Hospital M&E: a valid claim, a shared saving and a forecast the board has already heard
You are the client's project manager for a £9.0m mechanical and electrical installation at a hospital, let on a target-cost contract. The target cost is £9.0m including the contractor's fee; any overspend or saving against target is shared 50/50 between the trust and the contractor. Two-thirds of the way through, the design team issues revised ceiling layouts five weeks later than the agreed information release schedule, and the contractor claims £260k of extra cost and three weeks of delay. It gave notice four weeks after it became aware of the delay; the contract requires notice within eight weeks. The trust's estates manager says the contractor should have mitigated the delay and that the trust is not paying for contractor inefficiency. Separately, the contractor proposes a change to the containment route that would cut forecast cost by £600k. Forecast outturn, taking the £260k into account, is £9.96m, and the trust has already told its board that the scheme will be within 5% of budget.
1. Advise the trust on the contractor's claim: is there entitlement, and how should it be assessed?
Read the worked answer
Assess it properly; do not refuse it on principle.
Entitlement
- Late information is normally a client risk under a target-cost arrangement. The design team issued the ceiling layouts five weeks late against an agreed information release schedule. That is a client-caused event and, subject to the contract's list of compensation events, it gives rise to an entitlement.
- Notice was given four weeks after the contractor became aware; the contract allows eight weeks, so the time bar is satisfied. Nobody should argue the claim away on timing.
- The estates manager's mitigation point goes to quantum, not entitlement. The contractor must do what a competent contractor would to reduce the effect, and costs that reasonable mitigation would have avoided are not recoverable. It does not extinguish the claim.
- Check causation. Were the ceiling layout revisions partly prompted by the contractor's own design queries or late coordination drawings? If so, apportion.
Assessment
- Instruct a quotation under the contract, require the build-up, and test the £260k against the delay and disruption actually caused, using records rather than assertion.
- Check whether the three weeks sit on the critical path and whether the float consumed was genuinely available.
- Give a decision with reasons within the contractual period. Silence is the worst outcome; it invites a dispute and, under some forms, deemed acceptance.
Consequence to explain to the trust. If the event is accepted, the target cost moves to £9.26m and the pain/gain is calculated against that adjusted target, not £9.0m. Refusing a valid claim to protect the target is a false economy and will damage the collaborative behaviour the target-cost model depends on.
2. Calculate the effect on the forecast and on what the trust will pay, and advise what the senior responsible owner should now do.
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The arithmetic
- Adjusted target: £9.00m + £0.26m = £9.26m
- Forecast outturn: £9.96m
- Overspend against the adjusted target: £0.70m
- 50/50 share: the contractor absorbs £0.35m as a fee reduction, so the trust pays £9.61m
What it means
- The trust has told its board the outturn will be within 5% of £9.0m, that is no more than £9.45m. At £9.61m that commitment is breached by roughly £160k. The SRO must be told immediately, with the reason, not at the next scheduled report.
- The £0.26m event is not the main driver. Excluding it, the outturn would be £9.70m, still £0.70m over the original target and split £0.35m each. The trust should be asking why both the base estimate and the contractor's cost control have drifted, not only arguing about the claim.
Counterfactual worth tabling. If the trust refused the claim and held the target at £9.00m, outturn of £9.96m would produce a £0.96m overspend; the contractor would bear £0.48m and the trust would pay £9.48m. That looks £130k cheaper today, but it rests on a position the trust is unlikely to win, will generate a dispute, and will destroy the open-book behaviour that makes target cost work.
Recommendation. Accept the event, pay £9.61m, and pursue the base overspend separately through commercial challenge and a forensic review of the estimate and the contractor's cost reporting.
3. The contractor proposes a change that would cut forecast cost by £600k. How should you assess it, and how should the benefit be shared?
Read the worked answer
First decide what kind of change it is, because that determines who benefits.
Assessment before agreeing
- Require a written proposal with a priced assessment: the £600k saving, the cost of implementing it, the programme effect and the effect on the target cost.
- Check function and quality. A cheaper containment route that reduces maintenance access, breaches a fire compartment, or undermines the hospital's estates strategy is not a saving. Test whole-life cost.
- Check it does not simply shift risk to the trust, for example into future maintenance, or reduce the scope the trust is paying for.
- Confirm the design authority, the clinical and estates stakeholders and building control are content.
Who gets the benefit
- If the target is unchanged, outturn falls from £9.96m to £9.36m; overspend against £9.26m becomes £0.10m, the contractor absorbs £0.05m and the trust pays £9.31m. The trust is £300k better off and the contractor's position improves by £300k - the incentive is aligned.
- If instead the change instruction also reduces the target by £600k to £8.66m, outturn of £9.36m produces a £0.70m overspend; the trust pays £9.01m and captures the whole £600k, while the contractor gains nothing for taking delivery risk. It will not propose such changes again, and future value engineering will dry up.
Recommendation. Agree the mechanism in writing before instructing. Use an explicit value-engineering sharing provision, keep the target unchanged for a contractor-initiated proposal, and record the change through the change board with the quality checks evidenced.