Accommodation for HM Customs and Excise London ... · 1988, and with increasing staffing difficulties in London and the South East, the Department decided to develop a location strategy

Report by the Comptroller and Auditor General

NATIONAL AUDIT GCE

Accommodation for HM Customs and Excise London Investigation Division Staff

Ordered by the House of Commons to be printed 10 December 1990

London: HMSO it4.55 net 101

ACCOMMODATION FOR HM CUSTOMS AND EXCISE LONDON INVESTKATION Dl”ISION STAFF

This report has been prepared under Section 6 of the National Audit Act, 1983 for presentation to the House of Commons in accordance with Section 9 of the Act.

John Bourn Comptroller and Auditor General National Audit Office

7 December 1990

The Comptroller and Auditor General is the head of the National Audit Office employing some 900 staff. He, and the NAO, are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies; and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies use their resources.

ACCOMMODATION FOR HM CUSTOMS AND EXCISE LONDON INVESTIGATION DIVISION STAFF

Contents

Summary and conclusions Pages

1

Part 1: Acquisition of 74 Worship Street 6

Part 2: Occupational works for 74 Worship Street 9

Part 3: Cancellation of the 74 Worship Street project 13


Summary and conclusions

1. In 1986 the London-based staff of the Investigation Division of HM Customs and Excise (the Department) were housed in three buildings and some were about to move into a fourth. In May of that year the owners of one of these buildings sought the surrender of the lease, which had two years to run, and which the Department had expected to be renewed. The owners offered in return to refurbish and grant a long lease on one of their other properties, 74 Worship Street, London ECZ. The building was large enough to house the whole of the London Investigation Division and the Department took the opportunity to acquire 74 Worship Street with the aim of improving managerial efficiency and operational effectiveness.

2. The Property Services Agency (the Agency) signed an Agreement for Lease for 74 Worship Street in June 1987, and refurbishment work started in December 1987 and was expected to be completed by June 1989. But in December 1988, faced with the prospect of increased running costs for 74 Worship Street and following a number of reviews of their accommodation requirements, the Department withdrew from the project. At the time, the Agency advised that there was a “fair chance” that the cost of occupational works might be recouped through the sale of the lease, resulting in a net nil cost to the Exchequer, but this was not achieved. Property Holdings, one of the successor bodies to the Agency, paid the owners in April 1990 E6.9 million (including VAT) to secure a release from the obligation to lease the building. The overall loss to the Exchequer was about El4 million.

3. The National Audit Office examined how the Agency acquired 74 Worship Street for the Department; the arrangements for adapting the building to the Department’s requirements; and the reasons for and the consequences of the Department’s subsequent withdrawal from the project. The examination paid particular regard to the roles and responsibilities of the Agency and the Department.

4. The National Audit Office’s main findings and conclusions were:

On acquiring 74 Worship Street for the Department

(a) In 1986, the Department decided to bring the London-based staff of their Investigation Division together in one single building at 74 Worship Street in central London. The Department identified and evaluated a number of operational advantages, but did not quantify the additional costs of continuing to house all of these staff in central London (paragraphs 1.1 to 1.3, 1.7 and 1.9).

(b) With the advice of the Agency, the Department evaluated four options for rehousing the Investigation Division. They considered two of these were unacceptable on timing, financial and other grounds. They costed the remaining options - 74 Worship Street, and a combination of Harmsworth House and another building.

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ACCOMMODATION FOR HM CUSTOMS AN,, EXCISE LONDON INVESTIGATION DIVISION STAFF

There were, however, uncertainties about the Harmsworth House option as no suitable second building had been identified (paragraphs 1.7 and 1.8).

(c) The Department, with advice from the Agency, rejected Custom House as unsuitable, without a costing, on grounds of time, finance, space and light, and the need to move the staff then occupying the building (paragraph 1.8).

On controlling the costs of occupational works at 74 Worship Street

(d) With the aim of saving time and money, the Agency persuaded the owners of 74 Worship Street to integrate the occupational works with the owners’ own refurbishment work (paragraphs 2.1 and 2.2).

(e) The arrangements did not provide for the Agency to have any direct contractual link with the owners’ contractors and consultants. But the Agreement for Lease provided for the Agency to review budgets and tender prices, view and comment on the progress of works, and receive certificates of payments due supported by reports from the owners’ quantity surveyor. The Agency carried out verification of the reasonableness of occupational works costs using in-house quantity surveying resources and at a later stage by appointment of independent quantity surveyor consultants (paragraph 2.3).

(f) The Agency were responsible for managing the project, and the Department for authorising and meeting the costs of occupational works. In October 1987 the Department expressed concern about the Agency’s project management, and complained that the Agency did not keep them informed of cost changes. As a result, the Department and the Agency clarified their roles and responsibilities and established regular joint meetings at which costs were discussed (paragraphs 2.4 to 2.8 and 2.14).

(g) With a tight project timetable, the owners entered into a single tender negotiated contract for the main and occupational building works. The contractor’s price was subject to revision in light of tenders for work to be sub-contracted [paragraph 2.10).

(h) Cost estimates increased by ~2.4 million (57 per cent) to c6.6 million in eleven months from January to November 1988, when the Department cancelled the project. Revisions and adjustments reduced the estimate to E6.2 million by March 1990. The Agency were concerned that some of the cost increases might more properly be attributable to the owners’ works [paragraphs 2.11 to 2.13).

