Building standards - compliance plan manager role: cost benefit analysis

4. Cost Benefit Framework

4.1 Introduction

4.2.1 This section sets out the framework under which the costs and benefits of introducing the CPM role will be assessed. The analysis will compare the costs and benefits of introducing a CPM role into projects with the current approach to compliance management. The analysis will involve a comparison of two options:

• Option 1: Existing situation with respect to compliance management.
• Option 2: Introduction of a CPM.

4.2.2 The purpose of the cost benefit analysis is to quantify in monetary terms as many of the costs and benefits associated with each option as is feasible. The costs and benefits should be prepared over 60 years^[14] and the present value of the net benefits calculated.

4.2.3 The costs and benefits are analysed at the Scotland level for the high-risk building types listed in paragraph 1.3.1. It is appropriate to disaggregate the analysis by building type if the costs or benefits of the proposed role show material variation by building type. The analysis of the “general” literature does not provide sufficient detail to disaggregate the analysis by building type, but the review of specific building failures suggests that the consequent costs associated with buildings not being available vary by building type.

4.2.4 It is also important to consider who incurs the costs and who benefits from the CPM role. The actual cost of the CPM will be borne by the client, but some of the benefits will flow to the contractor and sub-contractors as they incur less costs in undertaking rework. The client will however, benefit in having the building available for continuous use rather than having buildings closed while failures are rectified in the post construction period.

4.2.5 For the purposes of the cost benefit analysis, the following costs have been adopted as “typical” of the cost of a high-risk building project in the following categories:

• Residential care: £6 million.
• Leisure centres: £10 million.
• Hospitals: £60 million; and
• Schools: £33 million.

4.2.6 It has not been possible to find any examples of the cost of constructing high-rise residential buildings, but a model project has been constructed based on the following assumptions:

• A 13-storey building with four apartments per storey.
• Average apartment size is 61 sq.m. with an additional 20% to represent external areas.
• Average build cost is £2,000 per sq. m.
• Allowances for external works, risk and professional fees have been made.

4.2.7 Using these assumptions, the cost of a high-rise residential building has been estimated to be £10 million.

4.2 Identification of Costs

4.3.1 The main costs to be quantified in the analysis are the costs incurred with the introduction of the CPM role. The costs of introducing the CPM role have been informed by the consultations with stakeholders. Through the discussions it became clear that the current cost of monitoring compliance was very difficult to estimate as compliance is undertaken by many people as part of their specific duties. There is no reason to assume that these duties will not continue to be undertaken when the role of the CPM is introduced. Hence, for the analysis, the only cost occurs in Option 2 i.e. the cost of the CPM.

4.3.2 Using the role of Principal Designer in the CDM regulations as a guide, the consultations suggested that the cost of that role could be 0.5% to 1.0% of construction costs. Using the construction costs in paragraphs 4.1.5 and 4.1.7, adopting 1% would yield estimates of the cost in the range £60,000 (residential care) to £600,000 for hospitals. While the lower end of the range seems reasonable, the £600,000 figure for hospitals appears quite high.

4.3.3 The role of the CPM will require considerable knowledge and experience, therefore a relatively senior professional will be required. The following assumptions are proposed for the analysis:

• For smaller high-risk projects (residential care homes, leisure centres and high-rise residential) a figure of £90,000 is assumed as the cost of the CPM role which would broadly equate to one full-time equivalent (FTE) person.
• For larger high-risk projects (schools and hospitals), a figure of £180,000 is assumed as the cost of the CPM role which is broadly equivalent to two FTEs.

4.3 Identification of Benefits

4.4.1 The benefits likely to arise from the introduction of the CPM role are essentially “avoided costs” and fall into two main categories:

• Costs incurred during construction of the building as a result of rework. These costs should be reduced with the CPM.
• Consequential costs of non-compliance associated with building failure in the post construction period. These costs should be avoided or substantially reduced with the CPM and they will typically fall into the following categories:
  • Costs of rectifying the work.
  • Injury and fatality costs.
  • Consequential costs of building not being available.
  • Other social or community costs.

4.4 Avoided Costs During Construction

Direct Costs

4.5.1 There is no one specific source of data on the cost of rectifying work arising from non-compliance during the construction process. The academic papers set out in Section 2 provide information on the cost of rework as a percentage of the original contract value.

4.5.2 Drawing on the research, the analysis will assume that all high-risk building projects incur costs during construction to ensure compliance, but that the cost of the rework will vary between the options. The introduction of the CPM will reduce the level of rework at the point of completion.

4.5.3 Direct rework costs from Table 2.1 are estimated to be in the range 1.71% to 9.3% of contract value. This is quite a large range and a figure of 5% is often quoted as a “widely accepted figure”. However, a proportion of this rework cost can sometimes be attributable to design changes and variations which are not a result of poor quality or non-compliance. This would suggest that the rework figure for non-compliance issues should be slightly lower.

