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TsyB W 00/530-1/5/0
GOVERNMENT SECRETARIAT
HONG KONG
6 December 2017
FINANCIAL CIRCULAR NO. 7/2017
Capital Works Programme
(Note : Distribution of this Circular is
Scale C.
Directors of Bureaux, Controlling Officers and
all officers dealing with capital works projects,
as well as resource allocation, annual Estimates
and procurement of stores and services for items
under the Capital Works Reserve Fund should
read it.)
--------------------------------------
This Circular updates the requirements
governing the
administration of a capital works project under the Capital Works Programme
(CWP). Financial Circular No. 3/2012 “Capital Works Programme” is hereby
replaced. Financial Circular No. 4/2010 “User Guide on the Finance
Committee, Establishment Subcommittee and Public Works Subcommittee” is
hereby updated.
CAPITAL WORKS PROGRAMME
2.
CWP comprises works projects funded by the following Heads of
Expenditure of the Capital Works Reserve Fund (CWRF) –
(a)
government works projects under Heads 702 to 707, 709 and 711
(collectively, they are called the Public Works Programme); and
(b)
capital subventions projects under Head 708
1.
/
DELEGATIONS .....
To: Directors of Bureaux
Controlling Officers
1
Head 708 funds “Capital Subventions” and “Major Systems and Equipment” projects. Only the part of
Head 708 relating to capital subventions forms part of the CWP.
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DELEGATIONS FROM FINANCIAL SECRETARY TO
CONTROLLING OFFICERS FOR THE ADMINISTRATION OF CWRF
3.
In accordance with the Legislative Council (LegCo) Resolution
setting up CWRF, the Financial Secretary (FS) may delegate his power of
administration to other public officers. By virtue of the Interpretation and
General Clauses Ordinance (Cap. 1), the aforesaid reference to “Financial
Secretary” also means the Secretary for Financial Services and the Treasury
(SFST).
4.
The Controlling Officer (CO) for each Head in CWRF is specified
in the Memorandum Note on CWRF in the Annual Estimates. COs may
administer the subhead(s) under delegated authority according to the approved
scope and, where appropriate, the approved project estimate (APE). When
exercising delegated authority, COs should observe Financial Circular No.
1/2004 “Responsibility of Controlling Officers”.
CATEGORIES OF CAPITAL WORKS PROJECTS
5.
There are four categories of capital works projects. Categories A,
B and C reflect the different funding status of a project under the capital works
resource allocation system, while Category D projects cover pre-construction
activities (such as design studies and site investigations) for major projects and
standalone minor works items each costing not more than the delegated
financial limit. Details of the different categories are set out in the following
paragraphs.
CATEGORY C
Pre-requisites for inclusion in Category C
6.
A project attains a Category C status any time of the year upon
approval of its Technical Feasibility Statement (TFS) by the Works Branch
(WB) of the Development Bureau. The requirements for the preparation of TFS
are set out in
Financial Circular No. 4/2012
“Requirements for Project
Definition Statement and Technical Feasibility Statement for Capital Works
Projects”
2.
/7. .....
2
Part of Financial Circular No. 4/2012 has been amended by Financial Circular No. 4/2017 “Optimisation
of Site Utilisation for Capital Works Projects”.
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7.
In case the scope of works and/or project estimate of a Category C
project is revised and becomes substantially different from that in the approved
TFS, a replacement TFS for consideration by WB and re-confirmation of the
Category C status of the project by Treasury Branch of the Financial Services
and the Treasury Bureau (TsyB) is required.
8.
Directors of Bureaux (DoBs) may
not incur any CWRF
expenditure on any pre-construction activities
3 for any Category C project,
except with the prior approval of SFST.
Deletion from CWP register
9.
DoBs should, in collaboration with the relevant works directors,
keep a close watch on Category C projects which have not been upgraded to
Category B within three years from the date of entry into Category C, and
should provide justification in writing to TsyB for the retention of Category C
status prior to the expiry of the three-year validity period. In the absence of
initiation by the relevant DoBs for retention of Category C status of the project
(mainly by revisiting / updating the relevant TFS and submission to WB for
approval), it will be followed up with a view to deletion of such project from
CWP after three years. Reinstatement of deleted projects in Category C should
follow the normal procedures outlined in paragraph 6 above.
CATEGORY B
10.
Category B projects are divided into Categories B+ and B-. Only a
project with Category B+ status has earmarked funding, and may proceed
with –
/(a) .....
3
Pre-construction activities, which usually include site investigation, feasibility studies, design and
preparation of tender documents, ensure that a project will be ready in all respects to start works on site
once funding for the construction works is approved. The costs of pre-construction activities can be
charged to the appropriate works-related block allocations under the CWRF subject to their expenditure
ceiling. Land acquisition, undertaken by the Director of Lands with funding met from block allocations
under CWRF
Head 701 ─ Land Acquisition, is regarded as an enabling factor for the project, but not as
part of the pre-construction activities.
