To the national Audit Office (NAO)
Dear Mrs Lewis,
I refer to your letter of 09/03/2021, the conduct of the NAO and Highways England (HE). To recap:
- I have been seeking the common rates (‘defined costs’) that Kier was to utilise when billing Third Parties (drivers, fleets, hauliers or their insurers) and Highways England following a DCP (damage to Crown property) incident.
- Simply put, Kier has two means of recovering incident attendance and repair costs under an ASC (contract), generally:
- if the bill is over £10,000, HE is sent the invoice comprising ‘defined costs’ plus a fee uplift (percentage). He must then try to recover its outlay
- if the bill is under £10,000, Kier retains the claim and sends the at-fault party the invoice comprising ‘defined costs‘ plus the Third Party Claims overhead (TPCO) uplift (percentage)
- I believe Kier has been using ‘defined costs’ when billing the Authority (who know the ‘rules’) but not Third-Parties from whom the process was kept secret.
- Kier did not comply with the contract from day one but charged Third-Parties using a profiteering process, under the nose of the Authority seemingly enabled and permitted by HE
- between 2013 & 2018, HE stated time and time again that DCP repair rates were ‘held’ but commercially sensitive, therefore, withheld.
- Between 2016 and 2018, the rates were the subject of attention by many to include Jim O’Sullivan (former CEO), Nick Harris (current CEO), Sharon McCarthy (HE), Tim Reardon (General Counsel), Sarah Green (former Green Claims manager) and KPMG (‘Project Verde’). A ‘lot of effort’ was put into reconciling the rates but …
- No one ever claimed they were auditing something that did not exist! However, After 12/2018, when the release of rates was required following a Tribunal decision, the Authority volt-faced; DCP rates were not held, they do not exist. The Authority had apparently failed to agree pricing for DCP works in any ASC (contract) since 2012. Far fetched?
- 16/04/2019, I approached the Authority’s auditor and specifically asked the NAO about this lack of DCP attendance & repair rates; this was the purpose of my writing. My email can be read here.
- Mr Kay (NAO), the Authority’s auditor, was to make enquiries.
- Mr Kay met with Sharon McCarthy specifically to discuss the stated lack of DCP rates
- Ms McCarthy reassured Mr Kay that DCP rates existed. Mr Kay’s original note of the meeting confirms this and can be read here.
- It then appears Ms McCarthy became aware her responses had been passed to me – there was a contradiction; to me, HE said ‘no rates’, to the NAO, there were rates
- Ms McCarthy apparently explained to Mr Kay he had misunderstood – seemingly he had asked about DCP rates (repairs, unplanned works) and Ms McCarthy had answered about ASC rates, those for planned works, schemes. I suggest this response, when considered in relation to Mr Kay’s note, is implausible.
- Mr Kay recanted his ‘held’ position – more about his claimed inability to record fact can be read here.
- But there are rates … ‘DCP Rates Exist’ (see below).
To date I have received no satisfactory explanation for this U-turn by the NAO, Mr Kay’s apparent inability to keep accurate records – his note is clear; he was discussing DCP rates with Ms McCarthy. You declined to address my various questions which I believe set out why Mr Kay’s conduct warrants further enquiry.
However, as there are schedules of DCP rates, I question the confidence that can be placed in the accounts of Mr Kay, HE and your enquiry. I am therefore seeking an investigation of the above conduct and resultant concerns (below) in light of recent disclosures about Area 9:
- DCP Rates Exist
I provide a summary of the actual situation as provided by a HE employee at Appendix A below. It transpires Area 9 DCP rates are provided to HE approximately annually. They are held by Kier Highways and supplied to HE for a set of people rates to be agreed.
DCP plant rates also exist. More simply, they are CECA less 30%.
- DCP Rates & ASC Rates are the same
This set of people rates is for all works, that is to say, both scheme work (ASC, planned work rates), and repair work (DCP, unplanned work rates). This contradicts the information HE provided to a Tribunal and I refer you to the relevant extracts from Tribunal Decisions at Appendix B and Appendix C. It also supports Mr Kay’s original conversation notes (referred to above) but undermines his U-turn.
I am seeking an explanation for the conduct encountered, why the NAO failed to disclose the situation; ASC rates are used for planned (scheme) and unplanned (incident/repair) works. Similarly, why your enquiry failed to ascertain and convey this. It is of additional concern that the true situation has been misrepresented to Tribunals, the ICO, Third parties and me.
Obviously, HE was undertaking this annual reconciliation exercise at the instruction of someone, passing the information to others. It is apparent many at HE are aware of the process in turn, that Kier is obviously familiar with it.
