Chapter 9: Tendering of the Infraco Contract to the Appointment of Preferred Bidder in October 2007

Introduction

9.1 As was discussed in Chapter 5, the procurement strategy for the Edinburgh Tram project (the “project”) included undertaking design and utility diversions in advance of the infrastructure works, with a view to “de-risking” those works and obtaining a fixed price for the infrastructure contract (“Infraco contract”). The procurement strategy envisaged that when the Infraco contract was signed, design would be complete and design risk would be transferred to the Infraco contractor by novation of the design contract. In considering the question of the appointment of a contractor for the Infraco contract I have adopted a staged approach, commencing with the period up to the appointment of the preferred bidder in October 2007. The stages that followed were:

• the period from October to December 2007, including the meeting in Wiesbaden, Germany;
• contract negotiations between January and May 2008; and
• contract close.

9.2 This chapter and the ones that follow consider these stages in turn.

Initial proposals and responses

9.3 On 6 October 2005, tie Limited (“tie”) published in the Official Journal of the European Union (“OJEU”) a Prior Information Notice dated 4 October 2005 in respect of intention to seek tenders for the Infraco contract [CEC01792891]. In advance of the publication of a Contract Notice it sought experienced tramway infrastructure contractors and system integrators to enter into discussions with tie in relation to the procurement process for the Infraco works “for the purposes of subsequently being able to structure the proposed procurement to achieve efficiency in process and outcome” [ibid, page 0001, paragraph 11.9]. The proposed start date for the Infraco works was 31 March 2007.

9.4 On 31 January 2006, tie published a contract notice in the OJEU in respect of the proposed Infraco contract [CEC00208568]. It was expected that the Infraco works would have a duration of 36 months, from the award of the Infraco contract until the commencement of tram operations.

9.5 Mr McFadzen was the project director at Bilfinger Berger (“BB”) with responsibilities for business development, bid management and, ultimately, project management. He proposed to his employers and to Bilfinger Berger Germany that BB should bid for the Tram project on the basis of the original procurement strategy [TRI00000058_C, page 0004, paragraph 14]. The strategy included the completion of the design by System Design Services (“SDS”) contractors before novation; and BB understood that design would be completed, and all necessary statutory approvals and consents obtained, prior to the award of the Infraco contract. In addition, tie would procure the utility diversion works and complete them before the start of the Infraco works [PHT00000034, pages 5–6]. tie’s procurement strategy meant that only small pieces of re-design and improvements to the design would be required after the award of the contract. This provided for certainty and was the “big selling point” for BB [TRI00000058_C, page 0004, paragraphs 14–15; PHT00000034, pages 5–6, 9]. In the event, however, there were many gaps in the design information that was provided to the Infraco bidders [PHT00000034, pages 8–10] and it became apparent that tie had failed to implement its strategy in respect of design and prior approvals. Part of the difficulty related to the degree to which the Employer’s Requirements were developing during the tendering process. In similar projects the Employer’s Requirements would normally be well developed before the start of the procurement process, but in the project the Employer’s Requirements had not been sufficiently well developed to go to tender, with the result that BB submitted a “heavily qualified tender” [TRI00000058_C, page 0005, paragraph 18] that contained many qualifications, some of which remained throughout the procurement process and were included in Schedule Part 4 to the Infraco contract (“SP4”), which is discussed more fully in Chapter 11 (Contract Negotiations) [PHT00000034, pages 10–11].

9.6 On 6 March 2006, tie produced a Memorandum of Information and Pre-Qualification Questionnaire in respect of the Infraco contract [CEC01781572]. Pre-qualifying candidates were requested to submit a completed pre-qualification questionnaire by 31 March 2006 (later extended to 14 July 2006). It was originally anticipated that:

• tie would issue documentation containing an invitation to negotiate on 25 April 2006;
• tenders would be returned by 1 September 2006;
• parties would be invited to submit a “best and final” offer in the first quarter of 2007;
• the Infraco contract would be awarded on 1 July 2007; and
• the Infraco works would be completed in 2010 [ibid, page 0011].

9.7 BB pre-qualified as a civil works contractor in March 2006 (and, in July 2006, pre-qualified again as part of a joint venture with Siemens) [Mr Walker TRI00000072_C, page 0003, paragraph 2]. The above timetable was not achieved. As will be noted in Chapter 14 (CEC: January–May 2008), the Infraco contract was not signed until 14 May 2008.

9.8 An Office of Government Commerce (“OGC”) readiness review of the project in May 2006 recommended that the procurement strategy be reviewed in light of market feedback [CEC01793454]. In particular, it was noted that some of the pre-qualified bidders (for both the Infraco contract and the tram vehicle supply and maintenance contract (the “Tramco contract”) had expressed concern at the requirements to accept novation of sub-contractors and that there were reports that potential Infraco contractors might not want to take on designers or might charge a premium for full novation of the SDS contract. It was noted to be important to retain at least three (and two as an absolute minimum) bidders as far into the process as possible in order to maintain competitive pressure [ibid, page 0004].

9.9 In May 2006, Mr Harper joined tie as interim Tram Project Director (“TPD”), following the departure of Mr Kendall, who had devised the procurement strategy. Mr Harper confirmed that the procurement strategy was reviewed following the OGC review and that it was decided to continue with it. While he regarded the procurement strategy as unnecessarily complex, it was a “constraint” within which he required to work (official notices having already been published setting out the proposed procurement and the System Design Services contract (“SDS contract”) having already been let). When he joined tie it was made clear to him that his role was to drive the project forward, to make progress and to change – and improve – the project’s reputation. He was only involved with the project on an interim basis and, if he had been engaged on a more long-term basis, it is possible that he would have considered reviewing the whole procurement process (albeit that that might not have been possible and might have led to penalties, claims from unsuccessful bidders and delay) [TRI00000043_C, pages 0003–0006, 0013–0015, 0027, paragraphs 8–9, 15, 17–19, 44–51 and 95].