(i) The Agency had difficulty in substantiating claims submitted by the owners’ quantity surveyors and following a payment made in July 1989, subsequent evaluations showed that no further payments were due until March 1990. They made a further payment in March 1990, bringing the total paid to E4.7 million, including VAT. By September 1990 the final cost had not been settled, and Property Holdings had agreed to refer to arbitration two unresolved matters (paragraphs 2.16 to 2.18).

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On the Department’s review of their accommodation needs

(j) In response to a Cabinet Office recommendation, the Department reviewed in 1985 their accommodation requirements for London Port and headquarters staff. They concluded that Custom House should be modernised for London Port staff and that Investigation Division should be housed together in another building. They did not evaluate the likely costs of the strategy, but subsequently prepared detailed investment appraisals in advance of all relocations and rationalisations (paragraphs 3.1 and 3.2).

(k) Also, in October 1985 the Department and the Agency initiated a joint study to review the use of Custom House. Their report in July 1988 identified large areas of under-used space and scope for redevelopment or refurbishment (paragraph 3.3).

(1) In response to the Government’s dispersal initiative in March 1988, and with increasing staffing difficulties in London and the South East, the Department decided to develop a location strategy for their headquarters accommodation. They concluded in May 1989 that for operational reasons London-based Investigation Division staff should remain in central London. An earlier review had concluded in September 1988 that the London Port staff, who then occupied Custom House, should be moved out of central London, and nearer to their work which had shifted down river (paragraphs 3.5 and 3.15).

(m) In August 1988 the Department had doubts about the suitability of 74 Worship Street as a headquarters for the Investigation Division. They were concerned at the likely high rental costs, poor use of space, inadequate natural light, and limited car parking facilities (paragraph 3.6).

(n) The Department carried out an investment appraisal in November 1988, which focused on alternative uses, compared with disposal, of Custom House. The principal difficulties which had led them to reject Custom House for Investigation Division in 1986 had disappeared. The Department had decided to move London Port staff out of London, the joint study of the use of Custom House had been completed, and funds were available for the refurbishment. The Department concluded that to use the building for the Investigation Division was the best option, the appraisal showing net benefits to the Exchequer of some f 70 million (paragraphs 1.8, 3.3, 3.5, 3.7 to 3.10 and Table 2).

On the retention of Custom House

(0) The Department’s preferred option was to refurbish and increase the floor space available in Custom House, at a cost of 06.7 million including VAT. They were influenced by the desirability of maximising the use of a Crown freehold (paragraphs 3.8 and 3.11).

(p) Cost increases led the Department to review the scheme in May 1989. They concluded that it would not provide sufficient cellular office accommodation needed by the Investigation Division. They opted instead for a scheme which would provide

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sufficient accommodation for Investigation Division and some other staff, but not a local VAT office. Following further consideration, the Department had decided VAT offices should not be housed alongside the Investigation Division in Custom House (paragraphs 3.12 and 3.13).

(q) The scale of the Custom House scheme was constrained by the funds available. As a consequence, the Department did not carry out a detailed financial appraisal of the options for refurbishment. The total costs of the refurbishment work were estimated at E21.7 million (including VAT) in March 1990 (paragraphs 3.13 and 3.14).

On cancelling the 74 Worship Street project

(r) The Department withdrew from the 74 Worship Street project in December 1988 -some 12 months after refurbishment and occupational works had started. The Agency took immediate action to cancel as much of the occupational works as possible. The Department accepted responsibility for meeting the remaining owners’ and contractors’ costs including any compensation costs arising from the cancellation (paragraphs 3.10 and 3.16).

(s) The Agency did not succeed in finding alternative government occupiers for 74 Worship Street, or in successfully marketing their interest. Disposal was handicapped by the incomplete state of the building, the absence of comprehensive warranties for some mechanical and electrical services, the downturn in the property market, and the absence of a lease (paragraphs 3.17 to 3.21).

(t) In April 1990 Property Holdings secured, at a cost of fZ6.9 million, a release from their obligation to lease the building. They remained liable for the remaining costs of the occupational works and the cancellation; these costs were recoverable from the Department (paragraph 3.22).

(u) In September 1990, the total estimated cost to the Exchequer of the 74 Worship Street project was f 14.4 million (paragraph 3.23).

(v) The November 1988 appraisal showed that there could be benefits in discounted cost terms of up to E70 million over 25 years from the retention of Custom House. The subsequent loss on the 74 Worship Street project has reduced the benefit to about E58 million (paragraph 3.24).

General conclusions

5. Because of the high cost and operational disruption in rehousing staff, it is essential that departments consider carefully their accommodation requirements and develop an overall long-term accommodation strategy. They should also exploit new opportunities to the full and undertake careful castings of all viable options available. The Department undertook between 1985 and 1988 several reviews of their accommodation requirements, each with different objectives and towards the end of 1988 formulated an overall plan for the London- based staff. Progress in completing the strategy was impeded by the uncertainty over the future and use of Custom House-a joint review

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ACCOMMODATION FOR HM CUSTOMS AND EXCISE LONDON ,NVESTIGATION DIVISION STAFF

with the Agency begun in 1985 was not finalised until 1988. The Department also in 1988 decided to rehouse the London Port staff occupying Custom House as over the years their work had gradually moved down river. If these key issues could have been resolved earlier, the Department might have avoided the need to acquire 74 Worship Street.

