KIRKLEES PRIMARY CARE TRUST
NEW HEADQUARTERS BRADLEY BUSINESS PARK HUDDERSFIELD
FULL BUSINESS CASE
Version 0.7 AUGUST 2008 s:Premises Development/Kirkleespct/Reports/FBC V0.5 13.8.08
CONTENTS Page EXECUTIVE SUMMARY
3
1.0
INTRODUCTION
5
2.0
DESIGN DEVELOPMENT
8
3.0
LEGALS
10
4.0
PARTNERSHIP WORKING
11
5.0
FINANCIAL EVALUATION
12
6.0
RISK ASSESSMENT
17
S:Premises Development/KirkleesPCT/Reports/FBC V0.5 13.8.08
2
EXECUTIVE SUMMARY Working together to achieve the best health and well being for all the people of Kirklees Overview 1.
This Full business case (FBC) builds on the Outline Business case approved by the PCT Board on 19 Dec 2007. It describes the process by which the PCT has negotiated the final details with the Preferred developer and quantifies the implications of the changes made to the financial aspects of the proposal.
2.
The purpose of this FBC is to seek final PCT Board approval to enter into a legally binding contract with the developer to provide a new HQ building for the PCT at Bradley Business Park. Following Board approval the Yorkshire and Humber SHA will also need to approve the FBC as the total contract value exceeds the PCTS delegated limit of £6m.
Background 1.
The case of need for new administrative Headquarters for the Kirklees PCT was made in an Outline Business Case. This was approved by the Kirklees PCT Board in December 2007 and endorsed by the Yorkshire and Humber Strategic Health Authority in January 2008 subject to clarification of a number of issues.
2
The OBC also identified the potential to sub let some space to the West Yorkshire Central Services Agency (WYCSA) and The Huddersfield Informatics Service (THIS). Further negotiations have been undertaken with both parties to understand their specific requirements and reach agreement on the apportionment of costs. At this stage it has not been possible to agree terms with THIS. The PCT has considered the implications of this to the project and decided that it is still viable without THIS. THIS has therefore been removed from the FBC analysis. Should THIS still wish to utilise space within the building then the PCT will recommence negotiations post financial close.
3.
Since approval of the OBC detailed negotiations have been undertaken with the preferred developer on a number of issues. These include: •
Design development
•
Legal contract
•
Fit out costs
•
These negotiations have now been completed. The purpose of this Full Business Case is therefore to detail the outcome of those negotiations and seek formal approval from the Kirklees PCT Board and the Strategic Health Authority to enter into contract with preferred provider.
3
Costs
1
The current costs of the development compared with those set out in the OBC are detailed in fig 1 Fig 1 comparison of OBC to FBC costs Item OBC FBC +/Gross area. sqft 44770 47250 +2480 Net area.sqft
39362
40430
+1068
Net/gross% Rent/sqft excl VAT ÂŁ Total rent excl VAT Fit out
87.9 14.73
85.6 15.05
-2.3 +0.32
579674
598472
+18798
350000
804981
+454981
Car Park
N/a
496000
+496000
Furniture and Fittings
450000
645087
+195087
Information Technology
150000
217375
+67375
Cause Gym and external fire escapes Gym and external fire escapes Reduction in net to gross area Gym and external fire escapes Includes VAT and it out to WYCSA Increased requirement from PCT Includes items to be recharged to WYSA and VAT Includes items to be recharged to WYSA and VAT
Programme 1.
The developers has agreed the following programme: Action Planning approval Approval of FBC Financial close Site set up Construction PCT commissioning Full occupation
Duration 8 weeks 4 weeks 1 week 4 weeks 56 weeks 4 weeks 2 weeks
Completed July 2008 27 August 2008 1 Sept 2008 1 Oct 2008 30 Nov 2009 24 Dec 2009 16 Jan 2010
4
1.0
INTRODUCTION
1.0
Background The case of need for new administrative Headquarters for the Kirklees PCT was made in an Outline Business Case. This was approved by the Kirklees PCT Board in December 2007 and endorsed by the Yorkshire and Humber Strategic Health Authority in January 2008 subject to clarification of a number of issues. This identified and confirmed that the preferred development was at the Bradley Business Park.