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(a) upgrading to Category A;
(b) parallel tendering before upgrading of the project to Category A. It
includes initiation of the prequalification exercise or consultants
selection procedures; or
(c) land acquisition before upgrading to Category A. It includes
affixing or serving a notice of resumption.
Pre-requisites for obtaining Category B status
11.
DoBs may seek to upgrade a Category C project to Category B+ or
B- by submitting bids in the annual capital works Resource Allocation Exercise
(RAE). Bids for upgrading to Category B must be supported by a TFS which
has been approved by WB. For TFS completed three or more years ago, the
information contained therein should be updated as appropriate.
Pre-construction activities chargeable to block allocations
12.
Once a project has attained a Category B+ or B- status, the relevant
works director(s), with the support of DoB, may undertake the necessary pre-
construction activities so as to render the project ready for upgrading to
Category A and commencement of construction works. If funding for a pre-
construction activity is estimated to exceed the delegated financial limit of a
Category D item and cannot therefore be charged to the relevant CWRF block
allocation, part of the Category B+ or B- project would need to be upgraded to
Category A for funding the pre-construction activity.
Initiating works-related tendering and consultants selection procedures for
Category B+ projects
13.
COs are reminded that they must
not award a contract unless and
until funding has been secured, even though they may
invite tenders or initiate
consultants selection exercises for Category B+ works contracts before funding
is secured in accordance with Financial Circular No. 5/2016 “Parallel Tendering
for All Contracts”.
/
Changes .....
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Changes prior to upgrading to Category A
14.
DoBs who intend to substantially vary the scope
4, project estimate
or programme of a Category B+ project should consult TsyB as early as
possible, irrespective of whether there will be consequential capital and
recurrent cost implications. Star Chamber may need to be consulted depending
on the degree of variation, particularly when the change involves an increase in
the project estimate and raises the issue of whether it is justifiable to pursue the
project. If additional resources are required, the DoB concerned is expected to
first meet them from within the total resources allocated for Category A projects
under his policy portfolio. Failing that, a RAE bid should be submitted to seek
additional resources.
Downgrading from Category B
15.
If there is a change in policy, user requirement and/or the delivery
programme which necessitates a revised TFS, or if there is no longer any
justification for a project (or the remainder of a partially-upgraded project) to
retain its Category B status (i.e. the project may be downgraded to Category C
or deleted from CWP), the responsible DoB, in consultation with the works
director concerned, should notify TsyB as soon as possible. Where the pre-
construction activities of the to-be-deleted project have been outsourced to
consultants, the CO of the project should take steps to discontinue the related
consultancy agreements as early as practicable. If the CO does not consider it
appropriate to do so, he should consult the relevant DoB(s), WB, TsyB and
where appropriate the relevant consultants selection board.
/
CATEGORY .....
4
Please refer to Environment, Transport and Works Bureau Technical Circular (Works) No. 30/2003
“Control of Client-Initiated Changes for Capital Works Projects” for details of the procedures on the
control of changes in scope of works.
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CATEGORY A
Upgrading to Category A
16.
DoBs may seek the support of the Public Works Subcommittee
(PWSC) and approval of FC to upgrade a Category B+ project to Category A
when all necessary pre-construction activities have been completed or
substantially completed. Statutory procedures and public consultation required
for a project should have been completed before putting forth the funding
proposal to PWSC and FC. Guidelines for preparing PWSC submissions are set
out in Financial Circular No. 4/2010 “User Guide on the Finance Committee,
Establishment Subcommittee and Public Works Subcommittee”.
17.
For projects costing up to $15 million each to be funded under
Head 708 (part) – Capital Subventions, their upgrading to Category A can be
approved by TsyB under delegated authority from FC.
Money-of-the-day project estimates
18.
All PWSC/FC papers on CWP projects should provide estimates in
money-of-the-day (MOD) prices
5 . For the avoidance of doubt, PWSC
submissions should no longer present project estimates in constant prices.
Financial Circular No. 4/2010 has been amended accordingly. Once approved
by FC, the project estimate in MOD prices will form the APE of the project.
TsyB will announce price adjustment factors to be used for converting constant
prices into MOD prices regularly.
19.
The relevant rules in using MOD estimates and the method in
───
deriving MOD prices are set out in
Annex A.
LegCo Panel consultation
20.
DoBs should consult the relevant LegCo panels prior to submitting
a funding proposal to PWSC. Prior discussion at Panel meetings enables the
Government to be apprised of LegCo Members’ concerns and to provide
clarification and supporting information in the PWSC submission as necessary.
Panel papers on capital works projects should be cleared with TsyB.
/21. .....
5
The same requirement applies to funding proposals submitted to TsyB for approval under delegated
authority.
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21.
For non-controversial proposals with low project estimates, DoBs
may consider circulating such proposals to the relevant Panels for Members’
comments with an offer to discuss at panel meetings before putting them to
PWSC/FC for consideration.
Approval from FC 22.
FC is the ultimate authority for approving the project estimate
(which becomes the APE after approval) and scope of works of a capital works
project. PWSC assists FC in examining capital works proposals. Even if
PWSC has clearly expressed support for an upgrading application, unless FC
has formally approved it, the relevant DoB or works director should not commit
any expenditure on the project. Likewise, for projects which can be upgraded
under delegated authority (see paragraph 17), DoBs or works directors
concerned should not commit any expenditure before securing TsyB’s approval
for upgrading.