6. The Department took the opportunity of acquiring the 74 Worship Street building to enable them to fulfil an operational aim which had been recognised as early as 1980. They reacted quickly in withdrawing from the project when their forecast running costs showed substantial increases and their reviews indicated a reduced requirement for accommodation in London. The Department’s financial appraisal only considered disposing of 74 Worship Street or Custom House as their London estate strategy indicated a future requirement for only one of these buildings.

7. All departments were untied for major civil projects from the Agency in 1988. As this case has demonstrated, and HM Customs and Excise recognised, it is essential for them to have a clear understanding of their role and the responsibilities of their agents. They must also closely monitor the performance of their agents to ensure that they are fulfilling their obligations.

8. Arranging for developers to carry out occupational works in conjunction with building or refurbishment works can save departments both time and money. But to achieve these benefits departments or their agents need to have direct contractual relationships with those controlling the work and certifying payments due; or at least to ensure that they have access to all information they need to exercise full financial control over their projects, Similar lessons emerged from the National Audit Office examination of the arrangements for acquiring a new headquarters for the Department of Energy (HC303, Session 1989-90).

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Part 1: Acquisition of 74 Worship Street

Background

1.1 In 1986 the 560 London-based staff of the Investigation Division of HM Customs and Excise (the Department) were housed in three separate buildings in central London:

- 12-14 New Fetter Lane;

- Atlantic House at Holborn Viaduct:

- Harmsworth House in Bouverie Street.

The Division were also planning to move some staff into part of Custom House in Lower Thames Street to cope with a recent increase in their complement. The leases of the first two buildings were due to expire in May 1988 and in March 1989 respectively, while the lease of the third had some 23 years to run and Custom House was Crown-owned.

1.2 In May 1986 the owners sought surrender of the lease on 12-14 New Fetter Lane which had two years to run and which the Department had expected would he renewed. They offered, in return, to grant a long lease on one of their other properties, 74 Worship Street, ECZ, to accommodate the whole of the Investigation Division. The Department took this opportunity to achieve an aim, dating back to at least 1980, of bringing all the London-based Investigation Division staff together in one building to improve managerial efficiency and operational effectiveness. The early surrender of the lease would be at no cost to the Government and the owners would waive dilapidations payable at the expiry of the lease in 1988 (but see paragraph 3.23).

1.3 The Worship Street building provided about 110,000 square feet of open plan office accommodation. This was large enough to accommodate the whole of the London-based Investigation Division. The owners agreed to undertake necessary refurbishment and arrange on behalf of the Department any occupational works they required. In June 1987, with the agreement of the Department, the Agency signed an Agreement for Lease. Work then proceeded to adapt the building to meet the Department’s requirements. But in December 1988, following a review of their London accommodation needs and with running costs increasing, the Department decided to withdraw from the project.

1.4 The National Audit Office examined:

- how the Agency acquired 74 Worship Street for the Department;

- the arrangements for adapting the building to the Department’s requirements;

- the reasons for and the consequences of the Department’s subsequent withdrawal from the project.

The examination paid particular regard to the roles and responsibilities of the Agency and the Department.

Procedures for acquiring new accommodation

1.5 Before April 1990, if departments needed new accommodation they notified their requirements to the Agency who checked whether these could be met from the existing Civil Estate. Departments were responsible for determining their accommodation requirements, including checking that they did not, without good reason, exceed the civil service space standards for the staff to be accommodated. The Agency were responsible for identifying the available options to meet the requirement and for advising on the most economical and effective way of meeting it, including the assessment of comparative cost information on all options. Departments were responsible however, under Treasury guidance issued in 1983, for taking the lead in coordinating the investment appraisal and ensuring that all relevant expenditure was considered. Departments had to justify their proposals to the Treasury where proposed expenditure exceeded their delegated limits. Where the appraisal indicated that the most economic way of meeting the requirement was to acquire a building, the Agency would be responsible for the procurement and the property would be added to the Civil Estate portfolio.

1.6 The organisational changes in the Agency which took place on 1 April 1990 affected departments’ responsibilities for acquiring accommodation. The Agency were restructured into the Directorate General of Property Holdings and PSA Services and responsibility for managing the Civil Estate was divided between Property Holdings and departments. Property Holdings took over

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responsibility for managing the Common User Estate, and departments took over responsibility for their individual Departmental Estates. PSA Services became an organisation providing design, project management and other services. From 1 April 1990, departments and Property Holdings became responsible for acquiring new accommodation for their respective estates. Also from this date, they have been fully untied from PSA Services and may purchase professional services from them or any other agents.

Appraisal of alternatives

1.7 After receiving the offer of 74 Worship Street, the Department carried out an investment appraisal of the various options. The Investigation Division stated that their staff needed to be located in central London because:

- the majority of investigations took place in Greater London;

- the Division frequently provided advice to the Commissioners and technical divisions, and needed ready access to the Department’s solicitors and prosecuting barristers, who were all largely based in central London;

- day-to-day work involved contact with many London-based bqdies, including the Home Office, New Scotland Yard and the National Drugs Intelligence Unit, as well as Customs attaches at embassies and high commissions;

- a move out of London would create substantial costs of moving a considerable number of staff and might create difficulties in staff retention and recruitment.

In addition, the Department identified and evaluated a number of operational advantages, for example rationalisation of essential support services, of housing the London-based staff of the Division in one building. They did not, however, quantify the additional costs of continuing to house all these staff in central London.

1.8 The appraisal considered four options:

(i) Harmsworth House together with a second building;

(ii) 74 Worship Street;

(iii) Custom House;

(iv) a new purpose-built building.