4.
The OBC also identified the potential to sub let some space to the West Yorkshire Central Services Agency (WYCSA) and The Huddersfield Informatics Service (THIS). Further negotiations have been undertaken with both parties to understand their specific requirements and reach agreement on the apportionment of costs. At this stage it has not been possible to agree terms with THIS. The PCT has considered the implications of this to the project and decided that it is still viable without THIS. THIS has therefore been removed from the FBC analysis. Should THIS still wish to utilise space within the building then the PCT will recommence negotiations post financial close. Since approval of the OBC detailed negotiations have been undertaken with the preferred developer on a number of issues. These include: •
Design development
•
Legal contract
•
Fit out costs
These negotiations have now been completed. The purpose of this Full Business Case is therefore to detail the outcome of those negotiations and seek formal approval from the Kirklees PCT Board and the Strategic Health Authority to enter into contract with William Birch Ltd. The OBC covered the following matters:
1.1
1.
Introduction
2.
Kirklees PCT – Profile – an updated review of current accommodation
3.
PCT Current Administrative Premises – A review of services pro by the PCT
4.
PCT Future Requirements For Administrative Premises
5.
Option Identification – Sets out the options selected and the process for deselecting options to arrive at the final short list
6
Financial Evaluation– the identification of the capital and revenue costs for the two short listed options;
7.
Risk Assessment – sets out the perceived risks of the short listed options and management strategies for dealing with these.
8.
Selection of preferred option – sets out the quantitative and qualitative assessments and analyses the range of options
9,
Ownership Options – confirmation of the ownership options.
Approach to Development of the FBC. The approach to the FBC has involved consultation with: •
PCT Staff.
•
The District Valuer in undertaking a further negotiations with preferred provider.
5
1.3
•
Hempsons, the PCTs legal advisors
•
West Yorkshire Central Services Agency
•
The Huddersfield Information Service.
Structure of Document The results of the approach adopted in the development of the FBC are presented in the following sections of this report:
1.4
1.
Introduction
2.
Design Development
3.
Legals
4.
Partnership Development
5
Financial Evaluation– the identification of the capital and revenue costs for the two short listed options;
6.
Risk Assessment – sets out the perceived risks of the short listed options and management strategies for dealing with these.
Business Case Process Figure 1.1 below provides an overview of the project structure and organisation created to develop the Full Business Case.
Figure 1.1 – Project Structure Business Case Process Trust Board Investment Decision Maker
Chief Executive/SMT Project Owner/Sponsor
Project Board Helena Corder Bryan Machin David Henwood Rob Harrison John Rayner Michael Storry Terry Service Alison Hyde
-
Project Director Director of Finance Project Manager Staff representative THIS WYCSA Corporate Services Communications
Project Team David Henwood Pat Patrice Julie Lawrenuik Ian Hazlehurst
-
Project Manager Corporate Services Finance HR
6
Jackie Wood Helen Haythorne Debbie Allen Michael Storry Representative Representative Representative
-
THIS Communications WYCSA WYCSA PCT Commissuioning PCT Public Health PCT Nursing and Quality
Wider Stakeholders Within the context of the above structure a Project Team developed the full business case. 2.0
DESIGN DEVELOPMENT
2.1
Introduction This section details the developments in the design since OBC and the financial consequences, if any.
