Multi-million cost blowout for major Wellington infrastructure project blamed on inaccurate 'guesstimate'

Tuesday, 26 March 2019

An artist's impression of the 35-million litre reservoir planned for Wellington's Prince of Wales Park, which has almost doubled in price since estimates were drawn up in 2017. The reservoir will be fully covered and landscaped when it’s completed.

The initial cost estimates done on a major Wellington infrastructure project – sold to ratepayers with a $30 million price tag only to later double in cost – were akin to a best guess.

A report that will be tabled at a Wellington City Council meeting on Wednesday points to a 'flawed' process for estimating the cost of big infrastructure projects, which one academic says is more like a 'guesstimate'.

The report, by utilities company Wellington Water, was prepared after the price tag for the Omāroro Reservoir, planned for Prince of Wales Park in the suburb of Mt Cook, jumped from the $29.5m price quoted in 2017 to $58.2m in the city council's recently-released draft Annual Plan.

It is the latest in a string of cost blow-outs that have plagued the council's infrastructure programme recently. Wellington's Town Hall project rocketed in cost from $43m to a reported $130m, while costs to strengthen and upgrade the St James Theatre have also doubled.

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Professor John Tookey termed said the cost figures relied upon were more 'guess-timates' than estimates.

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Blowouts on two other water projects were so great they had to be dropped from this year's annual plan. All of the price increases have largely been blamed on a tide of rising construction costs nationwide.

The Omāroro Reservoir project received councillor approval two years ago. At the time, a contingency and allowance for inflated construction costs had been built into the $29.5m quote.

A year later the price had risen to $40.9m and it was put into the council's 10-year plan with budgeting calculations for the city's future made around it.

This month it was announced that the cost of the project had blown out by a further $17.3m.

Mayor Justin Lester refused to comment on the issue on Tuesday. But Professor John Tookey, head of Auckland University of Technology's Built Environment department, said these sort of calculations, while common within the building industry, should be seen as 'guesstimates' rather than estimates.

'Estimates by their very nature are quite detailed. What these are; they're not so much estimates, they're more guesstimates – finger-in-the-air type of stuff.'

Wellington City Councillor Iona Pannett said lessons would be learned from the blow-out.

Tookey said these 'rates-based guesstimates' needed a significant buffer built in if they were going to be used for long-term planning purposes.

Something akin to unit rates were used on the first cost estimates for the Omāroro Reservoir. The technique involves picking a price per square metre then multiplying it by the area of land used.

But this rate did not account for many of the project's specifics, such as Wellington's narrow streets, its seismic stress, and the difficulties of building a reservoir in a dense neighbourhood.

The use of similar estimates had caused major problems for firms like Fletcher Construction on the Christchurch Town Hall and International Convention Centre project in Auckland, where a small buffer and rising costs tanked margins, Tookey said.

That explanation was echoed by utilities company Wellington Water in its report, which attributed most of the Omāroro Reservoir cost blowout to rising construction costs, and $2.3m to the inaccuracy of estimates.

Councillor Iona Pannett said news of the blowout was 'not great' but lessons would be learned from it.

'We're coming across this issue quite a lot now so we're obviously going to need to take this into account as we go forward with all these large infrastructure projects.'

'We are accountable for spending the money so we need to make sure that we're getting these things right.'

Wellington Water has suggested that, in future, the city council get private parties to independently estimate costs alongside council on any projects over $10m.

Tookey said another idea would be a list of assumptions to be published alongside three cost scenarios: optimistic, expected, and pessimistic, so that they could better understand the calculations behind the numbers.

'Councillors have got no idea where these numbers have come from, they've just been pulled out of somebody's posterior.'

ANATOMY OF A BLOW-OUT

Omāroro Reservoir

2012 - Concept design costed at $17.9m

2017 - Project approved with $29.5m including a contingency fund and with construction price increases built into price

2018 - Figure updated to $40.9m in Long-Term Plan

2019 - Cost goes up, yet agin, to $58.2m