The London Mayor called for pressure should be sustained to contain costs that are rising due to the global economic downturn.

His comments came at Mayor’s Question Time in response to a report published on Wednesday by Carphone Warehouse co-founder David Ross, which revealed that new economic and market conditions had put additional pressures on the venues’ budget which had risen by £106 million.

Not a penny more 

The report also identified areas of risk requiring attention, in particular planning the delivery of the Olympic Village, the Olympic Park legacy and security.

On the Olympic Park legacy, Ross recommended work should be accelerated to ensure Londoners receive long term benefits from the Games.

The Mayor said he has asked Ross to work with him to establish a Legacy Board of Advisers to advise him on plans for the Olympic Park once the Games are over.

The Mayor said, “David highlights some important issues including how important it is to have greater transparency and openness about cost forecasts for the Games than has been the case so far and I want to take this opportunity to reaffirm that Londoners will not pay a penny more council tax to pay for the Games – no matter the circumstances.”

The Games budget was set in March 2007 at £9.325 billion. The largest element of this budget relates to the Olympic Delivery Authority (ODA).

In its announcement last December the ODA’s baseline budget was presented by government as totalling £6.090 billion including £500 million of allocated contingency with additional unallocated contingency of £2.009 billion remaining.

Some £1 billion of this additional contingency, however, is an integral part of ODA’s real baseline budget/forecast of final costs. This now stands at £7.111 billion and the programme contingency included in this forecast is likely to be spent in full.

A further £1 billion contingency is held by the government’s Funders Group to cover wider risks, including economic risk. 

No scope for fundamental changes 

The report concluded that the ODA had made good progress, on what it described as a complex and challenging site, in taking forward the physical preparation of the Olympic Park, and remained on track to start its main construction activities in 2008.

By the end of March 2009, the ODA expects to have entered into contractual arrangements on individual projects valuing £5.1 billion against its current anticipated final cost of £7.111 billion.

At the end of March 2008 the ODA had awarded contracts to the value of £2.7 billion. This includes the relative larger and more complex contracts for the Olympic Stadium, the Aquatics Centre and 70 per cent (by value) of the contracts to be awarded under the structures, bridges and highways project.

More recently the ODA has also awarded the contract for the Velopark.

Ross said that there was no real scope for fundamental changes to what is now planned and is in the process of procurement, given the advanced state of procurement and design on the main venues and the tight programmes to complete the major venues in time for test events and the Games.

Attempting to do so would run the risk of adding to the eventual cost through delay. 

Significant savings 

The report said that site preparation and infrastructure was progressing well. It noted that the ODA had been hitting its milestones and was well on course to deliver a high quality platform for building the Olympic venues. 

“This has been done while making significant savings from the original budget and is a major achievement, as recognised by the IOC in the recent report by its Co-ordination Commission,” according to Ross.

A number of factors contributed to this, including an original budget based on a well-developed master plan, the absence of anticipated problems with contaminated soil and other ground conditions, and good levels of market interest and competition.

The report warns, however, that that there was no competition at all for the construction of the main stadium and the aquatics centre, where the ODA found itself with just a single bidder.

The original venue budgets were not based on detailed designs and assumed that there would be some competition tension in the market place.

Ross said that it would not have been economically viable to seek a fixed price deal on the venue contracts, with McAlpine on the stadium and Balfour Beatty on the aquatics centre. 

“The ODA are realistic about the significant level of risk that remains within these contracts,” he added.

Only a very small cost increase 

The extent of cost pressures affecting the venues can be seen in the £106 million increase in the anticipated final cost of the venues since November 2007. 

As an example, the ODA’s current estimate of final cost for the stadium contract has risen from £496 million in November to £525 million.

The rise in the venues budget has been offset by savings achieved or forecast elsewhere in the programme which mean there has only been a very small increase in the overall anticipated final cost of the total programme of £16 million. 

The report warned that containing cost pressures and avoiding further calls on the contingency would be difficult and require sustained effort to manage contractors effectively and to identify and realise cost opportunities across the programme.

Ross advised that this process must be overseen from the top by the Olympic Board on the basis of “the best possible information”.

The illiquidity of the banking system and falling house prices have had serious implications for the original arrangements between the ODA and Lend Lease, the developer of the Olympic Village Project. 

Lend Lease is currently having difficulty in both securing the private finance necessary to finalise the transaction and in determining what additional funding is required to make the project viable. 

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