Olympic contingency at risk from building cost inflation

Despite the thorough way in which the latest London Olympics Budget was prepared, cost uncertainties are still reflected in the £2.7 billion contingency allowance in £9.3 billion public funding.
This is the principal finding of the U.K. National Audit Office in its otherwise favourable analysis of the budget for the London 2012 Olympic and Paralympic Games produced by the Department for Culture, Media and Sport earlier this year.

The £9.3 billion figure, upper limit on public funding for the Games, is some £5.3 billion greater than the estimate in gross terms at the time of London’s bid. These estimates did not include the cost of the Olympic Village which is expected to be funded largely by the private sector.

As the audit report indicates, the main area of uncertainty is the impact of construction price inflation. Much will also depend on the level of funding secured from the private sector for building the Olympic Park.

“Significant areas of uncertainty remain”, it says, “such as the finalisation of detailed design specifications, the legacy benefits to be delivered, how potential suppliers will respond to invitations to bid for work, and the impact of inflation on construction prices, as reflected in the high level of contingency that has been provided for.”

In view of the tendency for major project costs to be under-estimated, the budget for the Games includes a contingency sum equivalent to some 30 per cent of the current budget. Use of this provision, currently set at £2.747 billion, is to be refined by the delivery authority as individual projects go forward.

By realistically reflecting the risk of additional costs, says the audit report, a risk based contingency should provide a better basis for effective cost control.

“It is however important to recognise that the Games budget is just that – a budget and not a target.

“Whilst effective risk management is essential, it is also important to seek opportunities where possible to manage within the available resources, including the contingency if used, for example by providing where appropriate suitable incentives for suppliers to come within the target cost for individual projects.”

Within the actions required to manage risk, the audit office has identified three needs which it says require particular attention now:

A clear statement of the key deliverables expected in return for £9 billion public funding, making clear time, cost and quality assumptions
More robust estimates of contingency to reflect the special risks associated with particular elements of the programme
A cash flow analysis to ensure that the ODA has money available and is not delayed in taking forward its delivery programme.
The Olympic budget includes expected funding from the National Lottery now set at £2.175 billion, of which some £750 million should be contributed by designated Olympic lottery games. This will however entail some loss of sales revenue for mainstream games currently supported by the lottery.

According to the audit report, this will be offset by a share in the expected profits from the sale of land in the Olympic Park when the Games are over. These profits, held by the London Development Agency, are to be shared with the Government, which in June expected to recoup for the lottery an estimated £675 million.