9.10 In June 2006, Mr Gallagher, the Chairman of tie, and Mr Howell, tie’s Chief Executive, met representatives of Turner & Townsend and of Scott Wilson Railways and invited them to comment on the project’s progress and to offer advice on what required to be done to ensure its success. In a letter dated 15 June 2006, Turner & Townsend made various comments, including in relation to the procurement of the Infraco contract. In particular, it was noted that the Infraco contract had been advertised with only three potentially realistic organisations likely to progress to a tender list. That was an unexpected outcome of the publication of the OJEU notices, with many of the UK’s largest civil engineering contractors having chosen not to make a submission. The industry’s reaction to the procurement route, which transferred significant risk and liability to the contractor, was that that had not been an attractive one when compared with the opportunities for contractors to undertake schools, health and roads projects. Turner & Townsend also expressed concern that one of the contractor teams could withdraw, leaving an inadequate tender list [WED00000085, pages 0001–0002]. Scott Wilson Railways expressed similar concerns in a letter to tie dated 22 June 2006, including that the proposed novation of the tram and design contracts to the Infraco contractor were two key areas in which it was believed that an inappropriate risk allocation had led to some of the UK’s major civil engineering contractors not being interested in tendering for the Infraco contract. It was noted that the current response to the Infraco contract of three interested parties could quickly reduce to only two potential bidders, thereby threatening the credibility of the procurement process and the viability of the project [CEC01778078, page 0002]. This concern became a reality when Amec withdrew its bid for the Infraco contract by 8 November 2006. The reason given for that withdrawal was corporate restructuring, the effect of which was that Amec no longer had the capability to provide all the skills necessary to deliver a tram system. While it was considered preferable to have three bidders, it was noted that the increased risks to the likelihood of obtaining a competitive bid would be mitigated by obtaining and closely scrutinising the details of bidders’ price proposals and benchmarking prices against prices obtained for comparable tram networks in Liverpool and Dublin [CEC01803371, page 0015]. In the event, the Liverpool tram scheme did not proceed. When he joined tie as TPD in January 2007, Mr Crosse would have preferred at least three bidders, but he was not surprised that there were so few because the market was not wholly confident that the project would go ahead. Bidding is an expensive process and if there was any question about funding then bidders would not bid [TRI00000031_C, page 0030, paragraph 92].

9.11 In August 2006, Mr Gilbert joined tie as the Commercial Director of the project with responsibility for the award of the Infraco contract. At that time there was an expectation within tie that there would be a level of design that sufficiently defined the shape and form of the scheme to provide enough information to enable bidders to price the scheme with limited assumptions, caveats and risk [TRI00000038_C, page 0006, paragraph 15]. In addition, the intention was that detailed design would be substantially complete when the Infraco contract was signed [ibid, pages 0018–0019, paragraph 49]. That was consistent with the draft Final Business Case (“FBC”) dated November 2006, which stated that it was expected that the overall design work to the point of detailed design would be 100 per cent complete when the Infraco contract was signed and that tie was seeking to complete the key elements of detailed design prior to selecting the successful Infraco bidder in the summer of 2007 [CEC01821403, page 0085, paragraph 7.53].

9.12 A paper prepared for the meeting of the Tram Project Board (“TPB”) in August 2006 noted concern over design delay and its effect on the risk transfer objectives of the procurement strategy. Steps had been taken to address these issues. A meeting had been held with Parsons Brinckerhoff’s (“PB’s”) senior UK management and a protocol had been agreed for supporting delivery of designs for the Infraco invitation to negotiate (“ITN”). The design and consent information required for the Infraco ITN would be identified and prioritised, agreed with the bidders, and then delivered to an agreed programme. The information required by bidders to minimise their risk premium levels would be identified and programmes developed for delivering that information progressively during the bid period [CEC01688881, page 0004, paragraph 3]. It was noted that in order to maintain the Infraco procurement programme the procurement would require to be conducted as an “ongoing negotiation”, with interim submissions being obtained from bidders for evaluation before delivery of final bids within the project programme. Given concerns in respect of the potentially unaffordable capital expenditure cost of the Tram project, a further value engineering (“VE”) exercise would require to be undertaken in October, after completion of a project estimate update [ibid, page 0005, paragraph 4].

9.13 A further OGC readiness review was carried out between 26 and 28 September 2006 [CEC01629382] and a follow-up review on 21 and 22 November 2006 [CEC01791014]. As part of its review the OGC team was asked to comment on the readiness of tie to issue the ITN documentation to pre-qualified bidders on 3 October 2006, against the background that the issue of documentation would be phased, with the documentation being issued for the principal sections initially and a further issue of design information at the end of October. The review team noted that there were advantages and disadvantages in issuing the ITN documentation on 3 October 2006 and concluded that, on balance, the documentation should be issued on that date as planned.

Invitations to negotiate

9.14 On 3 October 2006, tie issued the ITN to the pre-qualified bidders [CEC01794929]. Tender submissions were required by 9 January 2007. The documents comprising the ITN were contained in 21 CDs and a set of hard-copy drawings. The drawings provided to bidders were preliminary design drawings [report to the TPB Design, Procurement and Delivery Sub-Committee on 8 November 2006, CEC01803371, page 0011, paragraph 2.1].

9.15 By letter dated 13 October 2006, the consortium of Bilfinger Berger UK Limited and Siemens plc, known as Bilfinger Berger Siemens or Bilfinger Siemens Consortium (“BBS”), sought a continuation of the tender period by three months, given the complexity and magnitude of the tender [CEC01795260; see also BBS’s letter dated 16 October 2006, CEC01795314]. On 23 October 2006, BBS provided tie with initial feedback on the tender documentation, listing 14 points that had originally been intended as internal comments [CEC01795714]. In summary, these points included concerns about the early stage of the design, the existence of definite and significant gaps in the supplied drawings, the absence of details of the proposed track bed/slab, the potential influence on the final design caused by unresolved planning requirements and the influence of third parties. Moreover, significant issues were raised regarding drawings provided for bridges and other structures and it was said to be questionable whether the design, based on the drawings supplied, was sufficiently advanced to enable a robust and credible price to be prepared. These concerns were followed by further issues about the quality of the information provided by tie to BBS. In an email dated 25 October 2006 [CEC01823109] BBS sent tie a list of inconsistencies [CEC01823110] in the tender documents supplied to it, including inconsistencies between the hard-copy set of documents, the electronic CD set, the drawing list attached with the documents and the Employer’s Requirements. The list identified 24 specific structures for which no drawings had been supplied, and added 2 additional categories entitled ‘Miscellaneous Retaining Walls’ and ‘Additional Structures’. Mr Walker, Managing Director of BB, referred to these inconsistencies in the tender documents and considered that the administration of the tendering data was in disarray. Moreover none of the information provided by tie to BBS was consistent, so it was impossible to price. He stated that the design process at that stage was “woefully behind” and that tie did not appear to understand what the impact of that would be [TRI00000072_C, page 0006, paragraph 8]. Mr Walker’s assessment of the situation at that stage was reasonable, on the basis of the information available to him. In this respect he was supported by Mr McFadzen’s evidence to the effect that, by November 2006, BB had formed the view that design was “a bit of a shambles”, not only in relation to unclear numbering of the drawings but also in relation to the state of completion of design [PHT00000034, pages 13–14].

9.16 The concerns about the inadequacy of the information in the ITN were not confined to BBS. They were shared by employees of tie. Ms McGregor and Mr Dawson were concerned that, as a result of various outstanding issues that required to be addressed, tie might receive low and heavily qualified bids [CEC01797138]. Ms Craggs, a solicitor employed by Dundas & Wilson and seconded to tie as Director of Approvals and Consents, expressed concerns relating to the quality of the ITN and the ability to get a robust price [CEC01797628]. She considered that the documentation going to the tenderers was not fit for purpose. The design was not sufficiently advanced to give tenderers a clear indication of what they were being asked to bid against. She suggested on several occasions that the project be paused to allow the design to catch up and to enable the process to award the Infraco contract to start on a proper footing. Although she thought that Mr Harper acknowledged the validity of her concerns, the response that she received from Mr Harper, Ms Clark and Mr Gilbert was that tie had to keep to the programme, despite the status of design, in order to achieve the planned, and publicly announced, commencement date for operating the trams [PHT00000016, pages 105–109 and 155–158; TRI00000029, page 0024, paragraph 59]. Ms Craggs was an impressive witness, whose evidence I was able to accept as credible and reliable.