- Unauthorised Uplifts
The Area 9 contract commenced 01/07/2014. Immediately Kier acted contrary to the contract when billing Third-Parties, they utilised their own methodology that saw incredible profiteering; likely 5-fold or more uplifts on some aspects. When caught out, they utilised another process of an exaggeration, tainted with fraud. But until 01/2017, no one (except Kier, HE and possibly the NAO?) knew there was a contractually agreed process, the equation by which Third parties were to be charged ‘no more than’. HE kept it secret and neither HE nor Kier mentioned it – the process is explained here but involves Kier using ‘defined costs’ i.e. cost or ‘base rate’ to which an uplift percentage is added. Simple, but using the same base rate as HE, whilst the profit appeared healthy, Kier wanted much more.
The methodology uncovered, we placed this in the public domain and asked Kier, HE and their lawyers to price in accordance with the contract. They failed to do instead, turning upon us!
Over the years proceedings were issued and Kier were prepared to misrepresent facts, even in Court. Kier, in the name of the Authority, issued proceedings against Third-Parties in many claims, so many that Cardiff Court stayed multiple matters. In 2020, HJJ Harrison, at Cardiff County Court, hearing two specimen claims of the stayed group, recorded the ‘confession’ of a Kier/HE witness:
Furthermore, for the purposes of assessing the extent of Kier’s authority within Area 9 (Area 6/8) the court cannot ignore the evidence given on behalf of the claimant by Mr Cairns.
In summary, on this issue his evidence was to the effect that the costs calculated for the purposes of the claim did include uplifts for which he was unable to find authority within the contract.
As we had been advising the Authority for years; there were unauthorised uplifts, contract non-compliance.
He ramifications appear substantial. In addition to the authority and Kier Highways acting in concert, misrepresenting, there is the issue of misleading Courts and Third-Parties thereby securing inflated, contract non-complaint sums. However, as ASC rates are now known to be DCP rates, I believe the Authority should find it relatively simple to ascertain by how much Kier, in the name of Highways England and with their assistance, have overstated claims since 07/2014 and arrange reimbursement.
- False Costs & Recovery Information
It is evident Kier has not complied with the ‘one rate for all’ approach since 01/07/2014 in Area 9. In the name of Highways England, Kier has made contract non-compliant, overstated claims to 1,000s. They ignored the contract and our concerns. This use of exaggerated values also means the cost & recovery data Kier provided HE since 01/07/2014 is similarly flawed; the total cost has been overstated.
Kier is required to provide the Authority with Third-Party claim cost & recovery information. Specifically, they are to supply HE:
- Defined Costs
- TP Claims Overhead (TPCO)
- Amount invoiced
- Amount recovered
Kier has not been using ‘defined costs + TPCO’ but as best defined costs plus unauthorised uplifts’ (HHJ Harrison – above). Kier has been conveying to HE their ‘total’ (iii) as cost + TPCO but the figures are false, they have actually conveyed the ‘cost + unauthorised uplift + TPCO’ as the total (iii). The ‘total’ figure at ‘iii’ above is inflated. In turn, whilst Kier may accept a lesser settlement than ‘total’ i.e. the amount recovered ‘v’ is less than the total ‘iii’ and convey a loss, in reality, they are likely still substantially in profit. An example of the conduct is detailed here. Why would Kier mislead HE in this fashion, other than to hide their profiteering? Even this appears unlikely, the Authority is aware if only from our writing, that Kier is using inflated sums to bill the public.
- what is the purpose of the requirement to submit figures?
- why did the authority fail to identify the use of inaccurate, exaggerated (utilising unauthorised uplifts) rates
- why has the Authority failed to make an enquiry about the conduct?
- what are the implications of this?
- what provision is there in the Authority’s accounts for reimbursement of the funds obtained inappropriately in the name of HE?
- Compromised Authority
Having discovered Kier’s conduct, the Authority could simply have advised Kier Highways to abide by the contract; use cost plus the TPCO uplift. This is a transparent process that appears fair and would demonstrate the Authority acting in the best interests of the public (Third-Parties) it is to serve. As the cost of something is a constant (at a given date/time) utilising the same rate to HE or a Third-Party appears reasonable. It also sits nicely with the commonality of rates HHJ Godsmark’s approach wrote about, at para. 25 writing:
It would be odd if a tortfeasor was liable to Highways England for diminution in value of a damaged chattel in one sum if sued by Highways England itself and in a different sum if sued by Highways England via BBMM (a contractor).
To these common rates, add an uplift percentage; profit is a necessary component of such a business.
But the situation is odd as the Authority permits Kier to charge a Third Party using higher rates than they incur. Indeed, rather than insist Kier comply with the contract, the Authority changed the contract to assist their contractor to charge more.
It appears the Authority is so compromised by its actions, the permitting of abuses by its contractor, as to be ineffective; that the tail wags the dog. In turn, it is questionable what emanating from the Authority can be accepted at face value, what emanates from Highways England as opposed to being based upon their contractor’s demands or needs.
Please confirm this matter will be investigated rigorously and by when I can expect to receive an update.
Highways England & Kier Highways Area 9
1. 2016, reviews were requested of above threshold Green Claims cost packs to identify errors/anomalies with costs submitted by Kier
2. 2017, the process was adopted on a permanent basis.