2.2
Summary of changes and development of layouts Several changes to the origin layouts have taken place during the design development stage as a result of changes to the PCT’s requirements and due to technical issues. The PCT, having further considered its requirements has requested a dedicated office area to accommodate its executive team. It has also agreed to the provision of a staff gym to aid the retention and recruitment of staff. The cost of these changes has increased the rental to £598472pa,an annual increase of £18798pa. The District Valuer has confirmed that the increase is consistent with the original submission. The developer also advised the PCT that to comply with DDA requirements the main entrance needed to be resited to the first floor, accessed from the top level of the two storey car park. These changes were acceptable to the PCT which also enhanced the appearance of the building. There were no increases in costs as a result of this change.
2.3
Specification Detailed negotiations on the base specification and fit out specification have been concluded to reflect the PCT’s requirements.
2.4
Fit out The base rent provides for an open plan shell building complete with decoration, engineering services and floor coverings. It is the PCTs responsibility to fit the building out to its requirements. The PCTs requirements are detailed within the specification and illustrated on the layout plans. The PCT will contract with the developer to undertake the PCT’s fit out at an additional cost of £685k+VAT. The PCT has made this decision based on the following benefits. Shorter overall construction time • Fit out integrated with building design and construction • Reduced cost of returning building to shell structure on termination of the lease. • Reduction in double running costs saving £240k over the three months it is estimated that the fit out would take. • The costs submitted by the contractor are very competitive when compared with industry average costs for fit out. Theses range from £300sqm to £750sqm dependant on the quality of finish. The costs presented by the developer equate to £190sqm for an acceptable standard.
7
2.5
Car Parking The PCTs original car parking requirements were specified at 120 places. The developer offered 136 within its bid. Given the peak occupancy of the building including the need to provide car parking for a significant number of meeting rooms that will attract visitors to the building the PCT requested the developer to increase the number of parking bays,
This has been achieved by the provision of a mezzanine level to the front of the building providing an additional 56 spaces. The cost of this is ÂŁ422k + VAT . This will be paid for as a capital sum to the developer on completion of the project. Both WYCSA and THIS have both confirmed that at this stage they require no additional spaces. Should there requirements increase in the future then the PCT will consider allocating further spaces at an appropriate charge. 2.6
Planning Approval The detailed proposals have received full approval from Kirklees Council with minimal reserved matters relating to finishes and the treatment of soft landscaping.
2.7
Costs
The current costs related to those included within the OBC are detailed in fig 2.1. Fig 2.1 comparison of OBC to FBC costs Item OBC FBC +/Gross area. Sqft 44770 47250 +2480
2.8
Net area.sqft
39362
40430
+1068
Net/gross% Rent/sqft excl VAT ÂŁ Total rent excl VAT Fit out
87.9 14.73
85.6 15.05
-2.3 +0.32
579674
598472
+18798
350000
804981
+454981
Car Park
N/a
496000
+496000
Furniture and Fittings
450000
645087
+195087
Information Technology
150000
217375
+67375
Cause Gym and external fire escapes Gym and external fire escapes Reduction in net to gross area Gym and external fire escapes Includes VAT and it out to WYCSA Increased requirement from PCT Includes items to be recharged to WYSA and VAT Includes items to be recharged to WYSA and VAT
Programme The programme for the project is detailed in fig 2.2. This is based on financial close being achieved early in Sept 2008 to enable a start on site Oct 2008. Fig 2.2 - Programme Action Planning approval Approval of FBC Financial close Site set up Construction
Duration 8 weeks 4 weeks 1 week 4 weeks 56 weeks
Completed July 2008 27 August 2008 1 Sept 2008 1 Oct 2008 30 Nov 2009
8
PCT commissioning Full occupation
2.9
4 weeks 2 weeks
24 Dec 2009 16 Jan 2010
Independent tester The PCT will appoint an independent tester to verify that the building and fit out has been constructed to the specification. The appointment will be a joint appointment with the developer who has agreed that the independent tester will certify practical completion to the standard required within the Agreement for Lease.