23.
After the upgrading of a project to Category A, the relevant works
director should apply to TsyB for release of funds and/or creation of a subhead
for the project. To ensure timely delivery of capital works projects, DoBs
should adhere to the works commencement date as specified in the PWSC
submission in general. Where possible, DoBs should strive to commence works
as soon as practicable.
24.
DoBs and works directors must ensure that works expenditure
stays strictly within the APE for each Category A works project and in strict
accordance with the scope of the project as approved by FC or under delegated
authority. CO of a project should seek to increase the APE once he is aware
that the latest estimated project expenditure is expected to exceed the APE. He
should also alert TsyB once an increase in APE or change in the approved
project scope appears likely. SFST may approve, under delegated authority
from FC, minor changes to project scope or increase in APE which does not
exceed $15 million. No contractual commitments may be entered into prior to
obtaining the necessary FC approval or approval under delegated authority for
an increase in APE and/or any substantial change in the approved project
scope
6.
/
Completion .....
6
A substantial change refers to one which may cause an increase in APE by more than $15 million or
which, albeit not increasing the APE by more than $15 million, may constitute a significant deviation from
the scope of the project approved by FC.
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Completion of projects, finalisation of accounts and deletion from CWP
register
25.
DoBs and their works directors should finalise project accounts as
soon as possible and in any event no later than three years after commissioning
of the facilities
7. Works directors must consult TsyB when this timeframe could
not be met due to special circumstances. Upon settlement of all outstanding
balances and finalisation of accounts, works directors should confirm with TsyB
in writing the readiness of the projects for deletion from CWP. In turn, TsyB
will notify the Treasury of the deletion of the project vote, and include the
project in the annual report to PWSC of projects with finalised accounts and the
respective outturn expenditure.
Cancellation and curtailment of projects
26.
The Government has a good track record of completing virtually all
projects in Category A. For projects whose approved scope of works can only
be partially completed (i.e. curtailment) or cannot be completed at all (i.e.
cancellation), DoBs and works directors should provide detailed explanations to
TsyB and WB, apply to TsyB for deletion of the projects from the CWP
register, and consider informing PWSC and/or FC of the cancellation or
curtailment with justification.
CATEGORY D
27.
Category D projects funded under various block allocation
subheads cover thousands of standalone minor works items and pre-construction
activities for Category B projects such as works-related studies and site
investigations. There are at present 26 CWRF block allocation subheads.
Every year, FC approves the provision for each block allocation subhead on a
lump-sum basis. Slope works under Landslip Preventive Measures (
Subhead
5001BX) and land acquisition items (
Subheads 1004CA and 1100CA) have no
expenditure ceiling. The Universal Accessibility Programme
(Subhead
6101TX) has an expenditure ceiling of $75 million per item. All other Category
D items have an expenditure ceiling of $30 million per item.
/28. .....
7
For a Design-Build-Operate contract (e.g. landfills), DoBs and works directors should finalise the accounts
of the “Design and Build” portions of the contract as soon as possible and in any event not later than three
years after the completion of the “Design and Build” portions.
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28.
For projects with estimates beyond the relevant threshold or
outside the ambit of the existing block allocation subheads, DoBs have to go
through RAE and then seek specific funding from FC for each project (by
upgrading to Category A). To avoid nugatory expenditure, DoBs and works
directors shall not create Category D items to fund detailed feasibility studies or
advanced planning work for major projects before upgrading to Category B,
unless with the prior approval of SFST as set out in paragraph 8 above. DoBs
and works directors should observe the guidelines on the approval procedures
and the conditions pertinent to the creation of Category D items in Financial
Circular No. 3/2011 “Capital Works Reserve Fund – Delegated authorities in
respect of block allocations”
. ANNUAL FORECAST OF PUBLIC WORKS SUBCOMMITTEE
SUBMISSIONS AND YEAR-END REPORT
29.
At the request of PWSC, the Government has undertaken to
provide an annual forecast of submissions at the beginning of each legislative
session. Our target is to issue the forecast as early as practicable. DoBs are
required to ensure that the items included or explanations given in the forecast
are consistent with all relevant government commitments (e.g. Policy Address
or papers to LegCo). The forecast will be circulated to all relevant LegCo
Panels. Furthermore, we need to provide PWSC with a report by the end of
each legislative session to account for deviations between actual submissions
and the forecast. DoBs, client departments or subvented organisations are
accountable for any slippage, be it due to changes in policies, priorities,
programmes or user requirements.
LAND ACQUISITION
30.
Expenditure on land acquisition should only be incurred for
projects in Categories A and B+.
31.
For standalone Category D minor works items, the overall
development cost (i.e. land acquisition cost and construction cost) should be
assessed. If a proposed item involves a disproportionately high land acquisition
cost compared with the construction cost, the DoB (who gives the policy
support), Director of Lands (who controls the block allocations for land
acquisition), and the relevant CO(s) of the block allocations funding the
construction cost should scrutinise the item and make a conscious decision on
whether to proceed with its implementation.
