The Press SATURDAY, MAY 8, 1965. Cost Plus-On £l3 Million

Press, Volume CIV, Issue 30745, 8 May 1965, Page 14

The Press SATURDAY, MAY 8, 1965. Cost Plus-On £l3 Million

The unusual form of contract for the construction of the West Arm powerhouse was necessitated by the Government’s decision to decline the only tender received. “The price was so high it had to be “rejected”, said the Minister of Works (Mr Allen). The contract finally signed by the Government and the Utah Construction and Mining Company stipulates a price of £13.3 million, with adjustments up or down on an agreed basis, according to the audited cost of the project. The effect of this sliding scale is that if the cost (including £750,000 of overhead expenses) of the project is only £ll.B million, the contractor will receive £500,000 of the £IJ million saved. If the cost is lower than £ll.B million, the contractor still receives only £500,000 of the savings, so that Utah Construction has no incentive to keep costs below £ll.B million. If the cost turns out to be more than £13.3 million, the contractor must carry a quarter of the extra cost, to a maximum of £500,000. Thus, if the work costs £15.8 million, Utah Construction will pay £500,000 and the Government £2 million of the additional cost. The Government is to bear any additional cost above £15.8 million.

As the contractor’s fee or allowance for profit is estimated at £500,000, Utah Construction has an incentive to keep the cost below £15.8 million, and its “ incentive range ” may be put at £ll.B million to £15.8 million. In round figures, the Government has committed taxpayers to a bill of £l2 million to £l6 million—an arrangement which would hardly commend itself to the businessman or accountant. But what businessman or accountant would tender for work in the normal manner when the work was as difficult and the risks so imponderable as the West Arm powerhouse? The Government is already deeply committed to the Manapouri power project, of which the powerhouse is the culmination. In these times of inflation, costs are more likely to be higher than lower than estimated, and taxpayers should be prepared for a bill nearer £l6 million than £ll million. In a difficult situation, when an urgent decision was necessary, the Government appears to have struck a reasonable bargain—even if it turns out to be a cost-plus bargain.