The Agency were unable to identify any other options capable of meeting the Department’s requirements. The Department only fully costed the

first two options, both on the basis of estimated costs over 25 years, using accommodation cost figures provided by the Agency. The remaining two were unacceptable on timing and other grounds. Cost estimates for option (i) were uncertain because the Agency had been unable to identify any suitable second building. The results of the four appraisals were as follows:

(il Harmsworth House plus another building

Harmsworth House was already occupied by the Investigation Division, and its lease was not due to expire until the year 2009. But as its area was only 56,000 square feet, the Division would have needed a second building in the same area to accommodate the rest of the staff. The Agency considered that even if they could find such a building, it was unlikely to be completed by May 1988-when the New Fetter Lane lease was due to terminate. Nonetheless they provided hypothetical costs of such a building, which the Department used in the appraisal. The net present cost of this option was f69.5 million.

(ii) 74 Worship Street

Advice from architects indicated that the Worship Street building could be adapted to provide up to 120,000 square feet of accommodation. It had on-site parking for 60 cars, a facility which the Department considered would yield a considerable saving in staff time. As the building was owned by the same landlord as 12-14 New Fetter Lane they were likely to be sympathetic to a short overstay in that building until 74 Worship Street was ready for occupation. The net present cost of this option was f36.2 million.

(iii) Custom House

Custom House, with 138,000 square feet of accommodation, was rejected for a number of reasons. There would be insufficient time to complete the necessary alterations to meet the Investigation Division’s requirements, before May 1988, when the lease expired on 12-14 New Fetter Lane. The work would cost in excess of El0 million, and funds were not available. The Department would need to find quickly a suitable alternative building for London Port and the other staff and functions housed within Custom House. In addition, the use of space and poor light made the building inefficient as it stood.

(iv] A new Crown building

The Department rejected the option of a purpose-built Crown building on the grounds

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of high initial cost-about 130 million-and a construction timescale of five years.

1.9 The lkqartmnnt’s preferred nptinn was 74 Worship Street on the grounds of cost and because a single building for the staff concerned would provide greater operational efficiency and security. The Department therefore asked the Agency in December 1986 to obtain the building for their occupation.

Changes in planned accommodation at 74 Worship Street

1.10 Early in 1987 the local planning authority stipulated certain design requirements for the refurbishment of the building which increased the area by 21,000 square feet to 141,000 square feet. As this would increase the rent and the cost of occupational works, and reduce the number of parking spaces by about a half, to 36, the Department reconsidered whether they would still take the building. But in May 1987, the Department considered that there was still no real alternative to 74 Worship Street, and to avoid the prospect of losing the building, they gave the Agency a conditional undertaking that they would underwrite the additional rent and occupational works costs. They stipulated, however, that the design should be adapted to create a self-contained area of some 21,000 square feet, for which the Agency would try to find another government tenant, or that their accommodation charge under the Property Repayment Services scheme should be restricted to an amount based on the originally planned area of 120,000 square feet.

1.11 Soon after, following further planning authority stipulations. the owners proposed alterations to the building which would further increase the usable ares. Following negotiations with the Agency, they agreed to incorporate part of 74 Worship Street into an adjoining development, leaving a separate and secure area of 133,000 square feet for the use of the Investigation Division. The Department deemed this sufficient to meet the Division’s needs.

Lease arrangements

1.12 The Agency signed an Agreement for Lease for 74 Worship Street in June 1987. The lease was for 25 years with “upward only” rent reviews at five-yearly intervals. The initial rent was f2.2 million a year, payable from 42 days after notional practical completion. The owners agreed to undertake the tenant’s occupational works and to contribute fl million towards the cost of plant and machinery included in those works. This plant and machinery would become the owners’ property.

1.13 Also in June 1987 the Agency signed an Agreement to extend the lease of the building at New Fetter Lane to the date of handover of 74 Worship Street.

1.14 Under the terms of the Agreement for Lease the owners’ works were treated as notionally completed on 4 June 1989, and the Agency became liable to pay a licence fee in lieu of rent from 17 July 1989. The Agency (Property Holdings from April 1990) paid f1.71 million in licence fees up to 25 April 1990, when they surrendered their interest in the property to the owners (paragraph 3.22).

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Part 2: Occupational works for 74 Worship Street

Co-ordination of occupational works with main works

2.1 With the aim of saving time and money when leasing uncompleted buildings, the Agency try to persuade developers to adjust basic services, as far as practicable, to the Agency’s requirements. If the terms are advantageous, and to save time and avoid nugatory rent, the Agency also arrange for the developers to carry out the occupational works requirements concurrent with the developers’ own building or refurbishment works.

2.2 In October 1986 the Agency persuaded the owners of 74 Worship Street to carry out occupational works concurrently with the owners’ own refurbishment work. The Agency also agreed that the owners’ design team would prepare detailed designs, plans and specifications for the Department’s occupational works. These would be based on a design brief to be compiled by the Agency in consultation with the Department. The owners would incorporate the work into their contracts with consultants and building contractors.

2.3 These arrangements were written into the Agreement for Lease, which also provided for the Agency to review budgets and tender prices, to view and comment on the progress of work and to receive certificates of payment due backed up by reports from the owners’ quantity surveyor. There was, however, no provision for any direct contractual link between the Agency and the contractors and consultants responsible for the occupational works and for certifying work done and payments due from the Agency. The Agency carried out verification of the reasonableness of occupational works costs using in-house quantity surveying resources and at a later stage by appointment of independent quantity surveyor consultants.

