UK Gives Green Light to $15.2B in High-Speed Rail Construction
Decision gives economic boost to European contractors
With most work slowing down because of COVID-19, European contractors have been thrown a lifeline by the U.K. government’s formal April 15 start of $15.2 billion of work on the London-Birmingham high speed railroad, known as HS2.
The announcement reveals an 85% price hike above official estimates made when preferred bidders for the seven main civil contracts were named in July 2017.
By receiving notices to proceed, four multinational joint ventures can mobilize to start construction as early as this fall. Employing thousands of workers, the joint ventures must comply with official and industry health guidance, relevant to the level of epidemic at the time.
Balfour Beatty and VINCI have the largest slice of the work, covering the two northernmost contracts, together valued at roughly $6.2 billion. The 90 km stretch linking with the West Coast Main Line will include 76 bridges, 7.5 km of twin tunnel, 30 km of cutting and more than 33 km of embankments, all calling for 32 million cu m of earthmoving.
With the biggest workforce of all the contractors, employing 8,000-10,000 workers at peak, the joint venture of Balfour Beatty Group Ltd. and units of France’s VINCI Group S.A. will have the biggest health management challenge.
But, during these “unprecedented and challenging times” the contract “provides certainty for many businesses up and down the U.K.,” says Leo Quinn, Balfour Beatty CEO. The project “will drive investment in skills and capability for current and future generations.” Site work on the 74-month contract should start in the summer of 2021.
The next 80-km stretch to the south will be built in two contracts by a joint venture of Eiffage Genie Civil S.A. and Kier Infrastructure and Overseas Ltd., each with a 35% stake, and Ferrovial Agroman and BAM Nuttall at 15% shares each. Ferrovial and BAM Nuttall joined the team after the original partner, Carillion Construction Ltd., went bust in 2018.
“Whatever difficulties countries are currently facing, we stay confident in the fact that we will overcome the crisis and successfully deliver this ambitious project," says Benoît de Ruffray, Chairman and CEO of Eiffage.
Valued at $2.9 billion, the work due to start this year on the section includes 15 viaducts, 5 km of tunnels, 22 km of highway diversions, 67 bridges and 30 million cu m of excavation.
The next 21.6-km section of HS2 south is being handled by a joint venture of Bouygues Travaux Publics S.A., Sir Robert McAlpine and VolkerFitzpatrick. The $2-billion contract includes a 3.4-km viaduct across the Colne Valley and 16 km of twin-bored tunnel. Jacobs Engineering and Ingérop-Rendel are the designers.
The southernmost 26 km section in the London terminal at Euston is in the hands of a joint venture of Skanska Construction U.K. Ltd., Costain Ltd., and Strabag A.G, and is valued at $4.1 billion. “The contract gives our employees a sense of security in this currently uncertain environment,” said Strabag’s CEO Thomas Birtel.
The official launch of work on HS2 ends an agonizing couple of years when inflating costs hung over the project’s fate. When project owner HS2 Ltd. (HSL) named its preferred bidders in 2017, it expected work to start by 2019 at a cost of around $8.2 billion.
The contracts were in two phases. The first design phase was intended to fix target prices and the second covered the construction. However, as increasing unease grew over inflating costs, the government last year asked a former HS2 Ltd chair Douglas Oakervee, to lead an independent review aided by various experts.
His report was largely completed last December, but remained confidential until February, when the government decided to go ahead as planned, in line with Oakervee’s recommendations. While advising continuation of the whole project, he frowned at its procurement strategy.
HS2 Ltd.’s strategy “proved to be unsuccessful” as it loaded excessive risk on contractors, consequently inflating prices, he reported. Based on target costs with pain/gain sharing, “initially, all the risk was placed on the contractors.” When the initial draft prices proved to be excessive, HS2 Ltd. reviewed its strategy leaving the company “carrying most of the risk.” However, Oakerveee added that the “relatively modest reductions in price” seemed not to “reflect the full value of the savings that could be achieved.”
Oakervee advised the government to get better value from the main civil contractors or rebid the work.
With its notices to proceed, the government appears satisfied that even at $7 billion over budget, the projects remain a good value for the money.