9.17 By the end of 2006, considerable difficulties and delays existed in relation to design, which are noted in Chapter 6 (Design (to May 2008)). Nevertheless, tie did not consider delaying the tendering process because it thought that the issue could be resolved by re-programming and by addressing the design problems [Mr Harper TRI00000043_C, pages 0015 and 0029, paragraphs 51 and 102]. Mr Gilbert gave evidence that while it was not ideal, or usual, to seek initial bids based on preliminary design (with bids being updated later, as more information became available), tie wished to move the project forward because of emerging concerns that it might not go ahead, and that a lot of time could have been lost while waiting for more detailed design to become available before obtaining bids [TRI00000038_C, page 0020, paragraphs 51–52].

9.18 Mr Crosse opined that pausing the programme to allow design to be completed was not a realistic option. The deadlines for the project had been made public and stated in the business case upon which the project had been approved. If deadlines had been missed, that would have affected the credibility of the organisations involved, the economic benefits contained in the business case and the affordability of the project. While, in an ideal world, all the design would have been completed before the award of the Infraco contract and SDS novation, that did not usually happen in practice and, in the Tram project, the design was never going to be perfectly complete by then. Instead, tie’s aim was to have design sufficiently advanced in order that BBS felt sufficiently comfortable with the risk to set a price and accept SDS novation. There was no need to pause the programme; what was needed was for the “gridlocked” design to be unlocked to enable design to be progressed [TRI00000031_C, pages 0007–0008, paragraphs 15 and 18]. I consider that Mr Crosse’s reliance upon what usually occurred in practice in other projects failed to take account of the fact that the project had a different procurement strategy from other similar ones. This failure became apparent when he gave oral evidence. In any event, the impression created by tie’s reluctance to pause the process to enable design to catch up and to proceed with the negotiations with the bidders on a proper footing was influenced by a desire to adhere to a published programme, which was no longer achievable, for the purpose of ensuring that the project proceeded despite political opposition and irrespective of the additional cost to the public purse that would inevitably result. Moreover, Mr Crosse’s reliance upon the effect of any delay upon the economic benefits contained in the business case and the affordability of the project failed to recognise that proceeding with negotiations where the ITN was not fit for purpose and would not result in a robust price would also affect the affordability of the project and the ability to realise the economic benefits stated in the business case. I consider that in adhering to a programme that was incapable of being delivered tie was reckless and placed its own interests ahead of the public interest, despite the fact that it was a company wholly owned by City of Edinburgh Council (“CEC”) and dependent on public funds.

Submission of proposals

9.19 On 9 January 2007, tie issued Supplemental Instructions to Tenderers, which required them to return as much as possible of the tender submission on 12 January 2007, with any outstanding, amended or updated tender information to be submitted as part of consolidated proposals on 16 April 2007 [CEC01824070]. Between 12 January and 16 April 2007, tie would provide tenderers with further information, including updated Employer’s Requirements, significant development to the preliminary design, updated traffic modelling, the current programme for the Multi-Utilities Diversion Framework Agreement (“MUDFA”) works and detailed design for key structures. Detailed design from SDS would be released after appointment of the preferred bidder, at which point the preferred bidder would undertake due diligence on price- and risk-critical items in the SDS design [ibid, page 0004]. tie intended to appoint the preferred bidder in July 2007 and to award the Infraco contract in October 2007 [ibid, pages 0006–0007].

9.20 On 12 January 2007, in response to tie’s requirements set out in the Supplemental Instructions and the ITN as amended, proposals were submitted by two infrastructure bidders, namely BBS [CEC01533655] and Tramlines [a consortium formed by Laing O’Rourke, Grantrail and Bombardier]. BBS submitted a price of £295,846,555, consisting of £243,697,218 for phase 1a and £52,149,337 for phase 1b [CEC01818715]. As noted below, BBS’s tender was heavily qualified. The qualifications included, but were not restricted to, references to lack of design information and the consequences of that. In particular there were the following qualifications:

“Due to unavailability of design information and the uncertainty of the final delivered solution all prices are based on similar technical solutions for Tram systems, out with the UK. The prices quoted, whilst as accurate as possible, are therefore indicative and do not form an offer which can be accepted.” [CEC01533655, page 0003, paragraph 3.]

“Due to the current design status a detailed evaluation of risk cannot be undertaken. In the meantime we have allowed for a notional allowance of 10% on Civil and 6% on Systems and Track within our proposal.” [ibid, page 0003, paragraph 5.]

“Quantities, rates and programme durations are subject to adjustment as detailed design information is issued sufficient to allow these to be accurately assessed.” [ibid, page 0004 paragraph 4.]

“All overhead, overground and underground services including service chambers, service covers etc., will have been removed or diverted prior to our works.” [ibid, page 0004 paragraph 16.]

9.21 Mr McFadzen explained the approach adopted by BBS in submitting its proposals. The tender was heavily qualified because of the status of design. BBS lacked a “huge amount” of information that it needed to produce a firm price [TRI00000058_C, page 0010, paragraph 35]. Accordingly, the tender included a large list of qualifications and clarifications, some of which were maintained throughout the award process, ultimately becoming part of the pricing schedule in the Infraco contract (ie SP4 [USB00000032]). He explained that this was unusual because normally the employer would buy out the qualifications during the course of the discussions leading to conclusion of the contract [PHT00000034, pages 16–17]. In his statement he said that where a provisional sum was included in the tender as a result of incomplete design, it did not matter whether it was realistic; the overriding consideration was that BBS was in a competitive situation. Accordingly, BBS would insert the lowest possible sum even if that was not realistic. To illustrate this approach Mr McFadzen cited a hypothetical example of pricing a bridge with outline information only. If BBS thought that a realistic price was £500,000, it would use £250,000 as a provisional sum [TRI00000058_C, page 0010, paragraph 33]. He qualified this in his oral evidence to say that as contract close grew nearer and tie was testing the bid the prices grew more realistic. I consider the practical effect of this provisional pricing in Chapter 10 (Events between October and December 2007).