Roles and responsibilities

2.4 Until April 1966 the Agency were responsible for commissioning, managing and accounting for expenditure on major works projects carried out fol Government departments. Since then, departments have had responsibility and accountability for their

own major works projects on the Civil Estate in buildings intended for their sole occupation. They were untied from the Agency and could commission them or other professional agents to manage a project on their behalf. Since April 1990, departments including Property Holdings have been untied from PSA Services for all new works services. To discharge these new “project ownership” responsibilities departments are required to appoint “project sponsors”. Their role includes defining the requirements, commissioning professional advice and services, overseeing the project and controlling its costs.

2.5 The Worship Street project overlapped the changes in responsibilities, but from the outset the Department accepted responsibility for the cost of occupational works. Responsibility for project management, however, remained with the Agency.

2.6 In October 1987 the Department expressed concern about the Agency’s management of the project. The problem hinged on their respective roles and responsibilities. The Department pointed out that the Investigation Division had been drawn into giving instructions directly to the owners design team-a role which they considered was the responsibility of the Agency.

2.7 They were also dissatisfied with the arrangements for reporting and agreeing costs. They noted that most of the occupational works costs would occur after April 1988 when they would have assumed fully their project sponsor role. They recognised that the changes in responsibility had not yet taken place, but considered that the Agency should, nonetheless, have developed procedures to inform the Department of the cost implications of decisions on the occupational works.

2.8 As a consequence, in October 1987 the Department and the Agency met to clarify roles and responsibilities. They agreed that Investigation Division were responsible for determining their operational requirements and justifying them to the Department’s Personnel Division. The latter would act as project sponsor under the new arrangements, and would be responsible for authorising the Agency to incur expenditure on the project, and for

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ensuring that the Agency’s accounts were paid and the project budget not exceeded. The Agency agreed that they were responsible for meeting their client’s proper requirements, liaising regularly with both Investigation Division and Personnel Division and giving instructions and advice to the owners’ design team. The Agency and the Department agreed that an element of direct discussion between the Department and the owners’ design team might be necessary, but that specific instructions should always be given by or through the Agency. To strengthen project management, the Agency established project team meetings between themselves, the Department and the owners’ consultants. These meetings were held regularly until March 1989.

Cost of occupational works

2.9 The Agency provided the owners of 74 Worship Street with a preliminary brief of the Department’s occupational works requirements in March 1987, and most of the detailed requirements by October 1987.

2.10 In December 1987 the owners entered into a single tender negotiated contract with a construction company for their own and the occupational works. Although the Agency would have preferred the contract to be let after competition, they accepted that this was impracticable given the very tight timetable the owners had imposed for the project. The contractor did not quote firm prices for a substantial part of the works. These were to be determined as subcontracts were let. At the time the contract was let, the owners had provided the Agency with a preliminary estimate of E3.9 million for the cost of the occupational works. The contractor started work in December 1987, and the building was expected to be completed and ready for occupation by June 1969. Owing to structural problems and delays on the cladding subcontract, completion was progressively deferred. The building was finally handed over to the Agency in September 1989, in an unfinished state (paragraph 3.16).

2.11 In January 1988 the owners’ quantity surveyor estimated that the total cost of the occupational works, based on the detailed plans provided by the Department, would be f4.2 million. The Agency examined the make-up of the estimate and confirmed that it was acceptable. In February 1988 the Agency obtained the Department’s approval to proceed with the works at a total cost of f4.3 million, including f81,OOO for the Agency’s resource costs, but before deduction of the owners’

contribution of fl million towards plant and machinery (paragraph 1.12).

2.12 Until November 1988, shortly before the Department cancelled the project [see Part 31, the owners’ quantity surveyor reviewed and updated regularly the budget estimate. These revisions reflected changes in the occupational works requirements and cost adjustments following receipt of tenders from subcontractors. In the eleven months between January and November 1988 cost estimates increased by f2.4 million (57 per cent) from f4.2 million to f6.6 million-see Table 1. The Agency secured some reductions, but several matters remained unresolved. Although the Agency accepted that the contract was carried out during a period of rapid building cost inflation, they were concerned that some of the cost increases might more properly be attributable to the owners’ works.

2.13 After the Department cancelled the project in December 1988, the owners’ quantity surveyor produced revised estimates in March, June and July 1969 to reflect the estimated effects of cancellation (see Table 1). These changes reduced the budget estimate to a total of f6.4 million by July 1989. Revisions and adjustments since then further reduced the estimate to E6.2 million as at March 1990. All these estimates were before deduction of the owners’ contribution of fl million. The Agency’s estimated resource costs df so.4 million brought the total estimate for the occupational services up to f6.6 million by September 1990, subject to arbitration proceedings (paragraph 2.16).

2.14 In mid-1989 the Department complained to the Agency that they had not been informed formally of any changes in the cost estimates of the occupational works since February 1988 when they had approved a project budget of f4.3 million (paragraph 2.11). The Agency accepted that they had not kept the Department fully informed of the rising estimates, and that they had not followed the formal procedures for obtaining financial approvals from the Department. The Agency said that they had, however, discussed costs at the Project Team meetings with the Department.

2.15 The Agency agreed in August 1989 to give the Department a full explanation of the increases in the cost estimates as socm as possible but did not produce this until January 1990. They subsequently kept the Department informed of financial developments.