3.0
LEGALS
3.1
Introduction The original bids were based on Heads of Terms prepared by the PCTs legal advisors, Hempsons. Detailed negotiations have been undertaken between the two parties legal advisors to structure the legal frame work that reflects the needs of the PCT and still offer a commercially viable development to the developer. The legal documents include an Agreement for lease which describes the building required including detailed specification and plans. The Agreement for lease includes a draft lease which will be entered into on successful completion of the building.
3.2
Heads of Terms The summary Heads of terms are detailed in fig 3.1 Fig 3.1Summary of Heads of Terms Heads of Term Details
Lease Term Break Rent Permitted use Rent review Insurance Rates and Taxes Utilities Landlord and tenant Act Assignment Sub-letting Profit Share
3.3
10 years No Break ÂŁ98472pa + VAT B1(commercial office)+ D1(health) 5 years upwards only Included in rent Tenants responsibility Tenants responsibility Included Permitted as a whole Permitted up to 6 Includes provision for proft share (50/50) an any excess developers profit. Assessed by prospective development appraisal to out turn
Underleases The PCT has agreed Heads of Terms and costs with its under tenants, WYCSA. These are included at Appendix D. Formal under leases will be entered into with the under tenants prior to occupation of the building.
9
4.0
PARTNERSHIP DEVELOPMENT
4.1
Introduction This section describes the agreements reached with WYCSA.
4.2
West Yorkshire Common Services Agency Detailed discussions have been conducted between the PCT and WYCSA on the development of their requirements. The agreed plans reflect their agreed needs and have been signed off by them. The PCT has also agreed the share of costs relating to their occupation. These are detailed in fig 4.1. These will form the basis of a formal under lease between WYCSA and the PCT. Fig 4.1 Financial contribution – WYCSA Item OBC Proportion of 17.3% building Rent 117833 Service Charges 85313 Fit out Not calculated Car Park Not calculated
FBC 16%
Comment
106586 57360 99886 0
Excl gym Excl gym
Furniture and fittings Removal Costs
Not calculated Not calculated
278253 0
Redundant equipment IMT
Not calculated
0
Not calculated
23512
No additional spaces required Actual cost WYCSA will arrange own removal WYCSA will arrange own disposal Based on prop of area. More detailed work required to agree actual apportionment
10
5.0
FINANCIAL EVALUATION
5.1
Introduction This section presents the financial consequences of providing the PCTs accommodation needs in Kirklees. The approach to assessing the affordability of the scheme has involved the following stages:
5.2
Capital The preferred option is based on leasehold property. There are therefore limited capital costs other than “fit out” equipment and IM&T. These are illustrated in Figure 5.1 below: -
Figure 5.1 - Capital Costing Summary Item
Organisation
Option 1
Share Office equipment
Kirklees PCT
323668
WYCSA
278253
Total
601921 Fit Out
Kirklees PCT
705061
WYCSA
99886 804981
Car Park
Kirklees PCT
495850
WYCSA
0 495850
IM&T including VOIP, links and telephone handsets
Kirklees PCT
126488
WYCSA
23512 150,000 Total
2,131465
The PCT understands that its Operational Capital allocation for 2009/10 will be £1.1m. There are a range of funding options that the PCT wishes to discuss with the SHA. Option A – the total capital requirement of £2.13m could be met in full by the PCT if it is permitted to convert revenue funds held in the Strategic Reserve to capital funds. The extent of the resources required from the Strategic 11
Reserve would be that required to meet the PCTs other operational capital requirements plus the new HQ capital costs. Option B – the costs of the additional car parking is incorporated into the lease. This leaves an estimated capital requirement of £1.7m. The analysis is then as Option A above but with a lesser requirement to utilise Strategic Reserve revenue resources. Option C – the PCT makes a bid for some or all of the capital requirement against the SHAs Strategic Capital allocation of £28m in 2009/10. The PCT’s preferred option is Option C with a contingency plan of Option A if some or all of the PCT’s bid for SHA Strategic Capital is not successful. It is noted that WYCSA is not an independent NHS body and therefore not in receipt of capital allocations themselves. In the event that a bid for Strategic Capital is successful for the full capital costs the status of WYCSA is not an issue. However, if it is necessary for NHS Kirklees to utilise either its own revenue or capital resources it will expect the client base of WYCSA to make appropriate contributions. 5.3
Information Management and Technology The new building will be integrated into the Health economy wide WAN and will utilise the VOIP capabilities for integrating voice and data communications.
