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PROJECT MANAGEMENT |
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There is, I believe, a fundamental error in the nature of the construction contract which led to lack of trust on both sides. Colin Stannard, former Managing Director of Eurotunnel (Stannard 1990). The contract signed between Eurotunnel and TML in August 1986 was based on the standard FIDEC form for international constrruction contracts, and provided for three main elements of works, each let on a design and build basis:
The contract period was to run for 84 months from May 1986. After the issue of the Certificate of Completion, the maintenance period was to be 12 months for the building and civil works, and 24 months for the electrical and mechanical works. Defects liability lasted 10 years for the building and civil works, but less for electro-mechanical equipment that had a shorter design life. Preparatory works for tunnel access, precast lining segment manufacture, and spoil disposal started in late 1986, and the construction of the permanent works started in December 1987. Eurotunnel was just finding its feet and was little more than a paper organisation at the time the construction contract was signed, Effectively, the contract was negotiated between the banks and the contractors (Stannard 1990). The banks continually tried to move the contractor onto a fixed price in order to reduce their own risk. However, this was impossible given the inherent uncertainties of the project. The only source of cost information and an estimated outturn cost the banks had was TML, yet it was with TML that they were trying to negotiate. The banks therefore worked on the basis that TML's estimates were high. Conversely, TML worked on the basis that the estimates had to be low enough to ensure that the project went ahead. "In banking you bid high and then trim your margin: in contracting you bid low and then get your profits on the variations" (Stannard 1990 p 53). This analysis is supported by a senior Taylor Woodrow executive who argued that
This fundamental difference in negotiating practice only enhanced the tensions between the two sides. The original programme was that the completed facility would be handed over to Eurotunnel in December 1992 for commissioning and an opening in May 1993. Progress payments were to be made on a forward-funding basis - each month's claim was for the value of the works planned to be completed the following month, subject to a retention of 5%. The project was, therefore, inherently cash-positive from TML's point of view. The members of the TML consortium were also obliged to place a 10% performance bond subject to the issuing of the Certificate of Completion. The Eurostar and freight trains were the responsibility of the three railway companies and beyond the scope the contract between TML and Eurotunnel. The MdO was appointed on a fee plus disbursements basis with responsibilities to the IGC under the concession contract, and responsibilities to Eurotunnel for inspecting and checking the engineering design and construction work of TML, as well as monitoring progress and expenditure. The overall contractual structure of the project is shown in figure 1. The budgeted value of the contract, in 1985 prices, was £2.71bn, an increase on the £2.6bn cited in the UK White Paper (cmnd 9735 1986 appendix C), and the even lower figure of £2.33bn in the CTG/FM proposal of the previous autumn. To this figure has to be added Eurotunnel's costs of land acquisition, running costs, consultant's fees, inflation, and most importantly of all, interest charges which, with a contingency allowance, more than doubled this sum to the original £6bn capitalisation. The first increase in costs was announced in October of 1988 - some 7% in the tunnelling costs. On both sides of the channel the tunnelliers had been giving problems, and these were particularly severe on the British side. The British machines were designed to operate in dry rock, and so when wet rock was unexpectedly encountered on the seaward service drive problems mounted - hand finishing was required behind the machines and progress was slowed. The damp atmosphere also adversely affected the operation of the Hunslet site transport locomotives. By August 1988, the French were 12 weeks behind programme, and the British 5 weeks. Further cost increases were incurred when the Robbins/Markham machines on the British side were shut down for three weeks and extensively reengineered below ground in Autumn 1989. Although they had been modified based on the experience of the Howden in the seaward service tunnel, this proved inadequate, and considerable further work was required (Financial Times 5/4/90).