2.16 In April 1990, Property Holdings inherited from the Agency the responsibility for settling the costs of the occupational works. Property Holdings

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Table 1

74 Worship Street occupational works: Estimated costs

Pre cancellation

Estimate, January 1988 4.2

Cost increases, January-November 1988 - new items and changes in specification - professional fees - price changes at tender stage - other increases

Post cancellation

Cost increases to July 1989 Reductions arising from cancellation

less cancellation costs

Further changes to March 1990: - reductions and adjustments - increased fees - contingency

1.7 0.3 0.3 0.1

2.4 -

6.6

0.2 -1.4

1.0

-0.4

6.4

-0.6 0.1 0.3

-0.2 -

E6.2 million* -

* Excludes the Agency’s estimated resource costs of f0.4 million (paragraph 2.13)

Source: Property Services Agency.

Between January and November 1988 estimated costs increased by 57 per cent. Costs were reduced by f0.4 million as a result of cancellation.

agreed as part of the surrender negotiations with the owners to go to arbitration to determine professional fees due and whether specific costs were attributable to the occupational or owners’ works. By September 1990 final costs of the occupational works had not been settled.

Verification of claims

2.17 Between February and May 1989 the Agency paid interim claims amounting to f2.7 million including VAT. But, because of difficulties in obtaining sufficient information from the owners’ quantity surveyors to substantiate the claims,

and to relieve pressure on their in-house quantity surveying resources, the Agency appointed, in May 1989, consultant quantity surveyors to verify applications for interim payments. In June 1989 the consultants completed an interim valuation which assessed the total amount due at that time as f3.6 million (including VAT of f466,OOO); the Agency therefore made a further payment of f0.9 million in July 1989. The consultants were unable to recommend any further payments until they had more information from the owners’ quantity surveyor.

2.18 It was not until March 1990, after a meeting

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with the owners’ agent and quantity surveyor, that the Agency had sufficient information to make a further payment of fl.1 million, including VAT of E144,OOO. The total payments of 24.7 million, including VAT, made up to that stage included:

- f921,OOO cancellation charges agreed by the owners’ quantity surveyor with the main contractor but without consulting the Agency. The Agency accepted that this was within the terms of the Agreement for Lease and

concluded therefore that they had no option but to accept the charge;

- E343,OOO on a “without prejudice” basis for disputed items which were to be discussed further:

- E862,OOO as an interim payment for professional fees. The Agency considered that this figure was subject to further negotiation as they did not have any detailed information on the build-up of fees claimed.

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Part 3: Cancellation of the 74 Worship Street project

Review of London accommodation needs

3.1 In the mid-1980s the Department’s London staff were housed in some 50 headquarters and local office locations. Since then the Department have conducted a number of reviews of their London accommodation needs in response to:

- the need to use accommodation efficiently and to contain the growth of running costs;

- a Cabinet Office recommendation in 1985 that departments should develop accommodation strategies;

- increasing commercial interest in the site occupied by Custom House in Lower Thames street;

- the Government’s initiative to disperse civil service posts out of London and the South East.

3.2 The Department’s review to determine possible accommodation strategies recommended in August 1985 a “three roof strategy”:

- Custom House, occupied at that time by the London Port staff, should be modernised: - the Investigation Division should be brought together ii another building;

- the remaining London Headquarters staff should be housed in a third building. (This was largely achieved in March 1988 with the acquisition of a new building, Sea Containers House.)

The Department did not evaluate the likely costs of the strategy. They told the National Audit Office in September 1990 that detailed investment appraisals were prepared subsequently in advance of all relocations and rationalisations.

3.3 Also in 1985, against a background of increasing commercial interest in the Custom House site, the Department and the Agency initiated a joint study to review the use of that building. They agreed terms of reference in October 1985, and issued the final report in July 1988. It concluded that:

- Custom House had large areas of under-

used space and offered scope for redevelopment or refurbishment;

- potential alternative uses of the building by the Department could emerge from studies then underway of their other central London accommodation requirements; - the potential disposal value was uncertain and would need to be revalued once redevelopment potential had been assessed, but it could be in excess of El00 million. An investment appraisal indicated that a valuation of the building in excess of f60 million would favour disposal rather than retention.

The Department, however, saw Custom House as a significant part of their history and tradition and felt that if the financial arguments were inconclusive and the building could be used efficiently, then they should retain it.

3.4 The Agency and the Department decided that against this background they could not take immediate decisions about the long term future of Custom House. They agreed that the Department would continue their studies to firm up their central London requirements by the end of September 1988. The Agency for their part would examine the redevelopment potential of Custom House and invite the District Valuer to provide updated valuations of the building (see paragraph 3.9).

3.5 The Department had begun to draw up a strategy for its London estate during the winter of 1987, and in the following year they considered how to respond to the government’s March 1988 dispersal initiative. With increasing difficulties of high office rents and recruitment problems in London and the South East, the Department decided to develop a location strategy for their headquarters accommodation aimed at relocating staff out of London and the South East. By November 1988, the Department were sufficiently advanced in their review to conclude that in principle they still needed to maintain a substantial operational presence in central London. They would not however need both Custom House and 74 Worship Street. By September 1988 they had also completed detailed accommodation studies on the London Port

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staff. They concluded that the staff could be moved from Custom House to the east of London, since over the years their work had gradually shifted down river.