9.22 Mr McFadzen considered that, by January 2007, tie’s procurement programme was becoming more and more unachievable as a result of the delays with design and MUDFA. He did not consider it possible that design would be completed by October 2007 to enable the Infraco contract to be awarded at that time. There was no recovery plan for the design or for the utilities contract. No arrangements, such as additional payment or instructions, were in place to accelerate progress on these matters. He made individuals within tie (in particular, Mr Harper and Mr Gilbert) aware of his concerns at various meetings. He considered that the response from tie was slightly “heads in the sand”, with tie seeking to give reassurance that it would be all right, that BBS should not worry and that it should just get on with the procurement process [PHT00000034, pages 18–20]. He considered that the proposed contract was bespoke and did not appear to be very well thought out. It was very unusual that a contract for a project of this magnitude was not following a standard model contract (such as the NEC, FIDIC or ICE forms) [TRI00000058_C, page 0006, paragraph 21].

9.23 Numerous witnesses supported the evidence of Mr McFadzen that is set out in paragraphs 9.21–9.22. Mr Walker also confirmed that incomplete information provided to tenderers necessitated the submission of highly qualified tenders. For example, although the Supplemental Instructions to Tenderers referred to the detailed design of structures, there was none. Even at the stage of signature of the contract, the final design was absent. He considered that the tender process was started too early in relation to the progress of design. When BBS received the Supplemental Instructions to Tenderers in January 2007 he considered it likely that the procurement programme would continue to drift. He was of the view that tie’s procurement programme was unrealistic and not achievable and thought that the tender should be delayed for approximately a year to enable the design to be completed. Mr Walker advised tie representatives of his views to that effect [PHT00000035, page 12; TRI00000072_C, pages 0008–0009, paragraph 15].

9.24 Mr Flynn, Director of Major Projects at Siemens plc, gave evidence that the BBS bid was quite transparent in identifying a large number of clarifications, exclusions and assumptions necessitated by missing information, especially in relation to design [PHT00000045, page 25]. He stated that for comparable “build–only” contracts (cf. “design-and–build” contracts), the client would provide a complete design for the whole scheme, against which bidders could bid. That was not the case for the project, where the design and scope information provided during the bid phase was incomplete and immature. The issues presented by the immature status of the design and scope were compounded by the fact that tie wished to fix the price for the contract. That was inconsistent with the approach of commercial organisations such as Siemens, who wish to limit their liabilities and risk in situations in which scope, schedule and interfaces are volatile, as was the case with the project. He went on to explain that, typically, where a client does not know the specifics of what they wish to build, the client usually takes a different approach to pricing, such as by adopting a “target cost” or “emerging cost” approach. With a “target cost” approach, parties aim for a target price and agree an incentive arrangement around scope, schedule and cost that acknowledges the immaturity of scope and design. An emerging cost approach is, essentially, a “cost–plus” contract [TRI00000151_C, page 0004, paragraphs 16 and 18]. Mr Dawson confirmed that:

“if the scope is not fixed then bidders are unable to provide a fixed price unless they include additional risk monies, which then causes affordability issues” [TRI00000032_C, page 0011, paragraph 21(2)].

9.25 As noted in paragraph 9.19 above, the tender process required the submission of consolidated proposals on 16 April 2007, based upon the additional information listed. BBS submitted its consolidated proposals to tie on 8 May but it is apparent that, prior to that date, similar concerns to those noted above continued to exist about the procurement programme and achievement of the procurement strategy. These were expressed in a variety of ways. In a document dated 8 February 2007, tie responded to queries raised by Transport Scotland on the proposals received from the Infraco bidders [ADS00017]. The nature of the queries raised can be ascertained from tie’s responses. For present purposes it is sufficient to note that they included issues relating to programme compliance, contractual issues and novation. In addressing concerns about programme compliance tie considered that both bidders’ programmes were achievable. Factors that created a risk to programme compliance with the objective of delivering the tram network into service by December 2010 included “[d]isruption to work on site due to unexpected ground conditions, antiquities, unplanned events in Edinburgh etc” and “[b]uildability problems with designs” [ibid, page 0002]. To address the risks associated with unexpected ground conditions, tie would undertake extensive surveys in advance of works and provide all known data and records to bidders before their programmes were finalised. As will be noted in paragraph 9.47 below, this did not occur. In particular, interpretative reports of surveys of ground conditions were never provided to BBS. Contractual issues arose because both bidders had made substantial amendments to the proposed terms and conditions of the Infraco contract in order to protect their risk position pending receipt of more detailed design information and the completion of due diligence. It was noted that there had been a nervousness on the part of both bidders in respect of the nature of the output, depth and delivery of buildable designs to programme by SDS. The state of design was clearly relevant to the procurement strategy of novating the designer to the Infraco contractor. If that was to be achieved, the SDS contractors’ performance, and their performance in the perception of the bidders, would require to improve and the bidders would require to undertake due diligence on the designs. tie recognised that critical design must be completed well before contract award if the strategy of novation was to be achieved in accordance with the procurement strategy [ibid, pages 0003–0006].

9.26 On 22 February 2007, a programme prioritisation session was held, chaired by Mr Crawley, Director of Engineering Assurance and Approvals at tie. The objective of the meeting was to define “an achievable and aligned programme for the Tram Project” [PBH00021529, page 0001]. The meeting resulted in Mr Crosse proposing a five-month delay to the award of the Infraco contract, while maintaining a commitment to having an operational tram system by Christmas 2010, modified to delivering trams in trial running rather than in revenue-earning service [ibid, page 0002]. Ms Craggs attended that meeting but it is clear that she continued to have concerns in relation to the procurement, which had been exacerbated by events at an internal meeting prior to a meeting with bidders. She expressed her concerns in an email to Mr Gilbert dated 1 March 2007. These included a concern that tie was deviating from the procurement strategy and an expression of the need for a plan on how to deal with bidders, including an informed and consistent approach. She also considered that:

“there appears to be no management of the next drop of information nor a coherent plan of what we are trying to achieve. I just feel we are losing our way with this” [CEC01793907].

9.27 In her evidence to the Inquiry Ms Craggs explained that she was concerned that tie appeared to be losing control of the process to award the Infraco contract. tie had responded to a bidder’s concerns by making changes to the planned process – for example, by accepting the risk of obtaining consents, which was a risk borne by SDS and ultimately Infraco under the intended procurement strategy. It was unclear whether such departures from the planned award process were notified to the other bidder [PHT00000016, pages 164–166; TRI00000029, page 0024, paragraph 59].

9.28 On 3 April 2007, tie received Transport Scotland’s comments on the draft FBC [TRS00004144; TRS00004145]. Its main comments on procurement related to the risks and consequences of failing to achieve the planned convergence and closure within the required timescales, many of which risks related to the progress of design and possibly interfacing utility design to core infrastructure. Transport Scotland observed that it was clear that the programme was tight, and it raised various specific issues relating to programme in the following observations:

• “… the programme provided describes only a ‘Best Case’ scenario with no real feasible mitigation of delay or additional time for any secondary works required. This is a very critical programme issue and if the key early milestones cannot be achieved the delay will be extended to months.
• The programme with its dates and planned work flow for the SDS Design, INFRACO and MUDFA works is based on a large number of assumptions of … ‘right first time and on-time delivery’. Edinburgh Tram Network Project is a unique project in Scotland. Therefore the assumptions and preconditions appear optimistic.
• The programme shows that the entire Detailed Design for this project will be completed in October 2007 – is this realistic?
• The procurement process for the INFRACO contract is running parallel to the design stage. The award of the INFRACO contract is scheduled for October 2007 and the commencement of the main construction works will be in December 2007, is this realistic?
• The construction works of the first line (line 1a) will be completed in July 2010 (early finish date assumes no delays and right first time).
• In summary the overall durations for the construction works and procurement look reasonable. The durations for design, procurement, approvals and commissioning however look very compressed. The lack of float or mitigation opportunities and ‘right first time’ planning would appear optimistic.” [ibid, pages 0005–0006 and 0009–0010.]

