Thursday, 11 February 2016

Jersey Hospital Construction Costs: An Industry Comparison

Are Jersey Hospital
figures plucked out
of a hat?














I’ve been reading the International construction market survey 2015, and it makes for some interesting reading, and obviously trends reflects Jersey's own construction industry. In particular, it can be used as an instrument for understanding why different nations and regions have different building costs, and also by comparison where Jersey's hospital figures fit into the scheme of things.

Their survey shows construction activity is increasing, but recovery is patchy.

Construction profits – and costs to the end consumer – are driven by market forces. Where there is little in the way of demand, there is increased competition in the tendering process, and that drives prices to the end consumer – be it the private or public sector – downwards.

But where there is a lot of demand for building, the cost of building tends to rise, as it is now the end consumer who is competing for availability. The construction companies, given a choice between two building projects, will inevitably take the more lucrative one.

The situation in Jersey is further complicated by restrictions on imported labour, both for short term and for long term projects. This means that Jersey operates with a presumption against outside companies tendering, and a presumption against large increases in outside labour. These restrictions will tend to drive prices upwards.

The global trend in construction markets shows a patchy recovery, where sometimes there is more commercial property being built or refurbished, and sometimes the housing market is more vibrant. It varies both across nations and across regions. An example is given in the survey:

“London, the south of the UK, New York, Seattle and Tokyo are hot, benefitting from increased activity in residential and commercial property. However there are hotspots elsewhere for particular sectors. For example, while the overall construction market in Toronto and Sydney is only lukewarm, they have particularly strong levels of residential construction underway.”

The survey describes the markets as cold, lukewarm, warm, and hot. The hotter the market, the better for the construction company, but the worse for the end consumer. But it is not totally clear-cut. If there is too much competition, and a very moribund market, there is always the risk that the construction company may underbid, and be at potential risk of going bankrupt.

In a “warm” market, contractors are finding they can pick and choose which jobs they bid for, with more projects starting up. But the majority of global markets are described as “lukewarm” meaning there is still eager bidding to win jobs and price rises will be moderate.

Their experts predict that construction activity will increase in 17 markets, which means less competition for tenders and rising construction costs. 10 will be unchanged, and 8 will see a decrease in the number of construction projects, leading to greater competition on bids and, generally, lower rates of construction cost rises.

Regarding investment in infrastructure, once key problem is public budget sector constraint, something we also have in Jersey, but if the market is sufficiently lukewarm, it is actually a good time to invest in infrastructure and avoid the risk of construction costs escalating.

While it is not like-for-like, queries have been made on the costings on the dual-site option which seem to have escalated quite rapidly.

Jersey is however at present undergoing an increase in local construction work. Andium Homes is busy building houses, plans have been passed or submitted for a number of private sector housing projects (Gas Place Site, Co-Op by Grande Marche, Ann Street Brewery); vacant business property is being converted into residential accommodation (Charles Street, La Motte Street).

Meanwhile, large scale commercial or public projects are also being put in place – for example, the new police station, the Jersey International Finance Centre, the Dandara development near the Grand Hotel.

This is clearly a “warming market” and as the survey points out, “warming markets will see increased construction costs while cooling markets will see a decrease”.

The survey notes: "All regional construction markets should continue to improve during 2015–16, with the south leading and Belfast at the rear. Gradually, trade skills shortages are likely, contractors will cherry-pick which projects they bid for and construction costs will increase, rippling out from the south east."

The survey also includes a detailed comparison of building costs by different nations, and while Jersey is not there as on a global scale it is small in the construction industry, it does supply some figures by which we can make an educated comparison. These costs are higher in London because of the higher preliminary costs in making ground ready, working in close proximity to other buildings etc, and because of high demand.

As hospital sizes vary, the survey gives international building costs per m2 of internal area

In 2015 these UK ones were as follows.

For London:

Day centre (including basic surgeries) £ 2,300
Regional hospital £2,900
General hospital (e.g. city teaching hospital) £3,400

Central UK

Day centre (including basic surgeries) £ 1,400
Regional hospital £2,300
General hospital (e.g. city teaching hospital) £2,850

North UK
Day centre (including basic surgeries) £ 1,400
Regional hospital £2,400
General hospital (e.g. city teaching hospital) £2,850

Northern Ireland

Day centre (including basic surgeries) £ 1,430
Regional hospital £2,200
General hospital (e.g. city teaching hospital) £2,600

Scotland

Day centre (including basic surgeries) £ 1,500
Regional hospital £2,400
General hospital (e.g. city teaching hospital) £2,850

South UK

Day centre (including basic surgeries) £ 1,750
Regional hospital £2,450
General hospital (e.g. city teaching hospital) £3,000

So let’s look at the figures we have for Jersey, for example, for the Waterfront site and the People’s Park.