3. By agreement with HE, Kier charge plant at CECA rates minus 30%.
4. The review looked at a sample of hourly rates charged for various staff and operational personnel recorded as involved in making repairs
5. People rates were audited on a regular basis since the inception of the Area 9 ASC.
6. The purpose of this people rates reconciliation exercise is to establish values which represent what is called, in the contract with Kier (ASC), the “Defined Cost” of people (as laid down in a Schedule of Cost Components, or SOCC), based on an examination of actual people costs incurred undertaking contract activities.
7. The SOCC is a schedule of categories of costs, not a schedule of specific sums. “Actual people costs” is not simply whatever sums Kier has itself paid, it is cost correctly incurred by Kier, in line with the SOCC – in line with the permissible categories of costs, not specific sums and subject to audit by Highways England.
8. The agreed people rates are used consistently across all services in the contract which are reimbursed on a defined cost basis, including those services required by the contract to be delivered as cost reimbursable, schemes to replace life expired assets, or enhance the Area network, and Green Claims against third parties for damage to the Area network.
9. annually since about 2015, Kier provided Highways England with information setting out in vast, anonymised detail the way they propose to charge people rates
10. The information is complex providing (cost components for hundreds of Kier employees paid at a variety of different rates) HE therefore use random sampling, a ‘spot check’ methodology for assessing the rates proposed to be charged, by requesting and examining the backing evidence supplied by Kier.
11. The outcome of the review is a set of people rates.
12. These people rates are to recommend as those Highways England agree to pay, for all work performed by Kier in Area 9 under the ASC – that is to say, both scheme work, and repair work.
Extracts from Appeal No. EA/2018/0104
The request: I am seeking with regard to this specific issue:
‘The rates stated to be used by each contractor for each contract’.
30. Mr Carney explained that the withheld information consists of the rates and prices offered by bidders in relation to the tender in 2012 of the ASC for Area 10 (the “ASC Rates”). The ASC rates set an estimated target price for pre-planned work by the contractor. The successful bidding contractor’s performance is then judged against these targets through a “pain and gain” share – if the actual cost of the work exceeds the target the contractor bears part of the additional cost, and if the actual cost is less than the target the contractor shares in some of the savings. The ASC rates are a complex set of calculations by each bidding contractor based on their own methodology.
31. Mr Carney’s evidence was that the DCP rates are very different.
These are the actual charges by contractors to either HE or third parties* for emergency responses and repairs.
*the same rates are used for HE & TP’s.
31. The same elements as set out in the ASC Rates (e.g. plant, labour and materials costs) may be used to set DCP rates. However, this does not mean that DCP rates can be identified from the ASC Rates set out in the withheld information
Extracts from Appeal No: EA/2019/0119 (Full Decision – 028 091219 DECISION)
12. HE argued that the Appellant had fundamentally misunderstood the way the contract operates; “defined costs” in the form of DCP rates did not exist. There were said instead to be the ASC rates in the contract (that is pricing schedules, rates tendered by the supplier during the procurement process to build a target cost model). This position was, it was argued, recently upheld by the First Tier Tribunal in EA/2018/0104.
It was held in that decision by the Tribunal (who had seen the withheld information) that these were ASC rates and could not be interpreted as ‘DCP rates’.
14. HE’s position is that there are no DCP rates and that this had been an unfortunate turn of phrase (by Mr Carney). It maintains that there is no such schedule or set of rates relating to DCP either held by HE or on its behalf by Kier.
The only set of rates as such are the ASC rates (target rates provided during the tender process albeit raised by a set uplift each year).
Mr Carney explained that he had referred to there being DCP rates as the Appellant himself had produced information from Keir, given to him voluntarily, which clearly related to DCP. Mr Carney maintained that this was all he was referring to, including that these could not be commercially sensitive as, self-evidently, Keir did not see the information that way, as they had given it to the Appellant.
15. From the oral evidence, the Tribunal ascertained that contractors, in this case Keir, when undertaking work under their contracts with HE would use the ASC rates (which were updated every year) to work out an estimate on a particular job, and then by reference to that, decide whether it fell above or below the £10K threshold. If above, broadly speaking, Keir would pass its invoice to HE who would pay Keir, HE is picking up the responsibility for recovery of the costs from the driver or their insurer who incurred the DCP.
The costs charged would be based on the ASC target rates but would then be subject to the ‘pain/gain’ adjustment process under the contract. The HE staff would carry out a rough and ready check on monthly invoices based on their knowledge of the cost of such schemes. The monthly invoices would contain the actual rates applied for the specific DCP repairs, which the HE staff would expect to be broadly consistent with ASC rates. The Tribunal noted that it might be said that these rates were, in practice, approved by the HE by the invoices going ahead without challenge (this not being formal approval, but rather an absence of challenge).
20. The Tribunal was clear that the only rates in existence held by HE or the contractors on HE behalf were indeed the ASC rates. These were a component of how contractors charged for DCP work but no more than that.