9.29 As later transpired, the concerns about tie’s ability to achieve the optimistic and unrealistic programme became a reality.

9.30 In emails addressed, or copied, to tie dated 22 October 2006 and 21 November 2006 [CEC01759177; CEC01759176 respectively], Mr Harries, a highly respected chartered engineer with considerable experience in light rail and tram systems and the project engineer for Transdev Edinburgh Tram Limited (“Transdev”), expressed concerns about the quality of the documentation in the ITN. Transdev had been retained by tie as the proposed operator of the Edinburgh Tram Network, by reason of its experience and expertise in light rail operations. In his email dated 22 October addressed to Mr Richards, of Transport Edinburgh Limited, and copied to Ms Clark and Mr Harper, of tie, Mr Harries commented on the Employer’s Requirements that had been sent to Infraco and expressed frustration that a significant number of his earlier comments had been ignored. As for the quality of the information provided to Infraco, he commented: “If these really are the documents that have been sent out to Infraco, They (sic) are a very poor reflection on us all!” [CEC01759177]. In his later email addressed to Ms Clark and copied to Mr Gilbert and Mr Richards concerning the ITN second release he expressed disappointment that this release had so many errors and considered that there had been insufficient validation by tie, resulting in increased project cost and risk. Such comments are indicative of a chaotic and disorganised approach at the commencement of negotiations, which one might expect to have been addressed following the receipt of these emails. That does not appear to have happened. An email dated 25 April 2007 from Mr Harries noted that Transdev had reviewed the latest Infraco procurement release and were concerned that, yet again, very poor-quality information had been released to Infraco bidders, with insufficient checks having taken place prior to its release [CEC01630498, pages 0003–0005]. A table summarising the key issues included comments that:

• the documentation had not been checked prior to its issue to Infraco, and ownership of the documentation within tie was not clear;
• there were many instances of internal conflicts within the package and inappropriate duplication of information;
• the complete range of elements that made up the total project were unevenly described;
• there was an inconsistent and variable level of details from different authors within the package, which reflected a lack of overall editorial ownership and understanding; and
• the release to Infraco bidders was still not aligned with what the SDS contractors were doing, with the result that the novation risk would fall on tie.

9.31 In his evidence Mr Harries explained that while tie was being driven by programme requirements to release information in relation to the Infraco contract to bidders, issuing documents of that standard introduced future cost and risk (because aligning the documents at a later date was likely to result in contract changes and claims by the contractor) [PHT00000016, pages 13–14].

9.32 tie‘s reaction to these concerns was explained by Mr Crosse. He remembered receiving the email from Mr Harries and that it was a concern, particularly in view of his expertise. Mr Crosse and Mr Gilbert took the decision to provide the information to the Infraco bidders at that time in order that tie could keep to its procurement programme even although the design information provided to it was a “work in progress” [PHT00000021, pages 93–96]. I gained the impression that Mr Crosse failed to appreciate that the quality of the design information to be provided to bidders was more critical in this project than in “design-and-build” schemes such as those in Nottingham or Croydon or the Midland Metro. He seemed to take comfort from the fact that the amount of information provided to bidders was much greater than in other schemes. Such an approach was a fundamental error. It is surprising that Mr Crosse and Mr Gilbert adopted what appears to have been a slavish adherence to the project programme despite the concerns expressed by Mr Harries, and at a time when tie appears to have largely conducted the procurement process itself, without the benefit of legal advice from its solicitors (DLA) [Mr Fitchie TRI00000102_C, page 0011, paragraph 2.22]. That approach clearly exposed tie to the increased risk of contractors’ claims and additional costs mentioned by Mr Harries in his evidence.

Submission of consolidated proposals

9.33 On 8 May 2007, BB and Siemens entered into a formal consortium agreement [TIE00079228] and, by letter erroneously dated 8 May 2006, the consortium (BBS) submitted consolidated proposals [CEC01656123]. The bid price for the whole project (ie phases 1a and 1b) was £268.5 million [CEC00573745, page 0002], but the consolidated proposals were not final ones because BBS did not have sufficient and complete information. It had growing concerns in relation to design, approvals, third-party agreements, the conditions of the contract and delays to MUDFA [Mr McFadzen PHT00000034, pages 21–23].

9.34 BBS continued to have concerns about the design, the programme and the quality of the available information. These concerns were never resolved and, indeed, they increased as difficulties arose in obtaining consents and approvals from CEC. It was becoming more and more apparent to BBS that design would not be complete before the award of the Infraco contract. tie was aware that BBS’s bid was based upon all approvals and consents being in place at the time of SDS novation, MUDFA diversions being complete in sections before BBS started the Infraco work there, and all SDS design detail being complete before the award of the Infraco contract [CEC01654151, page 0002, clause 32.3; CEC01611490, page 0003, item 6].

Value engineering

9.35 VE is a process routinely carried out in construction contracts. In broad terms it is a process whereby the parties involved in the works consider whether there is a cheaper means by which the objectives of the contract can be met. It is normal for clients and contractors to seek VE opportunities to achieve savings on the cost of a project. Such opportunities vary according to the individual project but, for example, might relate to the method of construction or changes to the form of specific structures, resulting in lower costs. The two bidders for the Infraco contract had identified a number of opportunities for cost savings and improvements. The difference in the treatment of VE savings in this project from that adopted in other projects was that all the savings were to accrue to tie, with no share being payable to the contractor [Mr Walker PHT00000035, page 39; Mr McFadzen PHT00000034, page 42; TRI00000058_C, page 0014, paragraph 47]. A report by Mr Gilbert in early June 2007 noted that by May (presumably, following receipt of the bidders’ consolidated proposals) it was evident that forecast capital costs still exceeded available funding and that further savings were required. A series of VE workshops was, therefore, arranged with each of the Infraco bidders to discuss savings to close the funding gap. The first workshop with BBS was on 1 June [CEC01658322, page 0004, paragraph 1]. Notes of a meeting of some members of the tie management team on 6 June 2007 stated that a list of VE opportunities had been considered, categorised into “easy”, “medium” and “difficult” according to the likelihood of achieving them, and given a pro-rated anticipated result of 80 per cent, 50 per cent and 20 per cent respectively. The total value of opportunities considered, before applying the pro-ration, was £72 million [CEC01629344, pages 0002–0003]. In its response to the queries from Transport Scotland mentioned in paragraph 9.25 above, tie explained that the total value of opportunities was £32 million after factoring for the level of difficulty in implementation, of which £22 million represented the “easy” category of savings [ADS00017, page 0010]. The target savings from VE at that time was £14 million (of which £4 million had already been “banked”) [CEC01629344, page 0002]. A further tie report noted that a total saving of over £1.8 million was indicated from the reviews with BBS to date, with further savings yet to be quantified [CEC01644202, page 0002]. Minutes of the meeting of the TPB on 14 June 2007 noted that although the VE process had identified a large number of potential savings, it was recognised that not all of them would be achievable. Nevertheless Mr Crosse “was confident that VE savings in the range of £20m–£30m would be attainable” [CEC01565576, page 0008, paragraph 6.2].

