and Tier 2 and 3 subcontracts. In this way the termination can be restricted to the prime contract and the risks of schedule delay are mitigated.”

But Stewart says inflation should be “a retained risk for government” and adds: “HS2 and other projects have demonstrated that it is not possible or effective for inflation risk to be managed in its entirety within the project cost envelope.

“Some risk can be held by the supply chain and the delivery body/sponsor but the balance needs to be held by HMT as the Financial Shareholder.”

Stewart says “schedule has been prioritised over cost” on HS2” and that things started to go wrong right at the start.

He says the planning, development and design phase was rushed amid worries the scheme would be cancelled completely or cost would go up and up and added: “There is a golden rule in major project delivery that was characterised as ‘think slow, act fast’; ie time taken in the planning, development and design phase will have a big pay-off in the delivery phase.

“There is another saying that ‘projects don’t go wrong, they start wrong’.

“HS2 has failed to follow either of these mantras, both of which are viewed as essential best practice by the most experienced deliverers of major projects across the world. There is a need to change the culture on cost and affordability.”

The report says that not being able to get reliable costs and schedule estimates has blown public confidence in the scheme, pointing to “the failure of the Main Works Civils Contracts (MWCCs) to deliver reliable outcomes within the affordability framework [which] has been a persistent problem for the programme”.

It adds: “HS2 Ltd must take the prime responsibility for the performance of the MWCCs. It selected the contractual approach and is responsible for the contract management.

“The supply chain also has to take its share of the responsibility as it has largely failed to deliver under the partnership agreements and contracts it signed up to.

“There is still considerable uncertainty associated with the completion of the contracts. Getting these contracts into a place where they are performing reliably is essential to successful delivery of phase 1.”

And it says that contracts should not be awarded where there is “a significant level of assumptions and exclusions”.

It adds: “If necessary, delay the contract award until the risk of outstanding assumptions and exclusions can be reduced to a manageable and ultimately affordable level.

“There should be a requirement to ensure that assumptions and exclusions are captured and consistently managed across the contract. Transparency of the process can be improved by cross-referencing assumptions with risk and schedule data and benchmark forecasts of defined cost.”

The cost of HS2 phase 1 to Birmingham – later phases were cancelled in 2023 – has ballooned from a 2013 estimate of £21.9bn to anything between £45bn and £57bn today, Stewart’s review says.

Earlier this week, transport secretary Heidi Alexander confirmed the delayed completion of the HS2 line from London to Birmingham to 2035 at the earliest and revealed the new HS2 Ltd chief executive, Mark Wild, had told her the current overall project “in terms of cost, schedule and scope is unsustainable”.