Department of Health: The Paddington Health Campus Scheme

appendix fourAppendix fourThe opportunity cost of delay in taking forward theCampus scheme1 The opportunity cost of the failed project is likelyto be greater than the simple £14.9 million direct costof the project itself. Delay is expensive when buildingcost inflation is running ahead of general inflation inthe economy. While it is difficult to be precise about thecosts of delay on a scheme which was never static, forillustration, had the project eventually gone ahead inMay 2005, in substantially the same form it had reached byOctober 2003, then that 17 month delay would have addedapproximately £103 million to the cost of construction(construction tender prices exceeding general inflation bysome 13 per cent during the period) (Figure 12). The costof borrowing has the capacity to offset the impact of capitalcost increases, if rates fall, or indeed add to the cost, ifrates rise, although the degree of offset /cost would not beknown until financial close.2 This amount is illustrative and is not a cash cost, as theeventual project configuration by May 2005 differed fromthat in October 2003, partly to accommodate affordabilityconcerns. However, it does demonstrate quite clearly howquickly costs would have risen in this case, at that time. Thisunderlines the importance of factoring likely cost increasesinto decisions on whether to proceed with a project whenthere have been material changes to the key factors thatdetermined its original viability.12Construction Costs Inflation between October 2003 and May 2005Cost, £ millions1000950MIPS900850RPI800750Oct2003Nov2003Dec2003Jan2004Feb2004Mar2004Apr2004May2004Jun2004Jul2004Source: Office of National Statistics, Paddington Health Campus documentationAug2004Sep2004Oct2004Nov2004Dec2004Jan2005Feb2005Mar2005Apr2005May2005NOTERPI is the all-items Retail Price Index and MIPS is the Median Index of Public Sector Building Tender Prices published by NHS Estates based on informationcompiled by the Department of Trade and Industry.the Paddington Health Campus scheme 47