9.36 As with the ITN, there were concerns about the VE exercise. Emails between Transdev, Technical Support Services and tie in July 2007 reporting on meetings with the bidders to discuss VE savings in respect of structures noted disorganisation within tie (in particular, between the design and procurement teams), which was stated to be “embarrassing” for all concerned and led to concerns that the bidders were losing confidence in tie [CEC01627545].

9.37 Moreover, while acknowledging that VE is a normal part of projects, Mr McFadzen did not consider that the VE savings being sought by tie were achievable, with some of them being at the extreme end of what could be done. At one stage the VE “pot” was said to be £22 million, which he considered to be completely impossible. In his opinion the “mechanics” of the VE process were not really being progressed and would have required CEC, as approval authority, to have agreed to the re-design of certain structures. He cited the example of the possible re-design of the viaduct at Edinburgh Park station reducing the number of its spans from seven to one or two, saving £1.4 million, but this just did not happen. He considered that the VE savings being sought by tie were a “fantasy” and were being used as a form of “financial engineering” so that tie could “manipulate” the figures in order to report to CEC that the cost of the project was within the available budget [PHT00000034, pages 39–41, 43–45 and 156–158].

9.38 Mr Walker gave evidence to a similar effect. Although he appeared to express a different view from Mr McFadzen about the feasibility of achieving significant VE savings, it became clear that there was no real difference between them on this issue because, for a significant number of the suggested savings, no allowance had been made for the time required for re-design. Re-design could take several months and would cause further delay to the construction programme, where the design was already late. The cost of the delays caused by re-design to accommodate changes would exceed any claimed savings [PHT00000035, pages 34–36]. Both at the tender stage and during the subsequent contractual negotiations he had the impression that tie appeared to have a maximum price for the project, which included, but was not restricted to, the cost of the infrastructure works, to ensure that tie would obtain CEC’s approval to proceed with it. He described this as a “gateway” price. BBS was unaware of that price but the Draft Agreement relating to the Selection for Appointment as Preferred Bidder contained the following clause:

“4.3 tie shall not be obliged to, but at its sole discretion may, award a contract to the [Preferred Bidder] where

4.3.1 The estimated infrastructure works cost for Phase 1a as finalised during the Preferred Bidder Period exceeds or is forecast to exceed £218.5 million inclusive of the Infraco Contract Price” [CEC01497399, page 0008].

9.39 Mr Walker considered that tie was trying to “manipulate” the numbers in order to get the price through this “gateway” [PHT00000035, page 20]. His evidence in this respect is supported by the terms of SP4 relating to price, as explained in Mr McFadzen’s evidence. Although the construction works price was £238,607,664, subject to certain pricing assumptions that will be considered in Chapter 11 (Contract Negotiations), Appendix A1 of SP4 analyses that figure in a table, which is reproduced in Table 9.1.

Source: Infraco Contract, Schedule Part 4: Pricing [USB00000032, page 0015]

9.40 As can be seen from Table 9.1, that analysis results in achieving a price of £219,162,336 when VE savings are deducted and provisional sums are excluded, apparently achieving tie’s objective of a target price in the region of £219 million excluding provisional sums. Mr McFadzen explained that VE savings had to be delivered to achieve the construction works price of £238,607.664 and, as tie was aware, the nearer one approached the start of construction work the harder it would be to achieve such savings. The VE savings in Table 9.1 were unlikely to be achieved and represented financial engineering. If VE savings were not achieved they would be added back into the contract price in full and BBS would also be recompensed up to a maximum figure of £25,000 per VE saving for considering each potential saving [TRI00000058_C, page 0049, paragraphs 171–172; PHT00000034, pages 152–158]. I found the evidence of Mr McFadzen and Mr Walker compelling and, taking it with the evidence of the conduct of tie personnel leading up to December 2007 considered in Chapter 10 (Events between October and December 2007), I accept that tie was engaged in a financial-engineering exercise to illustrate a target price of approximately £219 million for the Infraco contract for phase 1a so as to achieve the “gateway” price required to obtain CEC’s consent for the project. I also accept that the “Identified Value Engineering” savings of £9.9 million and the further VE savings of £2.6 million (set out in Appendix A1 of SP4) [USB00000032, page 0015] were necessary to make the project appear affordable within the envelope of £219 million, but it is doubtful whether they were ever achievable. In or before April 2008, prior to contract signature, Mr Reynolds, the Project Director for PB, was concerned about the presentation of the Infraco deal to CEC. In his weekly internal report dated 28 March 2008 [PBH00036973, page 0001, paragraph 1.1] he noted that tie’s “price on the table” assumed VE savings approximating £12 million, but its construction programme did not reflect the design required to deliver the savings. As was noted in paragraph 9.38 above, Mr Walker considered that the cost of the delay to the construction programme necessitated by the need for re-design to achieve the VE savings would exceed any such savings (PHT00000035, pages 34–36). It appears that Mr Reynolds was expressing similar views in his internal report. More significantly, he warned his employers, in the following terms, about the need to take steps against future accusation of deception:

“I do not believe the major stakeholders, including CEC are aware of the position and we must ensure that the Novation Agreement is worded such that it protects PB from any accusations of deception which could be levelled at tie in future.” [PBH00036973, page 0001, paragraph 1.1.]

9.41 For his part, Mr Gallagher denied that there was a practice within tie of adjusting the risk allowances or VE figures to ensure that the project came below a target, or pre-determined, figure [PHT00000037, pages 44–46]. From my observations in the preceding paragraphs it will be apparent that I reject that evidence. I also consider this issue in Chapter 10 (Events between October and December 2007) and Chapter 11 (Contract Negotiations) in the context of Mr Gallagher’s email dated 25 October 2007 [CEC01453723], the discussions at Wiesbaden and the contract negotiations thereafter. Mr Gallagher’s denial of the existence of such a practice might be explained as indicating a lack of awareness of it. However, in view of the fact that he was the Executive Chairman of tie, and having regard to other evidence tending to show that he took an active interest in the detail of negotiations, including his involvement in the negotiations leading up to and including the meeting at Wiesbaden, I consider that he was aware of this practice. Accordingly, I am forced to the conclusion that his evidence on this matter was untrue.