/
OPTIMISATION .....
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OPTIMISATION OF SITE UTILISATION
32.
Given the high demand for developable land, project proponents
and works agents must ensure that the proposed projects will optimise the
utilisation of the project sites. Project proponents and works agents should
observe the requirements as set out in Financial Circular No. 4/2017
“Optimisation of Site Utilisation for Capital Works Projects”.
FURNITURE AND EQUIPMENT
33.
Approval from the appropriate authority is required for
procurement of furniture and equipment (F&E) items for projects under CWP,
notwithstanding that the provision of F&E of a project has already been
approved by FC or under delegated authority. The detailed arrangement and the
level of approval authority are set out in Financial Circular No. 3/2016
“Furniture and Equipment for CWP Funded under the CWRF”.
RESOURCE ALLOCATION MECHANISM NORMAL CYCLE
34.
The annual capital works RAE normally takes place in the third
quarter of the calendar year. All capital works RAE bids will be processed in
one composite exercise so that Star Chamber can have a comprehensive
overview of the funding requirements for all capital works projects. Detailed
arrangement will be set out in the annual capital works RAE call memo.
IN-YEAR BIDS
35.
To ensure fairness and preserve the integrity of the resource
allocation system, in-year bids are
not generally entertained. Only bids that are
genuinely urgent, exceptional and/or unforeseen that merit upgrading between
two RAE cycles would be considered. Such bids should be supported by an
approved TFS. Unless otherwise justified, the resources required for the in-year
bid should normally be met from within the total allocation for Category A
projects within the lead DoB’s policy portfolio.
/
SAVINGS .....
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SAVINGS AND ADMINISTRATIVE CAP
36.
If the contract for a Category A project is awarded at a price
substantially lower than the provision earmarked for it in the APE, to avoid
locking up resources unnecessarily, TsyB will “freeze” the savings. DoBs and
works directors should not spend against such savings. For RAE purpose and
monitoring of project spending, the updated requirement for the project (i.e. the
reduced project estimate) will be the administrative cap on the project
expenditure. Should there be any subsequent increase in the estimated project
expenditure, DoBs/works directors can apply to TsyB for an additional
allocation of funds within the APE or an increase in the APE. In considering
such applications, TsyB will take into account the administrative cap of the
relevant projects. Any increase in the project estimate (and the administrative
cap) beyond the APE should normally be met by offsetting savings identified
from within the administrative caps on other Category A projects. An increase
in the APE exceeding $15 million requires FC approval. Where the cost of a
project turns out to be substantially lower than the APE, the DoB or the works
director should apply to SFST to reduce the APE, or keep TsyB informed of the
reasons for not applying for an immediate reduction in the APE. Please refer to
───
Annex B for the mechanism for calculating the savings for offsetting the project
cost increase and the administrative cap.
COST CONTROL MEASURES
37.
DoBs should ensure that the requirements for capital works
projects are fit for purpose and strictly necessary having due regard to value-for-
money considerations. COs should be satisfied that the delivery of the project is
cost-effective. Every effort should be made to avoid cost over-run. Related
measures are set out in the capital works RAE call memo.
RECURRENT COST
38.
To best utilise available resources, DoBs should try to absorb the
recurrent consequences arising from new capital works projects through
redeployment of resources within their operating expenditure envelopes. If that
is not possible, DoBs may seek funding for meeting recurrent costs in the RAE.
The RAE bids would be considered taking into account the merits of the
proposals as well as the Government’s affordability. Please refer to Financial
Circular No. 2/2005 “Recurrent Consequences of Capital Projects” for details.
/
SHADOW .....
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SHADOW BIDS
39.
There are times when the Government wishes non-government
developers to fund and construct public facilities (e.g. a public open space) and
surrender the facilities upon completion for management and maintenance by
the Government. In such cases, policy bureaux of departments responsible for
the management and maintenance of the facilities may submit a “shadow” bid
(“shadow” in the sense that no capital funding by the Government is involved)
for the recurrent cost required and such bid will be considered on a competitive
basis along with other regular capital works RAE bids.
40.
If the capital cost of the public facility concerned is $30 million or
less, the project proponents should absorb the recurrent cost from within their
existing allocations as with other minor capital works projects funded under
CWRF block allocations. Bureaux and departments must not commit the
Government to shouldering the management and maintenance responsibility of
any public facilities constructed and paid for by private developers without first
confirming availability of the necessary recurrent resources either from within
their own envelopes, or through RAE.
AUTHORITY FOR ENTRUSTMENT OF CAPITAL WORKS
PROJECTS
41.
Any proposal to entrust a capital works project to a specified non-
government party such as a private developer, a utility company or a public
body (such as the Housing Authority and the MTR Corporation Limited) is in
effect a request for waiving the tender procedures. Such a proposal requires the
prior approval of TsyB. COs should submit justifications and details of the
entrustment proposal to TsyB for consideration.
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SIMPLIFIED .....