Once these problems had been resolved, tunnelling speeds increased rapidly. The service tunnel drives broke through in December 1990, the north running tunnel in May 1991, and its southern partner in June. Although the British had tunnelled much further than the French, these breakthroughs took place a little nearer England than planned as the French had been able to make up more ground against the original programme. These last two breakthroughs were both ahead of schedule, but this had been achieved at a cost of greatly increased manpower and expensive modifications to the tunnelliers amounting to £781m. The procurement items were mainly obtained from a variety of suppliers in a loose Euroshuttle consortium. The British company, Brush, in association with Swiss/Swedish company ABB supplied the locomotives. The Canadian company Bombardier led a consortium which supplied the passenger railcars, with much of the assembly work being carried out by its French subsidiary ANF Industrie, and BN of Belgium. Breda and Fiat of Italy supplied the railcars for carrying freight vehicles. These items also presented problems. The first was inflation - the tenders for the equipment were coming in much higher than had been expected in 1985. By 1989 the chair of TML was arguing that the depression in the railway equipment industry in the mid eighties meant that estimates made then were depressed, and hence misleading. Enhanced safety features specified at the instigation of the IGC following a series of railway accidents in Britain and France also raised costs (Contract Journal 15/6/89). A decision was therefore taken to reduce costs by reducing the speed of the trains from 160km/hr to 130km/hr. This meant that the railcars designed to carry the trucks could be open-sided rather than enclosed. The IGC, after considerable debate, accepted in December 1989 the principle that car passengers could stay with their vehicles during the shuttle journey. However, in April 1991 it announced that the fire doors in the railcars carrying these passengers had to be widened by 10cm. (Financial Times 9/4/91). This led to considerable redesign, increased costs, and delays in delivery of the railcars. Eurotunnel claimed £1b* from the IGC in compensation for a number of costly decisions, including some £40m* for the lateness of the decision on the doors. In turn, Bombardier claimed FF 3.4b* from Eurotunnel. The former claim was settled with a 10 year extension of the concession in December 1993, while the latter was settled in the same month by giving Bombardier FF700m* (around £80m) and 25m share units in Eurotunnel, but only after Bombardier had stopped work in protest for 3 months (Financial Times 25/11/93; 14/12/93). Bombardier thereby became Eurotunnel's largest shareholder. Due to these factors, costs rose by £460m. Although these two elements of the contract, and the management of cost and time associated with them were the subject of tough negotiations between TML and Eurotunnel, it was the lump sum works that generated most of the public displays of acrimony. While the target cost contract shared the risks between Eurotunnel and TML, with the former taking most of the risk, and the procurement contract allocated all the risks to Eurotunnel, the lump sum contract allocated all the risks to TML. Therefore, once changes became necessary in the specification of these works, TML worked hard to protect its position, especially as it looked as if it was going to incur additional costs and also penalties on the tunnelling contract. There were a number of changes required to the items specified in the contract of August 1986. Many of the problems arose because the project was organised on a fast track basis in which construction started before design had been completed. A TML representative argued that "the project was not properly designed in advance by Eurotunnel, and they developed a habit in the early days of asking for the best of everything, whether or not it was needed" (Financial Times 9/1/90). Perhaps the most important change was that as the design of the trains was completed it became apparent that a cooling system would be required in the tunnels. Initially, it had been expected that the air drawn in by the trains would provide adequate cooling, but it this proved inadequate, and 400mm chilled water circuit through half the length of the running tunnels was specified. The reduction in the speed of the trains allowed savings due to the simplification of systems for controlling air pressure in the tunnels, and the lower power supply requirements allowed a reduction in the electrical substations but also meant further renegotiations of the contract. As a result of these and other changes, costs rose by £512m for the fixed equipment Changes were also made to the termini. Considerable additional earthworks were required at the awkward Cheriton site due to IGC imposed changes in arrangement of the access roads for passenger shuttle loading (Lemoine 1994 p 124). Petitioners against the parliamentary bill also forced Eurotunnel to authorise changes to the site access roads and drainage (Byrd 1994 p108). The search for savings meant the loss of a £10m grande arche spanning the road approach to Sangatte. As a result of these and other changes, costs rose by £105m for the terminals.
The overall picture is given in table 2, which gives the figures in constant 1985 prices broken down by the main categories of work. The overall budget overrun in constant prices is 69%, the largest proportional increase being the rolling stock. The three construction elements of the overrun amounted to 58%. To these figures needs to be added the £72m paid in performance bonuses to TML under the terms of the original contract. Additionally, Eurotunnel paid £36m for direct works undertaken outside the contract with TML. The cost overruns were apparently more serious on the French side than the British, as is shown in table 3. However, these figure cannot be taken as authoritative as they were produced before all claims were settled. The project was finally handed over on the 10th December 1993, some 12 months late, a programme overrun of 14.2%.
