National Audit Office's report on termination of PFI contract for National Physical Laboratory

May 11, 2006

London, 10 May 2006

Report by the Comptroller and Auditor General. HC 1044 2005-2006, 10 May 2006
Full Report (1140 KB)
ISBN: 0102937699. Price: £10.75
Executive Summary (256 KB)

The Department for Trade and Industry successfully transferred risk in the PFI contract to build and manage new facilities for the National Physical Laboratory and protected the taxpayer from bearing the majority of the costs of the project's problems. Delays during the construction of the new facilities meant that the DTI did not secure the full benefits it wanted, when it wanted them. The DTI, however, prevented the construction problems from affecting the quality of scientific research. A National Audit Office report published today finds that the fundamental reason for the problems was that the original private sector design of the new buildings was deficient and a modified PFI procurement process might have avoided this.

In July 1998 the DTI and Laser, a special purpose company jointly owned by Serco Group plc and John Laing plc, signed a PFI contract for new facilities for the National Physical Laboratory, the UK's national standards laboratory for measurement of physical properties such as time, length and mass. Laser sub-contracted the design and build of the new facilities to John Laing Construction Limited.

Laser's sub-contractor had problems meeting the stringent specifications for temperature and noise levels within the laboratories. These and other problems caused delays averaging over two years for each construction phase. Laser solved many of the problems but a shortage of cash and its concern that it faced a financially open-ended design issue led it to propose early termination of the contract. The DTI agreed to the proposal and the parties terminated the contract in December 2004.

This is the first termination of a major PFI contract in which there were serious deficiencies in contractor performance. The project should have been finished in 2001; it is now not expected to be finished until 2007. So far progress with the remedial and outstanding works is on schedule and within budget.

The NAO found that the risks to the project could have been reduced in advance. Before agreeing to the contract, the DTI did not resolve its concerns about Laser's design because it believed that Laser would surmount them and it wanted to stay true to the principles of PFI. Following the award of the contract, the DTI did not impose a design solution on Laser, despite continuing concerns about the Laser's design. This was because the DTI wanted to ensure that responsibility for delivering buildings that met its specification would remain unambiguously with Laser.

The contract and the way it was managed by the DTI were effective in transferring risk to the private sector. This means that, while the public sector has lost some of the benefits from the use of the buildings, it has not borne the full cost of making good deficiencies in them. The DTI has also avoided the problems of the project affecting the quality of scientific research at the National Physical Laboratory.

By the time the project is complete the DTI's total investment in the new facilities will be about £140 million. This compares with an estimate of around £130 million for the total capital investment in the project at the time of contract signature. The private sector reported that it incurred a loss of at least £100 million during the construction of the new facilities.

Sir John Bourn, the head of the National Audit Office, said today: "The Department for Trade and Industry handled the termination of the contract well. But different handling of the project by all parties at the early stages might well have avoided the problems which led to the termination."

UK National Audit Office
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