Revised procurement programme

9.42 By summer 2007, Mr Gilbert recognised that a number of factors had contributed to delay in the work to award the Infraco contract. These included the need for more time to deliver VE savings and negotiated reductions to provide an affordable scheme, as well as delay in the issue of price-critical design information to bidders. A review of the bids received in January 2007 had identified that VE savings and negotiated reductions would be required in order to deliver phase 1a within tie’s budget. There had also been a review of the procurement programme to bring about a full alignment of the procurement and design programmes in such a way that minimised the impact on project completion. Proposed changes to the programme included:

• commencing due diligence on designs earlier in the process than previously planned;
• iterative bid updates based on price-critical emerging detailed design; and
• commencing bidder due diligence on detailed designs at the end of August, when the likely successful bidder was known.

9.43 It was proposed to award the Infraco contract in January 2008. Mr Gilbert presented a Revised Procurement Programme to the meeting of the TPB on 12 July 2007 [CEC01565576, pages 0056–0061]. At that meeting Mr Gallagher had highlighted that “a line on the design may have to be drawn prior to full completion to allow Infraco pricing and VE savings to be firmed up” [CEC01018359, page 0005, paragraph 3.2] and in his evidence he explained that this was a recognition that 100 per cent of the design was not going to be complete before contract close. The plan was to “get a final price, firm up what we know and agree a process for what we don’t know” [TRI00000037_C, page 0046, paragraph 155]. This decision was taken against the background that there were significant running costs for both tie and BBS in delay (tie’s running costs, for example, being approximately £1 million a month) and having regard to the possible political ramifications of another missed deadline [ibid, page 0046, paragraphs 155–156]. Mr Crosse accepted that this was a departure from the strategy in the draft FBC in December 2006 to have a final design priced by the infrastructure contractor and that it was also an express acknowledgement, for the first time, that a non-final design would be priced by the contractor [PHT00000021, pages 111–112]. Concentrating on the running costs associated with delay without balancing these against the likely financial consequences of departing from the procurement strategy, and permitting bidders to tender on the basis of an incomplete design as if it were a fixed design, is not a fair assessment upon which to commit substantial sums of public money. The Inquiry has seen no evidence that any attempt was made to undertake such a balancing exercise. I consider that any decision to depart from the procurement strategy could affect the risks, cost and economic benefits claimed for the project in the business case, and its ultimate affordability. As such, any departure from the procurement strategy ought to have been reported to councillors to enable them to take an informed strategic decision about all options relating to the future of the project, including whether they wished to maintain the original procurement strategy (eg by pausing the work to award the Infraco contract to allow design and the utility diversions to be completed) or, indeed, whether they wished to proceed with the project at all.

9.44 By letter dated 19 July 2007, Mr Gilbert enclosed a document advising BBS of the steps that tie proposed to take to support the Infraco procurement programme. Although bids had been received in January 2007 and updated in May, the programme for making a recommendation on the selected Infraco and Tramco bidders had been delayed because of delays to design and political uncertainty over the future of the project following the outcome of the election to the Scottish Parliament. tie’s strategy included novating the SDS contract and the Tramco contract to Infraco to create a single point of delivery, and de-risking of the price for the works by getting sufficient design done in advance of the Infraco recommendation so that risk pricing by bidders for scope and performance was minimised. The intention was to conclude tender evaluations and negotiations by 28 August to enable tie to put a conditional contract award recommendation to the TPB by 25 September. To deliver these objectives tie had to receive bids that satisfied various conditions listed. In particular, bids must not contain significant pricing uncertainty and risk allowances and they had to include a clear and agreed basis for adjustment in respect of various matters, notably:

• significant areas of design uncertainty (eg roads, pavings and drainage);
• significant quantity changes arising from completion of detailed design;
• significant changes arising from completion of due diligence on agreed critical design items; and
• VE items not fully incorporated into updated bids [CEC01627004, pages 0002–0003].

9.45 Mr McFadzen explained that the letter and enclosure were part of the negotiating process and that, around this time, there was a developing thought that parties had to reach a stage at which, whatever the state of the design information, it would be fixed at a particular point and would form the basis of the contract. BBS would be paid for any additional costs arising from changes to the design after it was fixed. The fixed design was called the Base Date Design Information and was incorporated into SP4 to the Infraco contract [TRI00000058_C, page 0016, paragraph 55].

Submission of updated proposals

9.46 On 7 August 2007, by letter erroneously dated 2006, BBS submitted updated proposals, with a revised tender sum of £254.5 million for phases 1a and 1b [CEC01604676, page 0002; Mr McFadzen PHT00000034, page 30]. The updated proposals included a schedule of clarifications containing numerous qualifications and conditions [CEC01491869]. The following provisions are relevant to issues of consents, design, site conditions and availability of a clear site for the Infraco works:

“1.5 Planning Consents and Building Fixing Consents will be in place prior to commencement of Works in the areas subject to the Consents.

1.6 Our programme and price assumes [sic] that Services; overhead, overground and underground, will all [be] diverted or protected by MUDFA/others to enable us to start works as indicated on our programme.

1.8 Our programme and price assume that TRO’s and all other statutory approvals are in place to enable a construction start, with full access to the site, on 7 January 2008 or such other date as may be agreed.

2.4 Our Tender is based on the SDS providing approved for construction Design information in time to enable us to procure resources, plan our works and execute construction in accordance with our programme.

7.1 In the absence of a Geotechnical Interpretative Report, we have not allowed for any risk in respect of Ground Conditions, foreseen or unforeseen. This includes risk relating to the presence of sub-surface voids and measures required to deal with ground water levels not allowed for in the current SDS design.” [ibid, pages 0001–0006.]

9.47 The above conditions illustrate that BBS was concerned about the state of site preparation and the level of available information. It is clear that the tender was based upon the existence of planning and building fixing consents as well as Traffic Regulation Orders and all other statutory consents, and upon the diversion of all services to give BBS access to a clear site to enable it to undertake the civil engineering works without hindrance. The design information was required to enable BBS to procure materials in time to start construction works in accordance with its programme. Failure to adhere to the programme would result in the contractor incurring losses. The context of condition 7.1 is that normally a contractor would assume the risk of ground conditions where adequate geotechnical reports had been provided to the contractor to assess the likely conditions to be encountered. BBS was not satisfied with the information provided and was unwilling to take any of the risks associated with ground conditions, whether such risks were foreseen or unforeseen. tie never provided BBS with adequate interpretative reports on ground conditions along the construction route [Mr McFadzen PHT00000034, pages 32–37]. In 2007, by letter erroneously dated 24 August 2006, BBS advised tie that its revised price for phases 1a and 1b was £263.1 million, with a price of £217.2 million for phase 1a and £45.9 million for phase 1b. The schedule of clarifications mentioned above was stated to remain effective unless specifically amended [TIE00087652].