Though outside the TML/Eurotunnel contract, the procurement of the 31 Eurostar trains to be operated by European Passenger Services (EPS) and the railways of Belgium and France also presented similar problems. The lack of a single project office shared between the three rail agencies in the early stages of the procurement of these trains delayed decision making. The trains were to be provided by the British company GEC and the French company Alsthom which merged their electrical engineering (mainly power stations and transport equipment) interests in June 1989 to form GEC Alsthom. The development of GEC's new asynchronous motors took longer than expected. These delays were compounded by a two year argument between BR and SNCF over the choice of a cab-based signalling system - in the end a French system was preferred - and logistical and coordination problems within the newly formed GEC Alsthom. The decision to build different parts of the trains in France, Britain and Belgium compounded the problems. In December 1993, EPS had only taken delivery of one train (Independent 10/12/93). New problems arose in 1993 when it was found that the gaps in the third rail were tripping the safety system in the Eurostar trains. The solution to this problem entailed replacing 3000 track relays between Cheriton and Waterloo (Financial Times 6/5/94). The supply of 46 locomotives for freight and sleeper haulage by Brush presented fewer problems, as did the procurement of coaches for long distance sleeper services from the British company Metro-Cammell, which is part of GEC Alsthom. These delays in the procurement of rolling stock have had profound implications for the project. Although the tunnels were completed on time, the installation of the fixed equipment and construction of the terminals suffered significant overruns, and the lack of trains with which to commission the fixed installations, has led to expensive delays in offering a cross-channel service. Through freight and commercial vehicle shuttle services built up in the month after the opening, but full passenger services were not available until the end of 1994. Although a figure of £50m* per month was denied by Eurotunnel as the cost of the delays (Financial Times 6/4/94), the difference between the original opening date of May 1993 and the commencement of something approaching a full service in late 1994, which missed the 1994 holiday season, may have cost in the order of £650m* in lost revenues on Eurotunnel's own figures from the 1994 Rights Issue documentation. This figure includes losses from the lack of revenues from the Eurostar and through sleeper services for which Eurotunnel claimed £1b* from BR and SNCF; against this, the two railway authorities counter-claimed for delays in offering the freight service facility. The dispute was settled largely in favour of the railways. Following the issuing of the Systems Acceptance Certificates for the fixed equipment and the rolling stock, commissioning could begin, but was not fully completed by the issuing of Tests on Completion until January 1995. The original commissioning period planned was 6 months from December 1993 to May 1994, but, effectively, it doubled to 12 months. As problems mounted it was decided to prioritise the commissioning of the freight services. Freight shuttle services started in May 1994, and a full 24 hour service in November of that year. The through freight came into service in the June. The IGC finally gave approval for the operation of limited Eurostar services in August 1994, but a full public service was delayed until the November. The IGC finally gave approval for the commencement of limited passenger shuttle services (Le Shuttle) on an invitation-only basis in August 1994, but full services for the public were not implemented until December of that year, and the final train was not received from Bombardier until July 1995, over 24 months late. Only the rail freight service met the deadlines that had been stated in the Rights Issue prospectus of May 1994, and even the launch of this service was behind the programme envisaged earlier in the year of a March start for freight, and a May start for passengers. Patrick Ponsolle, the co-chairman of Eurotunnel placed the main source of these problems with the IGC. However, many of the problems with the commissioning were generated by the way the project was managed. Ponsolle admitted that, "nous avons peut-être sous-estimé le temps nécessaire pour que nos équipes se familiarisent avec le matériel qu'elles allaient utiliser et avec l'ensemble des procédures et fonctionnement du système" (La Tribune 16/12/94). The problems were that due to the tortuous negotiations between TML and Eurotunnel, there was for a long time no clear date for the handover. Due to the delays to the construction programme, the commissioning was then fast-tracked in order to bring forward the revenue-earning period. This meant that construction and commissioning were taking place simultaneously, with one shift on construction and the other on commissioning. The complexity of the system was also underestimated. In