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SIMPLIFIED TENDERING ARRANGEMENT FOR CAPITAL WORKS
PROJECTS
42.
To streamline procedures, we have introduced a simplified
tendering arrangement for all works contracts. COs are authorised to personally
approve the award of –
(a) all works contracts not subject to the Agreement on Government
Procurement of the World Trade Organization (WTO GPA) and
not exceeding $30 million; and
(b) works contracts above $30 million but not exceeding $55 million
each and not subject to WTO GPA, provided that they are awarded
to the lowest conforming bidder or the highest combined scorer.
COs should follow the procedures set out in Chapter III of the Stores and
Procurement Regulations where simplified tendering arrangement is applied.
For details, please refer to Financial Circular No. 3/2009 “Simplified Tendering
Arrangement for Capital Works”.
RELATED FINANCIAL CIRCULARS
───
43.
Financial Circulars relating to CWP are set out at
Annex C. For an
update of the Financial Circulars in force, please refer to the Financial Circular
on “Retention of Financial Circulars” issued at the beginning of each calendar
year.
ENQUIRIES
44.
Please contact ‘W’ Division of TsyB for capital works projects
procedures, resource divisions on recurrent resources for capital works projects
or shadow bids, ‘E’ Division on optimisation of site utilisation and procurement
procedures under the simplified tendering arrangement, and Tender Division on
entrustment covered in this circular.
James H. Lau Jr.
Secretary for Financial Services and the Treasury
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Annex A
Money-of-the-day estimates
Purpose
This Annex sets out the rules in using money-of-the-day (MOD)
estimates and the method in deriving MOD prices.
Rules in using MOD estimates
2.
Project estimate in MOD prices will form the approved project
estimate (APE) for approval by the Finance Committee (FC) or under delegated
authorities. It represents the total cash payments estimated for a project.
3.
All Public Works Subcommittee (PWSC) submissions should
provide project estimate in MOD prices. For the avoidance of doubt, PWSC
submissions should no longer present project estimates in constant prices. The
calculation for deriving MOD estimates from constant price estimates and
phasing of expenditure should be submitted to the Treasury Branch (TsyB) of
the Financial Services and the Treasury Bureau for vetting. The constant price
base should be set at the price level prevailing at the financial year in which the
PWSC session begins. The following rules will apply -
(a)
all PWSC submissions should quote the project estimate (including the
contingency sum which should be broadly set at 10% of the total
construction costs
1 in constant prices) as endorsed in the latest capital
works Resource Allocation Exercise (RAE), subject to any changes agreed
by the TsyB. MOD project estimates should be derived with reference to
constant price estimates and the prevailing price adjustment factors as
explained in paragraphs 5 and 6 below;
(b) we can award contract(s) under a project only if the estimated cumulative
total of all tender prices for the contract(s) plus allowance(s) for inflation
2 falls within the MOD APE; and
(c) provision for price adjustment is designed to meet inflationary price
increases and should be used primarily for this purpose. The Controlling
Officers should refrain from using it as a secondary contingency item to pay
for real increases in the project cost due to unforeseen works items as far as
possible.
1
Total construction costs are the amount of the project estimate less the contingency.
2
Allowances for inflation mainly take the form of estimated contract price fluctuation payments.
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4.
On paragraph 3(c) above, additional costs for unforeseen works
items which are within the approved project scope should first be met from
contingency and savings in construction costs. Only if there is a genuine
surplus in the provision for price adjustment (e.g. lower-than-expected actual
contract price fluctuation payments) and no other project sum (including the
contingency) can be identified to meet additional cost should the provision for
price adjustment be used for meeting the additional cost for unforeseen works
items. If the combined effect of higher-than-expected contract fluctuation
payment and construction costs is such that the original MOD APE will be
exceeded, FC's approval (or TsyB’s approval under delegated authority if the
APE is increased by not more than $15 million) should be sought.
Derivation of MOD prices
5.
The Government Economist forecasts the trend rate of change in
the prices of public sector building and construction output, based on which the
TsyB derives price adjustment factors for converting project costs at constant
prices into MOD prices.
6.
MOD prices are derived by -
(a) splitting up a project estimate in constant price into a cashflow forecast
showing the estimated expenditure in each financial year; and
(b) multiplying the constant price forecast in a certain year by the price
adjustment factor for the same financial year.
A sample of calculation is provided at
Enclosure.
Presenting Project Estimate in MOD Prices 7.
There have been widespread reports that the project estimate
shown in the PWSC and FC funding submissions are found much higher than
those released initially. This has given rise to allegations of Government under-
estimating project costs initially
3 or failing to provide accurate cost estimates
for public works projects.
8.
To lessen misunderstanding, if release of initial project estimate is
inevitable, such should be presented in MOD prices based on a reasonably
realistic project programme (i.e. Forecast Cost per Provisional Design (FCPD)).
This approach can largely reduce the differences of the project estimate with
those shown in the later LegCo submissions due to the price level changes.
3
Or alternatively, cost overruns at the time when the projects are submitted to FC for funding applications.