9.48 The failure to progress design to meet the above conditions continued to feature in meetings and correspondence. For example, in an email dated 16 August 2007, Mr Dawson, the Procurement Manager for tie between August 2006 and March 2008, noted his concern that, although there might be firm rates for many items, other issues affected tie’s ability to select a preferred bidder. These included the extent of unresolved design or specification issues, and the timescale for execution, meaning that the variable elements of bids might be greater than tie would like, which would also make it difficult to identify any “clear water” between the Infraco bidders [CEC01649266]. In his evidence Mr Dawson explained that, with unresolved design or specification issues, bidders are unable to provide a firm or fixed price. If large elements are provisional then it is unclear which bidder really has the lower price [TRI00000032_C, page 0019, paragraph 35(1)]. The minutes of the meeting of the TPB on 26 September 2007 noted that SDS had produced approximately 58 per cent to 60 per cent of the detailed design [CEC01357124, Part 1, page 0007, paragraph 3.20]. Mr Walker gave evidence that, following a presentation by PB on 20 September 2007, he was dismayed that design was even further behind than BBS had been led to believe. He stated that, around that time, he made tie aware of his view that the Infraco tendering process should be put on hold for a year to allow the design and the MUDFA works to be progressed to a suitable state at the time of the Infraco bidders’ due diligence and at the time of contract close. The response from Mr Crosse was that tie had various mitigation plans that it was putting in place and would speed up the design so that BBS had it [PHT00000035, pages 18–19]. Mr McFadzen also gave evidence that the presentation on design on 20 September 2007 confirmed that the SDS contractors were not making great progress on design, which increased BBS’s concerns that the design would not be completed, as promised, when BBS took on the SDS contract [TRI00000058_C, page 0018, paragraph 63]. At this time it is apparent that, during the period between the nomination of the preferred Infraco bidder and contract award, tie was intent on securing a price that was within tie’s budget of £219 million for the Infraco works in phase 1a [CEC01602752; CEC01602753]. This remained its negotiating objective prior to the meeting in Wiesbaden. However, the contract that was ultimately signed failed to achieve tie’s objective. I doubt whether it was ever achievable within the timescale, given the incomplete state of design and the delays in the utility diversion works.

9.49 A further OGC review of the Tram project took place in late September/early October and a report was produced on 9 October 2007, erroneously dated 2006 [CEC01562064]. The report noted that the timeliness of project delivery was of concern. Both bidders had raised a concern that the planned preferred bidder period, which would include due diligence on the designs and the novated contracts, was tight. There was already a requirement for an overlap between the due diligence process and the mobilisation phase. The review team had seen a draft of the Infraco preferred bidder agreement, which included a list of activities and agreements that required to be finalised during the preferred bidder period and the areas of uncertainty of scope and price that required to be finalised. The review team believed that it would be very challenging to finalise these matters by the target date at the level of quality expected, and it recommended that the preferred bidder was appointed as soon as possible and that the programme during the preferred bidder period be monitored closely at a senior level. It was recommended that tie should actively consider:

• the levels of certainty required to meet the CEC approval process and how that would be achieved;
• the implications of contract signature not being achieved by the target date of 28 January 2008; and
• the necessary consequences of any areas that could not be finalised by contract signature and novation and how (and when) full certainty would be established.

Appointment of BBS as preferred bidder

9.50 On 15 October 2007, at a joint meeting of the TPB, the tie Board and the Legal Affairs Committee, it was recommended that BBS should be selected as preferred bidder. Both bidders’ pricing was based on preliminary design and included approximately 30 per cent of provisional sums, mainly for structures and highways. These were noted to be the key price-critical items. Bidders had been able to price the other items without detailed design having been achieved. The TPB and the tie Board endorsed the recommendation of the preferred bidder for the Infraco contract [CEC01357124, Part 1, pages 0011–0012, paragraphs 3.1, 3.3 and 8.1]. Mr Gilbert gave evidence that the two bids received by tie were very close in price but that key factors in the selection of BBS as the preferred bidder were its proposed track form and the benefit of the track form’s constructability within a street environment [TRI00000038_C, page 0007, paragraph 16]. A report dated 24 October 2007 by Mr Gilbert on the evaluation of the Infraco bids noted that it was a common feature of both bids that they were subject to exclusions, qualifications and assumptions relating to incomplete design, unforeseen ground conditions, utility diversions not carried out under MUDFA and Picardy Place (where the design remained subject to debate) [CEC01453691, page 0021].

9.51 On 22 October 2007, tie appointed BBS as the preferred bidder for the Infraco contract. The preferred bidder price for phase 1a was £208.7 million, although that was subject to variation upon resolution of the issues mentioned below [ibid, page 0022 [NB: in this document BBS is referred to as “Wallace” and Tramlines is referred to as “Bruce”]. tie and BBS agreed that a number of matters (“PB Finalisation Issues”) in the Draft Deal, the Infraco contract, the SDS contract and the Tramco contract had to be resolved before tie sought CEC’s approval to enter into the Infraco contract [CEC01497399, page 0006, clause 3.1; CEC01600796]. In short, they were that:

• the final design was not complete;
• the MUDFA works to divert utilities along the swept path of the route were not complete;
• the status of the third-party Agreements was unclear; and
• the pricing was not complete [Mr Walker TRI00000072_C, pages 0013–0014, paragraph 21].

9.52 During the period between the appointment of the preferred bidder and the award of the Infraco contract, tie intended to firm up provisional elements of the bidder’s price, and to realise VE savings, in order to deliver a price for the Infraco works within the available budgets of £219 million for phase 1a and £55 million for phase 1b [Appendix 6.1 of the preferred bidder agreement CEC01443700]. Despite negotiations over a seven-month period after BBS was appointed the preferred bidder, none of the issues was capable of being resolved. The MUDFA works were still ongoing, the design continued to be developed and the third-party agreements had still not been finalised.

Conclusions

9.53 BBS had initially bid for the Infraco contract on the understanding that all approvals and consents would be obtained before the Infraco contract was awarded and the MUDFA works would be completed in sections before the Infraco works commenced there.

9.54 tie proceeded with the work to award the Infraco contract despite knowing that there were significant delays with design and the MUDFA works.

9.55 It was – or ought to have been – obvious to executive officers within tie that the delays with the design and the MUDFA works were likely to jeopardise the objectives of the procurement strategy of seeking to de-risk the Infraco contract and of obtaining a fixed price for the Infraco works, with design risk being transferred to the Infraco contractor.

9.56 As the delays in design and the MUDFA works became increasingly clear to it during 2007, BBS took steps (through maintaining the qualifications and exclusions in its bids) to ensure that the risk of design and MUDFA delay remained with tie.

9.57 The negotiations between the parties concluding with the signing of the Infraco contract are considered in Chapter 10 (Events between October and December 2007) and Chapter 11 (Contract Negotiations).