The high price of cost overruns

Hey there, time traveller!
This article was published 01/11/2013 (4387 days ago), so information in it may no longer be current.

When he first arrived at city hall, Sam Katz appeared to be a no-nonsense, small-c conservative who would serve as a good steward of the public purse. Given his background as an entrepreneur, there was no reason to doubt this mayor would be cautious about the way the City of Winnipeg spent money.

That was 2004. Nine years later, things have changed.

Under Katz’s watch, several major capital projects increased dramatically in cost. Winnipeg’s new water-treatment plant had an original budget of $205 million but wound up costing $300 million. The Disraeli Freeway reconstruction was originally pegged at $140 million but wound up being $195 million. The Chief Peguis Trail extension was first presented as a $65-million project but ended up costing $110 million.

Although you can’t blame the mayor for construction inflation or scope increases, the fact remains he was unable to prevent a combined $195 million worth of additional taxpayers’ funds from being spent on cost increases on three projects alone.

No one likes to be in the captain’s chair when the ship starts listing to port. So Katz embraced a new mechanism in an effort to rein in runaway spending on major projects: the concept of a “guaranteed maximum price.”

In theory, a GMP places a limit on the cost of a major project.

Through a process of negotiation, a builder and a funder agree to a figure both parties believe will be high enough to cover any contingencies that may arise during the construction process.

If a construction company messes up on a project covered by GMP agreement, the builder assumes the responsibility for the additional costs. In theory, a GMP agreement is capable of providing governments with cost certainty.

But in reality, a GMP is only as good as the language in the agreement. If that language lists off a multitude of exclusions — or if the funder makes any changes to the design of the project — then all previous bets are off.

In other words, there rarely is such a thing as a “guaranteed maximum price.” There certainly isn’t in Winnipeg, where two of the biggest capital projects covered by a GMP are plagued by cost overruns.

First, there was Investors Group Field. In 2010, after the city and province wrested control of building Winnipeg’s new football stadium away from Creswin Properties, the two levels of government came up with a GMP for completing the project for $190 million.

Today, the cost of building the stadium is pegged at $204 million. Changes to the original, apparently faulty design led to $14 million worth of costs above and beyond the $190-million guarantee.

Winnipeg’s new police headquarters is also covered by a GMP agreement. In 2011, after $28 million in cost overruns were disclosed, the city capped the project at $194 million, based on a “guaranteed maximum price” of $137.1 million for the core construction component of the project.

At the time, Katz was confident he would never have to stand before reporters and discuss police-headquarters cost overruns again. “Any cost overruns now are the responsibility of those who are building it, not you or me or any other taxpayer,” Katz told reporters in 2011.

Unfortunately, the GMP agreement covering the new police headquarters was based on a design that was only 30 per cent complete. Even worse, that design was later revealed to not entirely suit the needs of the Winnipeg Police Service — which was hoping to place 14 separate divisions under a single roof.

In April of this year, a report to council confirmed there is a risk the final building design may result in a different, higher price. Then on Sept. 30, members of executive policy committee were informed of cost overruns as high as $17 million.

All of council will be updated about the cost overruns at the police headquarters project today at a closed-door seminar planned for 9 a.m. Daggers may be tossed at former chief administrator Phil Sheegl and project manager Ossama AbouZeid, who worked on the GMP. Blame may also be spread among the senior ranks of Winnipeg’s public service.

But the ultimate responsibility for cost overruns does not lie with officials and contractors. It lies with Winnipeg’s mayor, who now has less than one year to claim a legacy of fiscal prudence — and fulfil the promise of his original candidacy, nine long years ago.

 

bartley.kives@freepress.mb.ca