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Moreover, a clear statement should be made together with the release of project
estimate for the purpose of qualifying that these initial figures are only based on
an assumed project programme and preliminary project design, which are
subject to change as the project development process progresses. A sample
statement is as follows.
The Forecast Cost per Provisional Design (FCPD) of the project is $XXX
million in MOD prices. The Project Estimate will be substantially higher
or lower than the FCPD as a result of design development, programme
change, construction price level changes, etc.
Annual capital works RAE 9.
Although APEs approved by the FC are in MOD prices, the annual
RAE for capital works projects will continue to be on a constant price basis.
During RAEs, we will update constant price estimates for projects with
reference to the constant price estimates approved in the previous RAE and the
prevailing price adjustment factors.
Enclosure to Annex A
Sample Calculations
The following sample calculation illustrates how project estimate is
presented in MOD prices in a PWSC submission –
“
$ million
(in MOD prices)
(a)
Site works
7.4
(b)
Building works
11.2
(c)
Building services
10.6
(d)
Drainage
6.9
(e)
External works
40.4
(f)
Soft landscaping
6.8
(g)
Demolition of existing SYSRG
11.8
(h)
Energy conservation, green
1.4
and recycled features
(i)
Furniture and equipment
0.1
(j)
Consultants’ fees for
0.4
geotechnical engineering
services
(k)
Contingencies
9.7
Total
106.7
We have derived the MOD estimates on the basis of the Government’s latest set
of assumptions on the trend rate of change in the prices of public sector
building and construction output for the period of 2016 to 2022. We will
deliver the construction works through a lump-sum contract because we can
clearly define the scope of the works in advance.
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Subject to approval, we plan to phase the expenditure as follows-
$ million
Year
(MOD)
2016 – 17
8.5
2017 – 18
31.4
2018 – 19
44.0
2019 – 20
10.1
2020 – 21
8.1
2021 – 22
4.6
106.7
”
2
The calculations for deriving MOD project estimates from constant
price estimates and phasing of expenditure in the format below should be
submitted to TsyB for vetting.
Year
$ million
Price adjustment
$ million
(Sept 2015)
factor
(MOD)
2016 – 17
8.0
1.05775
8.5
2017 – 18
28.0
1.12122
31.4
2018 – 19
37.0
1.18849
44.0
2019 – 20
8.0
1.25980
10.1
2020 – 21
6.1
1.33539
8.1
2021 – 22
3.3
1.40549
4.6
90.4
106.7
Annex B
Mechanism for calculating the savings for offsetting the project cost
increase and administrative cap
Purpose
This Annex sets out the mechanism for calculating the savings for
offsetting the project cost increase and administrative cap.
Savings
2.
To determine the amount of savings in constant prices available for
funding new projects or covering increases in the approved project estimate
(APE) of the project, Directors of Bureaux (DoBs) or works directors should
determine the difference in dollar terms between the original APE and the latest
forecast outturn MOD cost. DoBs or works directors should then apply
deflation factors to deflate the MOD savings to the constant price base of the
current Resource Allocation Exercise to determine the constant price savings
that can be quoted to fund new projects or cover real cost increases of other
projects.
3.
In preparing proposals for APE increase, bureaux or departments should
provide this branch with the calculation of savings for vetting.
4.
Sample calculation of offsetting savings is provided at
Enclosure 1.
Administrative Cap
5.
To avoid locking up resources unnecessarily, TsyB will internally
“freeze” all savings arising from contracts awarded at prices substantially lower
than the provision earmarked for these contracts in the APE of the project. The
DoBs or works directors should not spend against the savings. The updated
requirement for the project (i.e. the reduced project estimate) will be the
administrative cap on the project expenditure.
- 2 -
6.
Savings from the following items in the awarded works contract will be
clawed back –
(a) cost of works items;
(b) provision for contingency;
(c) provision for price adjustment; and
(d) resident site staff (RSS) costs.
7.
For any single works contract to be tendered, works directors should
advise Works Branch (WB) of the Development Bureau (DEVB) of the sum
allowed for the individual component on “cost of works items”, “provision for
contingency”, “provision for price adjustment” and “RSS costs” at least two
weeks before inviting tenders for the works contract concerned. No further
amendments can be made thereafter.
8.
Savings from a works contract will be clawed back and frozen internally
if the awarded tender price of the works contract for the component “cost of
works items” is lower than its sum allowed reported to WB by more than $15
million.
9.
The savings to be clawed back are derived in accordance with the
following formulae –
(a) Cost of works items
80% of the difference between the sum allowed and the awarded
tender price for the works items will be frozen as savings.
(b) Provision for contingency
80% of the difference between the original provision and the adjusted
provision for contingency will be frozen as savings. The adjusted
provision for contingency is calculated by multiplying the original
provision for contingency by the percentage change between the sum
allowed and the awarded tender price for the works items.
(c) Provision for price adjustment
80% of the difference between the original provision and the adjusted
provision for price adjustment will be frozen as savings. The
adjusted provision for price adjustment is calculated by multiplying
the original provision for price adjustment by the percentage change
between the sum allowed and the awarded tender price for the works
items.