4.5.4 A couple of studies^[15] in Table 2.1 suggest that the cost of rework is reduced to below 1% when quality systems are introduced. Stakeholder consultation also confirmed that compliance should be higher with the CPM.

4.5.5 Hence, the assumptions adopted for the direct cost of rework are:

• 3% of original contract value for Option 1 (the current situation).
• 1% of original contract value for Option 2 (the introduction of the CPM role).

4.5.6 The difference in cost between the two options is the direct benefit (“avoided cost”) of introducing the CPM. Given the range of estimates in the literature, sensitivity analysis will examine the effect of altering these assumptions. Details are provided in Section 5.

Indirect Costs

4.5.7 The literature review also identified that in addition to the direct costs of rectifying work, there could be substantial indirect costs associated with rework including:

• The effect of delays to the critical path of the project.
• The consequential effects on contractors/sub-contractors from additional waiting time, lost productivity, increased stress and lost profit.

4.5.8 Indirect costs were not quantified as frequently as direct costs in the studies reviewed, but two studies estimated them as 2.75% and 5.6% of contract values. Other studies noted they could be up to five times the direct cost.

4.5.9 While these costs exist, there is less evidence available on which to base any assumptions and, where available, there is a considerable range of results. For the analysis we have adopted the lower estimate of 2.75% for Option 1 and have assumed that this will reduce to 1% for Option 2 with the CPM role.

4.5.10 Section 5 provides details of the sensitivity tests for this assumption.

4.5 Avoided Costs Post Construction

Costs of Rectifying the Work

4.5.11 The review of specific building failures in Section 2 identified that the actual costs incurred in addressing the failure are very specific to the particular failure and where the contract has been Design and Build, there is very little information available.

4.5.12 To generate a cost for this rework we need to reflect the fact that these major building failures are relatively rare. Hence, the cost of rectifying the work will be based on the probability of building failure occurring in a year. Ideally, the research would identify the prevalence of building failures due to non-compliance by building type and be able to classify the failures by severity of impact. However, this information is not recorded, therefore assumptions have been made on the probability of a building failing.

4.5.13 Major building failures such as Grenfell are relatively rare, but there have been a regular number of events in recent years. Stakeholder consultation suggested that there is an on-going issue with many buildings but at a much less “severe” scale than the incidents reviewed in Section 2. The analysis in Section 2 suggests that the number of failures in high-rise residential and school buildings appear greater than the other categories of buildings.

4.5.14 Hence, the analysis will assume that the probability of a building failure in any one year is 0.5% for leisure centres, hospitals and residential care homes and 1% for high-rise residential and schools building projects.

4.5.15 In generating estimates of the “avoided costs” of building failures, it is important to recognise that all costs reviewed in Section 2 and very “incident specific”. It is very difficult to draw firm estimates from the review as cost data are very patchy with some projects having very detailed cost information while others have very little data in the public domain.

4.5.16 Hence, there is a range of possible “benefits” associated with increasing compliance depending on the type and severity of the incident avoided, but no firm data on which to base the cost ranges. The analysis is therefore based on a series of assumptions which have been informed by the data collected in Section 2 and the consultations.

4.5.17 The analysis in Section 2 shows that the average cost of interim and permanent fire safety measures (excluding replacement cladding) at Chalcots Estate was £20.9 and £16.5 million respectively. This is equivalent to a total cost of over £58,000 per flat. However, when the cost of cladding is included, this increases to £200,000 per flat. On the Ledbury Estate the average cost of the initial repairs and investigations is estimated to be £34,000 per flat, but when the costs of refurbishment and strengthening of some of the towers are included, the cost increases to £436,000 per flat.

4.5.18 The extent of repair work is clearly related to the severity of the building failure with Grenfell Tower awaiting demolition. A change to the Scottish Building Regulations in 2005 means the possibility of an incident happening in Scotland which is similar to Grenfell is lower. As a result, the costs of rectifying any building failures in high-rise residential housing exclude the costs associated with removing and reinstalling appropriate cladding. The cost of rectifying a failure in high-rise residential housing is assumed to be £40,000 per flat.

4.5.19 For hospitals, the estimates of the repair costs are very large including £16 million for the RHYPC and over £50 million for the QEUH. Again these are very project specific failures, which represent repair costs of between 6% and 11% of total construction costs. For the model hospital, a repair cost of 8% of construction cost has been adopted.

4.5.20 There are no specific data available from the Edinburgh Schools Inquiry into the cost of rectifying the failures, therefore it is assumed that repair costs are also 8% of construction costs.

4.5.21 The DG One leisure centre cost more to reinstate than the original construction cost. It is hoped that such total building failure is very rare such that it would be inappropriate to use this to illustrate repair costs. In the absence of other data, it is assumed that repair costs are also 8% of construction costs.