Suitability of 74 Worship Street

3.6 In August 1988, while the accommodation reviews were in progress-and a year before the Investigation Division were due to move-the Department had doubts about the suitability of 74 Worship Street:

- Market rents had increased substantially since the Worship Street deal had been agreed. Although the rent payable to the owners (f16.75 a square foot] was fixed for five years, under the Property Repayment Services scheme departments are required to pay to the Property Services Agency (Property Holdings since April 1990) the current market rent of property occupied (see Footnote). The market rent for 74 Worship Street was then estimated by the Agency at f38.50 a square foot. But the Department, having discussed probable trends in rents with the Agency, expected this figure to rise further before they occupied the building, and a substantial real increase at the first rent review;

- The unsatisfactory configuration of the building resulted in wasted space and large areas lacking natural light;

- Space for car parking had reduced by about a half to 36 vehicles to accommodate redesign work required by the local planning authority.

These concerns, and the changing circumstances of London Port and the results of other reviews, led the Department to reconsider Custom House as an alternative location for the Investigation Division’s London staff.

Investment appraisal of Custom House

3.7 In November 1988, having decided that the London Port staff should be moved out of London, and with their concerns about the suitability of 74 Worship Street, the Department undertook an investment appraisal of alternative uses of Custom House. This tested, for each of three potential redevelopment schemes, the relative costs of:

Footnote: The Property Repayment Services scheme has recently been revised and the changes will be progressively introduced from April 1991. Departments will be charged the rent which Property Holdings is charged by the lessor provided the property is held on a lease with rent reviews at less than seven-year periods.

- retention and use for a number of local VAT offices, or disposal of the building and housing the staff of these offices elsewhere in central London;

- retention and use for Investigation Division (plus some VAT offices in any additional space), or disposal of the building and housing the staff of these offices in 74 Worship Street and other accommodation in central London.

3.8 The results of these comparisons are summarised in Table 2. They showed that, in all but one instance, the retention of Custom House represented the better value in discounted cost terms over 25 years. Retention for occupation by Investigation Division gave a better return than that for VAT offices. The Department’s preferred option was to refurbish and redevelop Custom House, at a cost of 06.7 million (including VAT and at 1988 prices), creating an extra 16,000 square feet of space (Scheme 2). The net benefit of this option was f68.6 million. The Department told the Committee of Public Accounts in April 1990 that retention of Custom House gave net benefits of this order (HC332, Session 1989-90).

3.9 The investment appraisal included valuations of Custom House as at September 1988, provided by the District Valuer for the three redevelopment schemes. These ranged from f35.0 million to f77.5 million-before refurbishment but assuming the necessary planning and listed building consents could be obtained, and from f60.7 million to fX56.2 million after refurbishment. The appraisal did not confirm the earlier conclusion that a disposal valuation of f60 million would favour disposal rather than retention (see paragraph 3.3 and Table 2)

3.10 Having taken the decision to relocate the London Port staff (paragraph 3.51, the Department considered that they could overcome the remaining difficulties which had two years earlier led them to reject Custom House for the Investigation Division (paragraph 1.8 (iii)). In December 1988 Ministers decided to retain Custom House, house Investigation Division staff in it, and withdraw from the 74 Worship Street project. Their reasons were:

- the investment appraisal demonstrated a substantial benefit to the Exchequer in retaining Custom House and using it for Investigation Division instead of 74 Worship street;

- Investigation Division would have a secure base under one roof with ample car parking (space for about 140 vehicles);

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Table 2

Investment appraisal: Custom House (as at November 1988)

Details of schemes

Increase in floor space (square feet)

Refurbishment costs* (Gn 1988 prices) Valuations of Custom House

Before refurbishment After refurbishment (?Zm as at September 1988)

0 16,000 32,000

11.7 15.7 25.2

35.0 50.5 77.5 60.7 96.0 156.2

Net benefits of retention (Xm net present value over 25 years)

For Investigation Division Before refurbishment 62.6 55.1 39.0 After refurbishment 70.2 68.6 62.2

For local VAT offices Before refurbishment 45.7 29.1 -3.6 After refurbishment 53.3 42.5 19.7

*For Investigation Division, refurbishment costs would be increased by El million

Source: HM Customs and Excise

The above analysis shows that there was a net benefit of up to E70 million in retaining Custom House for the Investigation Division.

- the site would be rent free to the Exchequer;

- Custom House would be retained within the Crown Estate as a long-term Crown freehold. This contrasted favourably with 74 Worship Street which might have to be vacated when the lease expired 25 years hence;

- Custom House was an extremely flexible building in contrast to 74 Worship Street;

- while the preferred redevelopment scheme would not provide the maximum potential space, it would provide substantial extra space within the funds likely to be available;

- the preferred scheme was considered more likely to receive planning permission and listed building consents than the larger redevelopment;

- regarding the c&t of occupational works ai

74 Worship Street, the Agency had advised that “there was a fair chance.. of recouping the loss in eventually disposing of the lease”.

Reduction in scale of Custom House refurbishment

3.11 In their November 1988 appraisal, the Department tested the case for retention or disposal of Custom House. They did not compare the costs and benefits of the three refurbishment schemes to evaluate whether it would be cost effective to create additional space in the building. But the Department told the National Audit Office that they were influenced by the desirability of maximising the use of a Crown freehold.

3.12 By May 1989, the Agency had developed in more detail their proposals for the Department’s preferred level of refurbishment. They concluded that the scheme could offer nearly 20,000 square feet of extra space-about 4,000 square feet more than originally envisaged. The Agency produced a revised estimate of L35.3 million-at May 1989

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prices and including fees of E4.1 million and VAT. This showed a substantial increase over the broad estimate of E16.7 million (excluding fees) used in the investment appraisal (paragraph 3.6). The increased level of expenditure would have required Treasury authority. With the aim of reducing costs, the Department reconsidered the available options. At this point they learnt that the additional space to be provided under the preferred Scheme 2 would be all open plan, and that the scheme relied on converting some of the existing cellular accommodation to open plan. This conflicted with Investigation Division’s accommodation needs which, for security reasons, were mainly for cellular offices. The Department therefore decided not to proceed with Scheme 2.