- 3 -
(d) RSS costs
80% of the difference between the original provision and the revised
provision for RSS costs will be frozen as savings. Works directors
have to review and adjust the provision for RSS costs, having regard
to the lower-than-expected tender price of the works contract. If it is
proposed that the RSS costs cannot be adjusted downward,
justifications should be provided.
10.
The administrative cap of the project will be its APE minus the savings
frozen as per paragraph 9(a) – (d) above. Updated cashflow requirements of the
project (in both constant prices and money-of-the-day prices) based on the
administrative cap (i.e. sum of cumulative expenditure of the project up to the
last financial year and projected cashflow requirements of the project in MOD
prices should equal to the administrative cap) should also be provided by works
directors.
11.
A flowchart showing the work flow of the administrative cap mechanism
and an example illustrating how the mechanism works are at
Enclosure 2.
Enclosure 1 to Annex B
Enclosure 2 to Annex B
Enclosure 1 to Annex B
Sample calculation
The following sample calculation illustrates how to determine the amount of savings in constant prices required for
supporting a proposed increase in approved project estimate (APE) in money-of-the-day (MOD) prices.
I. Proposal on offsetting savings in S eptember 2017 prices
* Please update values for cells with yellow background ONLY
Project
Change in total
Change in CapWex
Cum. Exp
Exp
Exp
Exp
Exp
Exp
Exp
Exp
Exp
Exp
Exp
Exp Post
Total Cost
CapWex 22-23
Code
allocation
22-23
up to 31/3/2017
2017-18
2018-19
2019-20
2020-21
2021-22
2022-23
2023-24
2024-25
2025-26
2026-27
2026-27
original
122.43
29.17
93.26
18.00
11.17
A
12.38
12.38
revised
134.81
41.55
93.26
16.00
25.55
original
131.14
88.57
42.57
14.00
37.00
29.00
8.57
B
(12.38)
(12.38)
revised
118.76
76.19
42.57
14.00
33.00
21.00
8.19
original
0.00
0.00
C
0.00
0.00
revised
0.00
0.00
original
0.00
0.00
D
0.00
0.00
revised
0.00
0.00
original
0.00
0.00
E
0.00
0.00
revised
0.00
0.00
Net change
0.00
0.00
Notes :
# The above cashflow should be updated as approved in the 2017 CWRAE or subsequently revised by any approved offsetting saving proposals/approved funding proposal by FC or its delegated authority.
II. Adjustment of admin caps in MOD prices subsequent to the above
Price Adjustment
Exp
Exp
Exp
Exp
Exp
Exp
Exp
Exp
Exp
Exp
Exp Post
offsetting saving proposal
Factor
2017-18
2018-19
2019-20
2020-21
2021-22
2022-23
2023-24
2024-25
2025-26
2026-27
2026-27
Project
Latest approved
1.00000
1.05125
1.10907
1.17007
1.23003
1.29154
1.35611
1.41883
1.48268
1.54940
1.61331
Code
admin cap
Admin Cap
123.00
Original admin cap
123.00
18.00
11.74
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
A
REVISED ADM IN CAP AFTER
136.12
16.00
26.86
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
APPROVAL OF THIS PROPOSAL:
137.66
Original admin cap
137.66
14.00
38.90
32.16
10.03
0.00
0.00
0.00
0.00
0.00
0.00
0.00
B
REVISED ADM IN CAP AFTER
124.13
14.00
34.69
23.29
9.58
0.00
0.00
0.00
0.00
0.00
0.00
0.00
APPROVAL OF THIS PROPOSAL:
Original admin cap
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
C
REVISED ADM IN CAP AFTER
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
APPROVAL OF THIS PROPOSAL:
Original admin cap
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
D
REVISED ADM IN CAP AFTER
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
APPROVAL OF THIS PROPOSAL:
Original admin cap
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
E
REVISED ADM IN CAP AFTER
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
APPROVAL OF THIS PROPOSAL:
link to page 23 link to page 23 link to page 23
Illustration
1. The original administrative cap (admin cap)
1 for Project A is $123.00 million in MOD
prices. An increase in admin cap to $136.12 million in MOD prices is being sought.
2. To determine the amount of savings (at the constant price level of the current RAE)
2
that Project A needs to quote from other project(s) –
(a)
applying the price adjustment factors to deflate the original and proposed
cashflows in MOD prices to September 2017 prices; and
(b) determining the difference between the original and proposed project estimate in
September 2017 prices i.e. $12.38 million in September 2017 prices ( in the
table).
3. On the other hand, the project estimate of Project B has been revised from $137.66
million to $124.13 million
3 in MOD prices. To determine whether sufficient savings
can be quoted from Project B to cover the proposed increase in administrative cap for
Project A (i.e. $12.38 million in September 2017 prices) –
(a) applying the price adjustment factors to deflate the original and revised
cashflows in MOD prices; and
(b) determining the difference between the original and revised project estimate in
September 2017 prices ( in the table).
4. Hence, sufficient savings can be quoted from Project B to cover the proposed increase
in APE for Project A.
