How can major UK infrastructure projects improve cost control?

Managing costs on major projects can be enormously demanding for both the client and the contractor.

Due to various influences such as scope changes and inflationary pressures, infrastructure projects are all too often characterised by evolving designs and commercial uncertainty, which can lead to cost escalation.

Those responsible for public sector infrastructure projects have a duty to assure the expenditure of public money. However, the National Infrastructure and Service Transformation Authority (NISTA) 2024─2025 delivery confidence assessment shows that of the 213 projects within the Government Major Projects Portfolio, a staggering 135 are classified as amber and 31 are red.

This indicates a moderate to high likelihood that most projects will not deliver their objectives on time or within budget.

Defined cost auditing presents a means to address some of these issues, by improving control and assuring the compliance of costs.

While this enables cost transparency, it can also create an environment of high data volume and complexity.

Typically, contractors may engage 50–70 subcontractors on an infrastructure project, each with their own subcontract, people costs and supply chain. All of which contributes to a multifaceted landscape that requires extensive commercial management. As costs grow, so does the volume of data that needs to be reviewed.

Commercial management is often further compounded by the need to balance other essential tasks, such as supporting with change control, payment assessments, and forecasting.

In this environment, the requirement to assure costs incurred can exceed the business-as-usual capacity of the client's commercial teams.

Even with additional commercial resources, projects often benefit from complementary specialist skills to verify large volumes of disparate and complex financial data. These skills sit at the intersection of commercial management, finance and accounting and data analysis, making specialist teams well placed to carry out detailed defined cost audits.

Defined cost audit teams, often including chartered surveyors, chartered accountants and data analysts, enable a thorough inspection of complex data, financial records, systems, processes and contracts.

For testing compliance with the NEC, their remit typically involves verifying and analysing accounts and records of defined cost incurred to provide the works, in accordance with the schedule of cost components. In practice, this means verifying if a contractor's costs, such as – but not limited to – people, subcontractors, equipment, plant and materials, comply with the requirements of the contract.

Verifying defined costs is often onerous, requiring complex analysis of thousands of financial records rather than straightforward invoice value checks.

Based on my experience of working in and deploying independent defined cost audit teams on UK infrastructure projects, up to 5% of the costs applied for are routinely identified as non-compliant within payment applications.

Findings have ranged from simple calculation errors uncovered through analysis of disparate data sources, to more significant, recurring issues such as non‑compliant staff, subcontractor and overhead costs.

Often, due to the volume, accessibility, and complexity of data, many of these findings may not be identified during monthly payment assessments. This means there is a very real risk of overpayment. 

Even a small percentage of non-compliance on projects valued at £10m, £100m or £1bn can represent a substantial sum. Identifying and correcting such costs can release significant budget back to the project.

Protocols typically cover the rules of engagement, from audit programmes to testing plans. They can also introduce structured reporting processes across planning, delivery, and reporting and closeout phases.

Planning: begins with a kick-off meeting with the client and contractor to discuss audit objectives, the anticipated data requests, and scheduling of meetings with key stakeholders such as payroll, human resources, procurement and the commercial team.

Delivery: this includes the main bulk of the audit, involving the detailed audit testing. Outputs are discussed with the client and contractor to enable progressive resolution and prevent any surprises at reporting and closeout stage. 

Reporting and closeout: this phase brings together all the work done by the defined cost audit team.  

Findings and recommendations will be formally communicated, usually by a draft report issued for comment. A closeout meeting is then held with the client and contractor to discuss findings and recommendations, including actions and timescales for closure. Following this, a final report is issued to key stakeholders.

The data underpinning the audit report's findings and recommendations are typically provided as working papers in spreadsheet format. These data are used to support the closure of issues and later checked in subsequent payment applications.

For smaller valued projects, say under £1m, some may question whether a defined cost audit is warranted. 

In such cases, a defined cost audit team could collate multiple projects by a contractor under a single audit programme, effectively undertaking cross-sectional work package duplication checks.

Clear processes enable an environment where stakeholders are aware of impending audits and their requirements with sufficient time to prepare.

Audit requests can be scheduled at specific intervals, giving time to obtain archived information. Meetings can be arranged early so that they are less disruptive to business-as-usual activities. 

To support cost accuracy and compliance, audits can be strategically placed at intervals in the project life cycle to address different needs at specific stages.

Systems and process integrity audits: early-stage audits that test a contractor's systems and processes for readiness and compliance.

Cyclical defined cost audits: delivered at predefined intervals to audit defined costs. They can also be structured so they align with mechanisms of the contract, such as NEC4 ECC clause 50.9 (inspection and closeout of defined cost for a part of the works following the contractor's notification).

Subcontract deep dive audits: provide additional assurance based on risk assessments before subcontractor completion. These audits can include cataloguing the subcontract sum, completion date, movement from their original subcontract sum and any known risks. Access and depth of engagement can be achieved through the contractor records or directly with the subcontractor, depending on the scope of the audit and contractual provisions. Based on my experience, this has involved testing such as equipment utilisation, labour time and rate or payroll audits.

Efficiencies can also be generated during the audit and for the project itself.

Defined cost audit teams can test larger sample sizes and review additional evidence beyond what has already been provided to commercial teams, enhancing the overall coverage and depth of substantiation reviewed.

They can also free up client commercial management teams to place greater focus on other high-impact areas governed by contractual timeframes such as – but not limited to – supporting the assessment of compensation events.

At wider framework level, data can be efficiently used to monitor supply chain performance across audits, supporting continual improvement. 

Examples can include tracking supply chain response times, the time taken to close out findings, and the identification of recurring themes during each audit cycle. 

Deploying an independent defined cost audit team acts as additional layer of verification in addition to existing contractor and client commercial management teams.

The reports and working papers they produce not only signal genuine efforts to assure the validity of costs but also serve as tools that can be used for organisational learning and continual improvement.