5.4
Revenue Cost Assumptions The following assumptions have been made regarding the revenue costs under each of the options: •
Business rate valuation based on 80% of rentable area at £15sq. Rates payable based on 43p/£ = £5.16sq ft
•
Energy taken as 1.34p/ sq ft (increased by 40% to reflect moves in energy costs)
•
Cleaning taken as £1.8/ sq ft
•
Security at £0.10/ sqft
•
Maintenance at £0.36 sqft IR + £.60 sqft FRI
Revenue costs are summarised at Figure 5.2 Figure 5.2 - Summary of Revenue Costs Item
Area sqft
Option 1 OBC
FBC
39362
40430
£
£
12
Rent incl VAT at 17.5%
681117
703205
Service Charges and Insurance
Incl in rent
Incl in rent
Rates @ £5.16
203108
208619
Energy and utilities @ 1.34/ sqft*
52745
54176
Maintenance £0.36 sqft + £0.6 sqft
37787
38819
Cleaning and security @ £1.9 sq ft
74788
76817
1,049,545
1,081,636
26.66
26.75
WYCSA (7736sqft)
203,147
163,946
THIS (5184sqft)
136,132
0
Total Income
339,279
163,946
Less current costs**
963,000
1,015,867
Sub Total Rate per sq ft Less income from sub lease
Net revenue impact on PCT
*
(252,734)
(98,177)
Costs increased across OBC and FBC relating to increase in energy prices
** Based on current costs however an increase of up to 40% on current rent can be expected for Beckside Court to account for increase in rents following rent review 08/08 As there is a net recurrent revenue saving under either option the recurrent revenue costs are affordable from within existing resources. 5.5
Value for Money The PCT has undertook a value for money analysis of all the options. The VFM analysis was undertaken using discounted cash flow techniques to arrive at an equivalent annual cost (EAC). This process allowed the PCT to accurately assess the variable cash flows over the period of the lease to provide a true assessment of the annual cost of the offers to the PCT.
13
The selected option is that for which approval is being sought in this Full Business Case. It had the lowest equivalent annual cost and the DV recommended its acceptance. As detailed in Section 2.2 the annual rental has increased by £18k and the equivalent annual cost has increased from £869,978 to £886168. As stated in 2.2 the DV has confirmed that the increase is consistent with the original submission and therefore represents value for money. 5.6
Value added Tax and Stamp duty The lease costs will be subject to VAT and are included within the appraisal. Allowance has also been made for SDLT at £48272
5.7
Other Non recurrent Revenue Costs Figure 5.4 Details the non-recurrent revenue costs of this project. Description
Total Cost £’s
Stamp duty
48272
Removal costs
25000
Early break penalty for Beckside Court
286841
Disposal of surplus and redundant equipment
15000
Double running costs (assume 1 month)
80250
Allowance for Beckside Court
15000
dilapidations
at
Legal and other professional fees
20000
Independent tester
40000
Total non costs
recurrent
revenue
530,363
The non-recurrent revenue costs are affordable from within the non-recurrent resources available to the PCT, notably £10m currently held in the strategic reserve.