particular, the number of fail-safe elements in the system made it very difficult to operate partially. If someone was working on an element, an alarm would go off which would shut the system down. This was compounded by the fact that a central part of the commissioning is the training of operative staff, so system shutdowns could not be overridden as this would have effectively trained staff to ignore warning signals (interview 5/9/95). Throughout the life of the project, relationships between TML and Eurotunnel were punctuated by a number of formal agreements which allowed the project to keep going, even if they did not resolve all the outstanding issues. The first of these was the Joint Accord in January 1989, when it was agreed to extend the original opening date of the tunnel by one month to June 1993, to settle all outstanding payments, and TML promised to improve the quality of its management. However problems continued through 1989 as disagreements over the cost of the lump sum works grew, and by June 1989 some £384m was in dispute between the two sides. A second accord was reached on 20th of February 1990 which resolved a number of areas of contention. The main points were that, firstly, it provided for a reduction of 25% in the staffing of Eurotunnel's 350 strong PID which had long been resented by TML as its presence was seen as reflecting Eurotunnel's mistrust of TML. Secondly it provided for the capping of TML's commission on the procurement items. As rolling stock costs had soared, the percentage fee had proved a goldmine to TML. Thirdly, the cap on TML's liability for 30% of extra costs incurred on the target cost contract of 6% of total project costs was removed, although the baseline for the calculation before TML incurred such costs was raised by nearly £300m to take into account cost increases already agreed. Finally, changes were agreed in the senior management of Eurotunnel. From February 1990, relations between TML and Eurotunnel improved. However, hostilities again broke out in October 1991 over progress payments. Some £1.2b was at stake - £800b on the fixed works, and £400b on other items (Financial Times 7/9/91). Because these payments did not reflect the cost increases, TML risked going cash-negative. The issues were put starkly by the chair of Dumez - "we are determined to see Eurotunnel take responsibility for their extra costs. The contractors will not finance the project" (cited Financial Times 24/10/91). This message was reinforced at a press conference held in Paris by all ten heads of TML's constituent companies. They backed their claim by threatening to stop work on those elements which were the subject of dispute - in particular the cooling system. The matter was taken to the Disputes Panel, which found in favour of TML in March 1992, and ordered an additional £50m* each month to be paid over the existing £25m* monthly payment (Contract Journal 2/4/92). This decision was overturned in September 1992 (Financial Times 1/10/92) by the Arbitration Panel, but TML were not obliged to repay the additional £200m* which had already been paid. Negotiations were to continue for the rest of the life of the project. In October 1992, Eurotunnel offered a settlement which included payment of approximately £200m in shares and other paper, in addition to £1b in cash was rejected (Financial Times 24/8/92;16/12/92), but further discussions brokered by the Bank of England led to a working truce on 27th July 1993. This protocol, for which Neville Simms, the chief Executive of Tarmac is accorded much of the credit (Anderson and Roskrow 1994 p206) was crucial, for it laid out the agreed commissioning programme, and the conditions for the handover of the facility to Eurotunnel. Henceforth, the parties promised to "undertake best efforts fo ensure cooperation over the commissioning and early operation of the project, working together towards the achievement of the common goals identified in the Protocol". Although the fixed installation and terminal works were finished in April 1993, some four months late, they could not be commissioned due to the lack of rolling stock. After August 15th 1993, TML would incur serious penalties for late delivery costing some £240m in the first year. Eurotunnel agreed to waive these penalties so long as TML handed over the completed works on December 10th. However, no agreement was reached on the outstanding lump sum costs at this time, although Eurotunnel agreed to advance TML £235m* pending final settlement of the dispute. TML met this target, and the tunnel was finally opened officially on May 6th 1994, 12 months after the date originally planned. Agreement was finally reached on 5th April 1994, on all claims except those related to procurement items with a payment of between *£50 and *£60m. However, in September 1995, Eurotunnel announced that it was making a fresh claim against the members of TML for around *£1b, despite the fact the Tests on Completion were complete and the contractors' performance bonds had been returned (Financial Times 22/9/95). |
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