3.13 To keep within the cost constraint agreed in 1988, and following a feasibility study prepared by the Agency, the Department proceeded with an alternative refurbishment scheme. The Department did not carry out a detailed financial appraisal. The scheme would give the Department less than 2,000 square feet of additional space, but would be sufficient to house 750 Investigation Division staff, and 60 other staff. By June 1989 the Department had considered in detail questions of security and common services. They concluded that other enforcement staff were more compatible occupants of Custom House than VAT staff (paragraph 3.7).

3.14 The Agency estimated in March 1990 that the cost of the more limited refurbishment of Custom House was El9.6 million (including VAT) at current prices. An additional E2.l million was needed for urgent refurbishment work on Custom House to house staff vacating the New Fetter Lane building. Estimated costs for the refurbishment therefore total E21.7 million including VAT.

Investigation Division’s accommodation needs

3.15 In May 1989 the Department finalised their review of the location strategy for their headquarters accommodation (paragraph 3.5). They concluded that all the London Investigation Division staff should remain in central London for operational reasons. Some 200 of the Division’s staff moved to Custom House from 12-14 New Fetter Lane in September 1969, joining the 150 already there. The remaining staff (about 400) are expected to nmve in by the end of 1992.

Cancellation of the 74 Worship Street project

3.16 The Department’s decision in December 1988 to withdraw from the 74 Worship Street project came 12 months after refurbishment and occupational works had started on site and

9 months before the projected completion date. The Agency took immediate action to cancel as much of the occupational works as possible, and the building was therefore left unfinished. Work on all floors was incomplete, and a number of mechanical and electrical installations had not been commissioned or completed. The Agency on behalf of the Department accepted responsibility for meeting the remaining owners’ and contractors’ costs including any compensation costs arising from the cancellation.

3.17 The Agency considered three alternative options for the building:

- find other Government occupiers; - surrender their interest to the owners for a premium;

- market their interest with a view to assigning the lease as soon as it was completed.

3.18 Although they approached other Government departments and public bodies, the Agency were unable to find a Government tenant. Their preferred option therefore became the surrender of their interest to the owners. Market rents had increased considerably since the rent for 74 Worship Street had been agreed and they considered that their interest was worth about E6 million. The owners considered however that the Agency should pay them a premium of between f6 million and f 7 million to take back the property.

3.19 Unable to reach a satisfactory agreement, the Agency appointed a major firm of London agents in July 1989 to market their interests in the property. Despite their efforts over a period of nine months, the agents were unable to find a buyer.

3.20 Disposal of the property was handicapped by the incomplete state of the building, the absence of comprehensive warranties for some construction work and mechanical and electrical services, and the downturn in the property market. Also, the owners and the Agency had not completed the lease, and without this the Agency did not have an interest capable of conveyance.

3.21 The owners and the Agency could not complete the lease because:

- the owners did not produce acceptable plans and schedules for their original scheme of refurbishment, for attachment to the lease. Such documentation would be essential for the five-yearly rent reviews;

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- the Agency could not agree to the insertion in the lease of a date by which they or an assignee would be obliged to complete the building to the owners’ original specification.

3.22 Because of the lack of success in selling the property, Property Holdings-who had inherited the Agency’s former estate management responsibilities for the building (see paragraph 1.6)-secured in April 1990 a release from the obligation to lease the building. In return they agreed to pay the owners E6.9 million (including VAT). In addition, Property Holdings remained liable for the cost of tenant’s occupational works, including all liabilities arising from cancellation; these costs were recoverable from the Department. The final amount had not been determined by September 1990 (see paragraph 2.16). Property Holdings were also required to pay maintenance and security costs of about ElOO,OOO from September 1989 to April 1990. In addition, the costs of marketing including the agent’s fees were about f100,000.

3.23 In September 1990, the total estimated costs of the 74 Worship Street project, after deducting the owners’ contribution of fl million, amounted to f14.4 million (see Table 3). In addition, Property Holdings told the National Audit Office in September 1990 that, as the Agreement for Lease for 74 Worship Street had not been fulfilled, the owners had made a claim for dilapidations in respect of the New Fetter Lane building (see paragraph 1.2).

Table 3

Total estimated costs of the 74 Worship Street pjed

Premium paid to owners Occupational works (see Note) Licence fee in lieu of rent Resource costs Maintenance, security

and marketing

6.9 5.2

1.7

0.4

0.2

f 14.4 million

Note: These costs include cancellation costs and savings, but are net of the owners’ contribution of fl million.

Source: Property Holdings

Benefits of retention of Custom House

3.24 The Department’s November 1988 appraisal showed a net benefit of up to f70 million in retaining Custom House for the Investigation Division (paragraph 3.8 and Table 2). The assumptions underlying that figure included nil cost for the cancellation of the Worship Street project, which was not achieved (paragraph 3.23). The National Audit Office estimate that the effect of this has reduced the net benefit to the Exchequer over 25 years to approximately E58 million.

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Documents

Accommodation for HM Customs and Excise London ... · 1988, and with increasing staffing difficulties in London and the South East, the Department decided to develop a location strategy