1
To avoid locking up resources unnecessarily, this branch will internally “freeze” all savings arising from contracts
awarded at prices substantially lower than the provision earmarked for these contracts in the APE. DoB/works directors
should not spend against the savings. The updated requirement for the project (i.e. the reduced project estimate) will be
the admin cap on the project expenditure.
2
The savings required should be deflated to the constant price level of the current RAE. For the present illustration, we
have assumed the constant prices at September 2017 level.
3
$124.13 million becomes the admin cap for Project B.
Enclosure 2 to Annex B
Calculating administrative cap for capital works projects
Works department to advise WB of sum al owed on “cost of works
2 weeks
items”, “provision for contingency”, “provision for price adjustment”
before
and “RSS costs” of contract(s) to be awarded
invitation
of tender
After
Is recommended
tender
tender price of the component
No further
return
NO
“cost of works items” lower than its
action
sum allowed reported
required
to WB?
YES
After
award of
Does the difference
Admin cap =
contract
exceed $15 million?
NO sum allowed
in APE
YES
Admin cap to be imposed
Works department to calculate the Admin cap
Works
in accordance with the mechanism
department
promulgated, and to update the cashflow
to update the
cash flow
WB to vet the calculations and submit the
updated information to TsyB for endorsement
TsyB to update and revise the cash flow and
Admin cap
- 2 -
Mechanism for calculating the administrative cap
of capital works projects
Example
(1)
At least two weeks before inviting tenders for works contract
Works department to advise WB of the sum allowed for the following components –
(a)
Cost of works items =
$664 million
(b)
Provision for contingency =
$40 million
(c)
Provision for price adjustment = $60 million
(d)
RSS costs =
$18 million
(2)
After award of works contract
Works department to check if the awarded tender price for the component “cost of works
items” is lower than its sum allowed reported to WB by more than $ 15 million –
- 3 -
(a)
Awarded tender price for the
“cost of works items” component =
$417 million
(b)
Sum allowed for the “cost of works items”
component reported to WB =
$664 million
(3)
Within two weeks after the award of works contract
Works department to derive and report to DEVB the administrative cap of the project in
accordance with the rules under the mechanism –
(a)
Cost of works items
(i)
sum allowed =
$664 million
(ii)
awarded tender price =
$417 million
Difference between (i) and (ii) = $247 million
SAVINGS TO BE FROZEN = 80% x $247 million = $197.6 million
(b)
Provision for the contingency
(i)
original provision =
$40 million
(ii)
adjusted provision =
$25.1 million
($40 million x 417/664)
Difference between (i) and (ii) = $14.9 million
SAVINGS TO BE FROZEN = 80% x $14.9 million = $11.9 million
(c)
Provision for price adjustment
(i)
original provision =
$60 million
(ii)
adjusted provision =
$37.7 million
($60 million x 417/664)
Difference between (i) and (ii) = $22.3 million
SAVINGS TO BE FROZEN = 80% x $22.3 million = $17.8 million
- 4 -
(d)
RSS costs
(i)
original provision =
$18 million
(ii)
revised provision proposed
by works department =
$14 million
Difference between (i) and (ii) = $4 million
SAVINGS TO BE FROZEN = 80% x $4 million = $3.2 million
TOTAL SAVINGS TO BE FROZEN = ($197.6 million + $11.9 million + $17.8
million + $3.2 million) = $230.5 million
Administrative cap of the project
= $794.5 million (APE) – $230.5 million
= $564 million
Works department to update and provide to DEVB the updated cashflow requirements of the
project (in both constant price/MOD) based on the administrative cap $564 million (i.e. $561.5
million (for works) and $2.5 million (for non-works)).
Annex C
List of Financial Circulars
relating to the Capital Works Programme
Now In Force
Financial
Subject
Circular
No. 1/2004
Responsibility of Controlling Officers
No. 9/2004
Guidelines on the Management and Control of Government
Funding for Subvented Organisations
No. 2/2005
Recurrent Consequences of Capital Projects
No. 3/2009
Simplified Tendering Arrangement for Capital Works
No. 4/2010
User Guide on the Finance Committee, Establishment
Subcommittee and Public Works Subcommittee
No. 3/2011
Capital Works Reserve Fund
Delegated authorities in respect of block allocations
No. 2/2012
Procedures for making changes to the Estimates of the
Capital Works Reserve Fund
No. 4/2012
Requirements for Project Definition Statement and
Technical Feasibility Statement for Capital Works Projects
No. 3/2014
Correctional Services Industries
No. 5/2014
Consultants’ Fees and Site Staff Costs for Works Projects
No. 7/2014
Guidelines for Procurement of Services Involving Trading
Funds
No. 2/2016
Donation vs Sponsorship
No. 3/2016
Furniture and Equipment for Capital Works Projects
Funded under the Capital Works Reserve Fund
No. 5/2016
Parallel Tendering for All Contracts
No. 6/2016
Fees and Charges
No. 4/2017
Optimisation of Site Utilisation for Capital Works Projects
No. 5/2017
Powers of Write-off
Document Outline