14
5.8
Balance Sheet Treatment An appraisal has been undertaken on the appropriate balance sheet treatment in accordance with the International Accounting Standard 17. IAS 17 Leases defines a finance lease as a lease that transfers substantially all the risks and rewards incidental to ownership of an asset. Operating leases are any other leases. The classification of leases between finance and operating is therefore based on the extent to which risks and rewards incidental to ownership of the asset lie with the lessor or the lessee. Having reviewed IAS 17 it is considered that this lease will be an operating lease and therefore “off balance sheet”. The opinion of the PCT’s auditors has been sought. The Auditors opinion is that they are not minded to challenge the opinion of the Director of Finance that the lease is an operating lease under IAS 17. The PCT notes that the International Financial Reporting Standards will be Introduced to the NHS from 1 April 2008. As of the date of this document the implications of this on the PCT and this business case are not known. It is assumed that if there is any effect on PCT costs there will be an equivalent change to the PCT’s resource allocation.
15
6.0
RISK ASSESSMENT
6.1
Introduction The PCT has undertaken a risk assessment of the development. The key risks are summarised below.
6.2
Design , construction, installation The majority of these risks are absorbed by the developer therefore the risk to the PCT is minimal. The key impact of any of the risks occurring is the delay to completion. The PCT has negotiated a long stop date within the Agreement for lease that allows the PCT to terminate the contract if the building is not practically complete within 12 months of the programmed date (30 Nov 2009) Although such a delay would be inconvenient to the PCT it is manageable within the continued availability of existing premises. There is no greater risk on the PCT on this project compared to any other new build.
6.3
Availability and Performance All the potential risks have been managed through legal agreements or by the selection of reputable PASA contractors supported, where appropriate, by service contracts.
6.4
Operating The risks presented by this are minimal and no different to the risks currently being managed. It could be argued that overall the PCTs operating risks are reduced by this new development.
6.5
Technology and obsolescence The key risk here is organisational change. The design pre-empts the split between provider and commissioning within Primary Care Trusts. The lease structure also allows the PCT to sub let in parts or to assign its leas holder responsibility to a successor organisation or to a non NHS organisation of similar financial standing.
16
DETAILED RISK ASSESSMENT Risk Assessment New HQ Risk Probability Impact score Management of risk 1. Design, Construction, Installation Change in PCT requirements
3
2
Unforeseen site conditions Delay in gaining access to work area
4 2
1 1
Delay due to PCT operations interfering with work Exceptional weather Fire/lightning/explosion
0 3 3
3 1 3
Legislative/regulatory change Poor project management
2 2
2 3
Contractor default Construction delays
1 1
3 3
Delays to equipment installation
1
5
TOTAL, Design, Construction, Installation
Max flexibility in design. Max 6 opportunities for sub let or assignment Developer risk. Risk to PCT is delay in completion. Excessive delay gives grounds for termination in Agreement for 4 lease. 2 Developer risk. See above PCT will not commence its 0 commissioning until formal handover. 3 Developer risk see above 9 Developer insured risk see above Will need to be assessed when nature of 4 change known 6 Developer risk see above. Old established family firm with robust 3 financial base 3 Developer risk see above Fit out included in main contract. PCT employing specialist contractor to supply 5 and place loose equipment 55
2. Availability and Performance Latent defects in new build
2
3
Defective new equipment
1
4
Facilities become unavailable
1
4
Equipment breakdown
1
2
6 Covered by lease. Collateral warranties Equipment to be selected from established reputable companies on 4 PASA list Would need to assess at time. No 4 increased risk from existing provision Equipment to be selected from established reputable companies on PASA list. Service contracts will be 2 arranged for any sensitive equipment 16
TOTAL, Availability and Performance 3. Operating Legislative/regulatory change
2
1
Running costs higher than budget Management of tenants TOTAL, Operating
2 3
2 2
Will need to be assessed when nature of 2 change known Running costs estimated at bench marked levels. Actual costs should be 4 less as new building constructed to Part L 6 Formal arrangements to be established 12
17
4. Technology and Obsolescence Technological change/asset obsolescence
1
1
4
4
Organisation change
TOTAL, Technology and Obsolescence
TOTAL RISK SCORE
1 Generally low tech building Lease facilitates partial sub lets or total 16 assignment 17
100
18