The Olympics “Delivery Partner” model – a precedent worth following? (Part 2)

We explained yesterday about the ODA (Olympic Delivery Authority) deal with their delivery partner, CLM. We wanted to know how much this has cost, and what the ODA got for their money. (This is a rather number-heavy post, I should warn you!)

The spend is in the public domain, even if it is buried away in the ODA annual report. Up to April 2011, ODA paid CLM £517 million, of which around £180M was performance related. Over the three years from April 2008, the average was around £136M a year.

We might assume therefore that as the construction programme moved past its peak in 2011, the annual fee for 2011/12 and onwards will decline - ODA won't spend £136M a year again. So if we were at £517M at April 11, we're guessing the final fees to CLM after the last couple of years' payment may end up at something like £650M.

Now, if the quoted  total Olympic construction budget of £7.25 billion includes the CLM costs, which I believe it does, then that suggests their fees represent around 10% of the actual payments to suppliers (i.e.  £6.6 billion for construction, £0.65 billion to CLM).  So that's one measure of the cost - is that 10% reasonable as a contract management fee?

Next question is, what did ODA get for their money? Well, they got a successful programme. But in more tangible terms?

In response to our Freedom of Information request, ODA told us that CLM had an average of 472 staff working on the programme between 2008 and 2010. (We’ve taken this averages to smooth out some peaks and troughs over the 3 years the actual numbers were 460 in 2008, 512 in 2009 and 444 in 2010).

A bit of simple Maths tells us that ODA therefore paid an average of approx. £289,000 per head per year for CLM people over those three years.

Now, as ODA pointed out to us:

“The rates are professional service rates paid to CLM by the ODA and include employment costs, business costs and overheads. The rates include all CLM consortium members business and employment costs such as employers National Insurance contributions, pension contributions, medical insurance, vehicle costs, training costs, company business operating costs and head office costs”.

It looks like ODA paid on an hourly rate per person basis, because when we asked about the ten most expensive CLM people, we were told that the rate for the most expensive CLM person was £314.92 an hour, going down to £176.37 for number ten. They wouldn’t give us job titles for those people.

So it looks like a professional services, hourly rate type contract, with the top fee being £315 an hour, or some £2500 a day, or £567,000 a year (allowing for holidays). The average cost of £289,000 per year represents a day rate of around £1300 – so a whole lot cheaper than MOD’s famous Alix Partners contract!

Given how quickly the individual rates drop off from the top handful, it is likely that there were a lot of staff around the average – so let’s say in the £275-3250K annual fees bracket, then a few higher and lower paid outliers.

Let’s continue our deductive process.  My rule of thumb for looking at professional service charging rates is this. Take the base salary, and double it to allow for pension, benefits, insurance etc - all the direct costs of employment. Then add on the corporate margin – which in a smaller consulting firm might be 50%. In a large, it can be 100% or even more.

So if a consultant is paid a basic annual salary of £50K, a small consulting firm might look to make £150K a year from that individual in fees, while a large firm is looking to make £200K+. If the expected utilization is 160 days a year, then that means a daily charge rate of £1250 for the large firm.

There’s an element of guesswork here, but that would suggest that the fee income of £300K a year for CLM may indicate that their individuals were paid on average around £75K plus a decent benefits package, if they were employees - of course, some may have been contractors themsleves.  (And obviously, junior, administrative and similar staff would earn less, and senior people more). But overall, that would still give a very healthy profit margin for CLM, particularly as the utilisation over the year was close to 100% I suspect.

My view is that CLM did a brilliant job in delivering the programme. I have met a few of their people and they were very impressive – top level commercial, procurement, project and contract managers, often with a background in firms like Bechtel, KBR and similar. There’s a strong argument that the individuals and the firms deserve to be very well rewarded for what they have achieved.  I certainly think that the sort of people you need to deliver really big, critical programmes are going to cost you, even as an average, the best part of £100K each, and their employer will want a multiple of that obviously.

So let’s not pretend or expect that the sort of expertise needed to deliver huge, complex procurement and capital projects comes cheap. The Olympic construction success has come at a considerable cost. And £300K per person per year may well be the sort of amount that needs to be budgeted if any other public body wants to mimic ODA and go down this “delivery partner” route.

And in our next post on this topic we'll look at what it might mean for others, like MOD, who may consider this option.

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Voices (6)

  1. Final Furlong:

    Well done Peter. A few more FOIs due methinks.

    So that will be 472 ‘external’ staff who have been significantly trained and developed (and are now experienced) to source and project manage a major construction programme in government. All of whom will disappear once the programme is complete.

    Notably, I’m told that the core team within the ODA who originally developed and ‘procured’ the CLM model and related contract left some time ago (a few years…) for new pastures.

  2. Ian Heptinstall:

    I trust “a whole lot cheaper than …Alix Partners” doesnt become a measure of public sector purchasing excellence, in the same way that delivering a project on time should not become a measure of project management excellence.

    If the delivery parner really was delivering excellence in performance, do you have any metrics on the capital productivity, speed, safety and environmental impacts? If they too were world class, I have no issue with your logic on rewarding the people involved. However if they programmes and budgets were comfortable, then it is less impressive, and I’m not as sure of the value. Having said that, the senior folks who ensured that politicians and officials didnt keep tinkering with the scope must have done an excellent job.

    World class major project execution standards are delivering projects on schedule, with schedules at least 25% shorter than traditional norms, with associated reductions in total cost. Japan’s largest ministry (MLIT) spends some £100 billion a year, and has acheived such results since the mid 2000’s.

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