190416 Concerns Raised with the NAO

16/04/2019 To: Correspondence Team <enquiries@nao.org.uk>
Subject: COMPLAINT re Highways England & Contractor charges / recoveries

Dear Sirs,

I draw to your attention concerns relating to the audit of Highway England insofar as claims are concerned. I understand the NAO audit the Authority and have reported on claim recoveries, revenue.  The following ‘confession’ from Highway England explains that they have no schedule of costs they are to be charged for the repairs following damage to crown property (DCP). 

Following complaints from loss adjusters, Highways England commissioned an independent investigation into the pricing in Area 9 of below threshold (i.e. below £10,000) claims for damage to the strategic road network (sometimes referred to as Damage to Crown Property (DCP) or Green Claims). The investigation revealed a lack of transparency in the pricing of Green Claims in Area 9, citing the lack in the Asset Support Contract of any schedule of rates (labour or materials) for third party repairs.

As none of the ASCs contain schedules of rates, and Highways England considers that the lack of transparency applies equally to above threshold claims (i.e. those above £10,000) claims as well as claims below threshold it was considered that a review covering all areas was required.

Whilst the investigation into Area 9 in isolation was concluded it was widened into a root and branch review to improve the end-to-end process for the recovery of Green Claims generally. This review is ongoing and a final report has not been produced.

In particular the issues relates to Kier Highways, generally Area 9 and BBMM in Area 10.  These contracts have been in place for years and seemingly no one is able to reconcile the charges made by contractors with a schedule of rates.  The Authority’s own audits have failed to identify the lack of rates.

I question how the NAO was able to review / audit the figures arising from claims.

It is important to be aware that in some Areas, for example 9, who is presented the bill following a repair is defendant upon repair cost https://www.englandhighways.co.uk/claims-costs/  

  • If the invoice is over £10,000, the contractor usually presents their invoice to Highways England who make payment to them. Highways England then seek to recover their outlay from the at-fault party.
  • Generally, invoices below £10,000 are presented to drivers, fleets, hauliers and insurers by the contractor who bears the cost of the restoration and attempts to recover payment from the at-fault party where they are identified.  These are referred to as ‘Third Parties’.

But pre 07/2014, when Kier took on Area 9, the rates were substantially different- a time line is here https://www.englandhighways.co.uk/area-9-time-line/ .  As of 07/2014, Kier employed a process that was not consistent with the process, that of ‘1153’. It took us over a year to put an end to this process that saw gross and obvious exaggeration, see: https://www.englandhighways.co.uk/a-simple-guide/1153-2/

Kier should have adopted the contractually agreed Third Party claims process addressed in Annex 23 of the contract.  Appendix A to this sets out the means by which a Third Party is to be charged ‘no more than’:

Defined Costs(£) + Third Party Claims Overhead (%) = Maximum (£)

Importantly:

  • defined costs (or base rates) are to be the same to Highways England and Third Parties
  • Highways England kept the process secret; they placed the contract online with the annexes but not the Appendix and ‘coincidentally’:
  • Kier did not comply with the process from day-one (01/07/2014)

Whether or not a schedule of defined costs exists (the evidence supports them existing) Third Parties have been overcharged for years.  This may be of little concern to NAO (or Highways England), however, contractors are required to submit their claim and recover costs to Highways England for each and every claim.  Between 2015 & 2017 Highways England sought to convince me they held no data about these Third Party claims.  However, it transpired they do, that ‘Annex 19 reports’ are submitted to Highways England by the contractor on every Third Party claim.  In turn, it appears a reason for this is to ascertain whether a contractor has recovered more than a threshold – if they do, their monthly lump-sum payment is reduced.  There may be more reasons for this occurring currently unknown to me.

With regard to the costs / recoveries / lump-sum relationship, an FoIA response stated no contractor has ever achieved the threshold such that their monthly lump-sum would reduce.  Given the rates Kier (as an example) are charging, that they are not complying with the ‘defined costs process’ (yet claim to a Court and us that they are), it is incredible to accept the threshold could not be achieved.  However, it appears not only are Kier charging substantially in excess of ‘defined costs’ they are misrepresenting the costs to Highways England on every claim – 1,000’s of claims.  The report required by Annex 19 is:

  • Third Party Claims handled by the Provider Service Information Chapter 1.9 & Annex 23 Report detailing, for each claim: 
  1. a)         the amount claimed from third parties,
  2. b)         a calculation of Defined Cost and resulting Third Party Claims Overhead,
  3. c)         the amount recovered,
  4. d)         an explanation of any differences between any of these amounts, and
  5. e)         explanation of why any loss greater than Defined Cost has been claimed.

An actual example can be found here https://www.englandhighways.co.uk/false-information-supplied-to-highways-england/ but to explain the concern using some rounded figures, if Kier presented that they had invoiced a Third Party:

  • £8,000 defined costs, the TPCO @ 25% would be:
  • £2,000 and the total:
  • £10,000

If they recovered £9,000, they would report costs were more that recovered i.e. a ‘loss’ (of £1,000) and their lumpsum payment would likely be unaffected. However, Kier’s costs are grossly exaggerated.  The rates are Inconsistent with ‘defined costs’ charged to Highways England and they additionally include, by way of example, £600+ of ‘planning;’  (addressed / incorporated in the TPCO of 25.29%) and about £300 of debris removal whereas HE are charged about £80.  It is therefore possible, if reporting accurately the above figures should be:

  • £4,000 defined costs the TPCO @ 25% would be:
  • £1,000 and the total:
  • £5,000

In recovering £9,000, Kier are substantially in profit; in addition to the profit within the TPCO, they are £4,000 up on their costs! 

By reporting the £8,000 as ‘defined costs’ they are misrepresenting facts, overstating the defined costs and reporting incorrectly.  Having raised concerns about the issue for years, it is only now that Highways England have made the above admission; they have no schedule of defined costs.  However, this makes no difference to the above situation, if true, this lack of a schedule of rates simply explains how it is occurring with ease, under the nose of the Authority.

Is it really the case Highways England have bene receiving these Annex 19 reports without any audit, accepting them at face value?

I believe there are a set of rates, a schedule of defined costs.  It appears Highways England would rather face criticism for ‘lack of transparency’ than release figures identifying the £millions over-claimed from the public and failing to protect the public purse.   Given the sums involved, it appears malfeasance is at play.

If there is no schedule, how do Highway England staff, upon receipt of an above-threshold bill (>£10k) ensure it is correct pre-payment?  The answer, based on their latest account is ‘the do not, they cannot’.  Bills are rubber-stamped for payment with the Authority seemingly saying ‘they look ok’ and on this basis they pass to Green Claims team for recovery and if necessary to lawyers who are expected to pursue unconfirmed sums.

What appears to have escaped Highways England is that their contractor, Kier, clearly has a set of rates, a schedule they charge Third Parties.  They need only ask for this to understand it is not base don the same as that charged to the Authority.

We suspect you are aware of the ‘defined costs’ process, have knowledge that the rates exists and were therefore able to comment upon the process when auditing.