4.5.22 A similar assumption of 8% of construction costs has been adopted for residential care homes.

Injury/Fatalities Costs

4.5.23 The value of a casualty in a building failure will include healthcare costs to the NHS, lost output as casualties require time off work and emotional and physical suffering. The Department for Transport (DfT) uses the average value of prevention per casualty by severity (fatal, severe etc.) in its assessment of road schemes and these values have been adopted for this analysis. The DfT data have been updated to 2020 prices and are:

• Fatality: £2 million;
• Severe casualty: £229,000; and
• Slight casualty: £18,000.

4.5.24 The main assumption relates to the number of casualties associated with building failures. The review of incidents in Section 2 found that only three failures had resulted in injuries or death and these were all associated with fires in residential building types:

• Grenfell Tower: 72 fatalities and 70 injuries.
• Waddell Court: 1 fatality and 2 injuries.
• Rosepark Care Home: 14 fatalities.

4.5.25 On this basis, it is assumed that casualties are restricted to residential building failures (high-rise residential and residential care) and one fatality, one serious injury and one slight injury are incurred. There will be no casualties associated with the other building types.

Consequential Costs

4.5.26 Consequential costs include:

• Costs as a result of the building not being available and the need to provide alternative accommodation.
• Costs associated with investigative work on other high-risk buildings to ensure the failure does not occur again e.g. review of cladding on high-rise buildings, checking wall-ties in other buildings in other authorities.

4.5.27 Building not available: These costs occur because the building failure renders part or all of the building as unusable and leads to the building owner having to find alternative accommodation and possibly other costs e.g. additional transport etc.

4.5.28 The analysis in Section 2 showed that the cost of alternative provision is very much dependent on the type of building. The cost of re-housing all the Grenfell residents is the single largest component of the total cost to date. This cost is influenced by the number of households affected and the length of time alternative provision is required.

4.5.29 For the high-rise residential analysis, it is assumed that:

• All 52 households in the model are displaced from their homes for six months;
• Average rent for social housing is assumed to be £90^[16] per week per household.

4.5.30 For residential care homes in Scotland, the average cost per week varies for publicly funded and self-funded residents with the latter paying approximately £200 per week more. This analysis takes a mid-point between the two figures and assumes only residential costs are covered i.e. the cost of nursing care is not included which could add at least £70 per week to any costs.

4.5.31 For the residential care home analysis, it is assumed that:

• The average size of a care home is 40 residents, and all are displaced for six months;
• The cost of living in a residential care home is £800 per week, excluding nursing and any other specialist services.

4.5.32 For schools, it is estimated that the total cost of alternative classrooms, transport etc. is £370 per pupil. This is primarily based on the Edinburgh Schools experience. The average pupil role for the model school is assumed to be 1,000 pupils^[17].

4.5.33 For hospitals, the average cost of keeping the old sick children’s hospital in Edinburgh open for another 15 months was £9,000 per bed or £6,800 per bed per annum. The analysis assumes that building failures are most likely to affect a ward rather than the entire hospital building.

4.5.34 For the hospital analysis, it is assumed that:

• One 20 bed ward is unavailable for six months.
• The cost of providing a bed is £6,800 per bed per annum.

4.5.35 The data available for the cost of providing alternative facilities when DG One was closed are very limited. As there is no firm basis for estimating the cost of alternative provision, we have not included a cost against this building type. There is also no statutory requirement for local authorities to provide leisure facilities.

4.5.36 Other investigative/repair work: These costs occur because the building failure has prompted building owners to check their buildings for non-compliances. Both Grenfell and Edinburgh Schools led to all local authorities undertaking investigative work on some of their buildings. However, the cost of this work is not known, so this is identified as a potential benefit which cannot be monetised.

Social and Other Costs

4.5.37 The analysis in Section 2 showed that building failures can generate a number of other costs including:

• Stress and effects on mental health for people affected by the building failure.
• Emergency services responses.
• Public inquiry and legal costs.

4.5.38 The social costs associated with the schools and hospital incidents include increased stress, disruption and anxiety. There were also substantial social care and well-being costs associated with Grenfell and Chalcots Estate including the exacerbation of pre-existing mental health conditions.

4.5.39 Given the lack of detailed cost information, it is not possible to monetise the potential social costs. These costs have been assessed on a four-point scale of no impact, minor impact, moderate impact and major impact. On this qualitative basis, the effect of building failure on social costs is assessed as:

• Hospitals – moderate impact.
• High-rise residential – major impact.
• Schools – moderate impact.
• Residential care – major impact.
• Leisure centres – minor impact.

4.5.40 Depending on the type of building failure there could be costs associated with an emergency service response. This cost is most likely to be associated with a fire and will vary by type of building failure and severity of failure. Given the potential variability, the cost is identified but not monetised in the analysis.

4.5.41 There are also substantial public inquiry and legal costs associated with some of the incidents. Again this cost will vary by type and severity of building failure such that the cost is identified but not monetised in the analysis.