Waterfront: cost £471,000,000, area as per the letter from Andrew Green - 49,623 m2, gives us a cost per m2 of £9,492!

People’s Park: cost £444,000,000, areas as per the letter from Andrew Green, 48,797 m2, gives us a cost of £9,099 per m2!

Clearly this is nonsense, as a London central hospital comes out at £3,400 per m2! And remember that includes the higher “preliminary costs” of a build in a capital city.

So let’s reverse this and ask how much it would cost if it was built at London rates. If we do that, the Waterfront comes out at £168,718,200 and the People’s Park at £165,909,800. That leaves a respective difference of £302,281,800 and £278,090,200. So what does that represent? What is that buying?

If part is the cost of equipping the new hospital, then that should be removed from the figure and shown separately so we can see at least something of what is going on. That's such a general bulk figure it cannot be commercially sensitive. 

And we also know that part of the cost for the People's Park goes towards compensatory purchases, but is it that high? And what does the Waterfront difference represent? Surely decontamination is not as high as that! And there is presumably in the case of the People's Park, purchase of land? But what of the Waterfront? Is the States of Jersey Development Company expecting to be paid for land which was ceded by the States to them for £1?

In answer to the question from Christian May, Andrew Green replied as follows:

“Your Committee may appreciate that the breakdown of costs is commercially confidential and the public release of this information could significantly and detrimentally affect subsequent procurement in relation to the Future Hospital.”

“For these reasons, the breakdown of costs is being made available to the relevant political Scrutiny Panels and their advisors and to your States Members under appropriate confidentiality agreements, but will not be made public.”

Quite honestly, we should have some idea where the hospital sits within the range of UK hospitals, and taking a London case scenario, we can calculate the cost element. To hide behind confidentiality the extra surplus costs, which clearly cost far more than the hospital build itself, is to treat the public with contempt.

We deserve better than a smokescreen of confidentiality, which is what we always see nowadays, and some better transparency on where the taxpayers’ money is going to. To bundle up all the costs so that comparisons with UK hospitals cannot be made is not the way to inspire confidence.

It reminds me of those investment packages which bundled up good money with bad, prime with sub-prime, so that no one really understood what was going on. As it stands, the figures given might as well have been plucked out of magicians hat, for all the sense anyone can make of them.

Senator Green advises that “the costs relating to the Future Hospital have been developed by professional quantity surveyors within the Gleeds Management Services”.  We are being told to take their figures on trust, or rely on Scrutiny to check them. I'd feel happier if Ben Shenton was able to check them independently as well, as part of an independent review.

As it is we can see the kind of figures for hospitals Gleeds provide elsewhere - Bridgewater Hospital, construction cost £16,000,000 in 2014, client Somerset PCT NHS Trust / Gleeds Management Services. The costings I give for the Jersey hospital above based on London costs for hospital builds per m2 are not far off this. So why can't we have these figures?

I would have more faith if Turner and Townsend reviewed the figures, and gave us some idea where the base hospital building cost lay by comparison to those in the UK. We would have some evidence that the figures given are accurate. We need that comparison; we haven't been given it.

As it stands, we have meaningless figures upon which we are suppose to make some sort of meaningful choice. And told to take all the figures on trust! Do we have to be treated with such contempt?

2 comments:

Phil Renouf said...

Having read a few accounts of the new Royal Liverpool Hospital, especially the claim that the development is "luxurious" yet, apparently seeming to offer impressive value compared to Jersey proposals, I would appreciate some sort of explanation for the differences. I noted that the Liverpool contracts contain clauses to protect jobs for locals with minimum quotas and even provision that homeless persons be offered work on the project so perhaps our restricting labour market will not be as dominant a factor as some might want to make out. Given the need to house imported labour, I can't actually see the difference in cost being significant compared to the apparent disparity between UK costs and the projected costs that we have been offered.

James said...

You will have to factor scale in somewhere. The Royal Liverpool that Phil is talking about will serve a population of around a million. We are building for 100,000, something that the UK NHS (and most other countries) has long since thought was uneconomic.

One is also tempted to speculate that, being the States, there would have to be brown envelopes floating around somewhere: and the ability of Jersey people to delay projects on the most specious of grounds would also drive costs up. But even combined, I don't think this would account for a cost of £9000/m2.