Procurement and Cost Study

Question 1

The private financial initiative (PFI) is a procurement method that focuses on attracting the financial resources from the private sector with the purpose of funding the development of the public infrastructure, thereby resulting in the establishment of the public private partnership (eds Akintoye, Beck & Kumaraswamy 2016). Talking about its applicability to health care (the construction and management of the facilities), it cannot be viewed unambiguously. On the one hand, the PFI accelerates the process of implementation of the project due to the fact that the performance is measured on the basis of time-to-completion criterion. In turn, the delays are significantly reduced. Moreover, the diversity of methods and approaches utilised by the representatives of public and private sectors contributes to the higher quality of the infrastructure solutions, which improves the overall efficiency of the project in the long-term perspective. In fact, it is quite important for the Specialized Emergency Care Hospital that focuses on lifesaving. Finally, the risks associated with the execution and implementation of the initiative are transferred to the non-governmental organisations (eds De Vries & Yehoue 2013), in other words, the party that has more experience in risk management in comparison to the government.

On the other hand, the reliance on the PFI may lead to the emergence of the following problems. First of all, the private sector expects a compensation for the risks it has to take, which means that the government expenditures and, therefore, the strain on the budget may considerably increase. Given the fact that the health care facilities are often dependent on the support provided by the latter to function efficiently, such situation may affect their performance in the long-term perspective (eds Akintoye, Beck & Kumaraswamy 2016). Additionally, the profitability of the project can be difficult to forecast due to an increased range of factors that influence it (the ones common for the private and public sectors). Finally, as it was mentioned before, the third parties tend to have more expertise relating to project management, thereby putting the government at disadvantage. As a result, several tasks, specifically cost assessment, become more difficult to conduct for the latter, which does not contribute to the implementation of the efficient cost-containment measures (eds Akintoye, Beck & Kumaraswamy 2016). Given the considerable size of the future facility (three-storey hub, wards, ambulance podiums, and others), this fact may lead to excessive expenditures related to its construction.

Thus, by taking into account the effect of the PFI on the projects in the field of health care, one can state that the feasibility of the former as a procurement method is relatively high. However, in order to ensure the seamless and efficient implementation of the initiative, the previously described bottlenecks are to be addressed. First of all, it is imperative to conduct a comprehensive analysis of the health care industry in the region, focusing on the supply and demand for services provided by the local hospitals and clinics. In this case, it will be possible to forecast the profitability of a highly specialized facility (the one that focuses on the emergency care and lifesaving) as well as identify the risks associated with its creation and mitigate those (eds De Vries & Yehoue 2013). Consequently, this will make it possible to lower the amount of compensation to the third party and calculate the profitability of the clinic. Additionally, the public sector is to ensure that the lack of balance in regard to the expertise is absent (eds De Vries & Yehoue 2013), namely by assigning the staff of the Department of Health to supervise the project.

Question 2

The implementation of any initiative is associated with expenditures, which dictate the need for their identification, especially at the initial stage. In such situations, the entrepreneurs have the opportunity to choose the most suitable approach among the several ones. The first of those is the top-down estimate method that is used to estimate costs when the information is quite limited. In this case, the assessment is produced in a generalised manner, with the project being evaluated as a whole in accordance with a single indicator. As a result, this process does not require much effort and time, but the end results are characterised by low accuracy (± 50%) (Harrison & Lock 2016).

Another method that can be used for the preliminary evaluation of the cost of the project is the method of evaluation by analogy. It utilises the factual data on the cost of previously completed projects in the similar field of activity. In case the similarity between the initiative and its analogue is considerable, the results of the assessment can be quite accurate (Kloppenborg 2015). Evidently, such approach does not require much effort to obtain the guaranteed accuracy, but its downside lies in the fact that the required data can be difficult to procure. The accuracy of the evaluation by analogy ranges from -30% to + 50%, with the costs associated with such analysis totalling 0.04% - 0.15% of the total expenditures (Harrison & Lock 2016).

Finally, the parametric estimation focuses on the determination of the parameters of the evaluated project, which vary in proportion to the cost of the project. On the basis of one or more parameters, a mathematical model is created. For example, the cost of developing a line of code can be selected as the software development parameter. To estimate the cost of the survey, the number of automated business processes can serve the similar purpose (Kloppenborg 2015). With a close relationship between cost and project parameters as well as the possibility of their accurate assessment, one can increase the reliability of the obtained data. The advantage of this method is the low amount of information required for the analysis, while the disadvantage is the inconsistent accuracy (-30% - + 50%). The cost of preparing the parametric estimate is 0.04% -0.45% of the total cost of the project (Lock 2014).

Given the situation of NUH NHS Trust, the second method is the most feasible for the evaluation. In fact, the new hospital does not have any close analogues in the UK due to its focus on the emergency care and life-saving procedures. Nevertheless, the projects in the field of health care that use the PFI as the procurement model are quite common in the country, meaning that they can become an object of research that evaluates their effect on the UK’s budget (Mendick, Donnely & Kirk 2015). In other words, the cost of these projects as well as their characteristics is reviewed comprehensively. Thus, finding an analogue (the similar-sized hospital that was created as a result of cooperation between the private and public sector) for the preliminary assessment will not be a problem, making it possible to perform a relatively accurate estimate, while ensuring the efficient cost containment.

Question 3

Value management is a system of techniques united under a common name and used to measure and monitor the effectiveness of the project implementation. It is grounded on the principles of utilisation of a wide array of numerical indicators that are identified in the course of work. The information support of this method is premised on the use of accounting data and the subsequent calculation of the cost of the project, which is decomposed in the framework of financial planning by the types of costs on a single timeline (eds Guthrie et al. 2014). However, it should be noted that this approach is unsuitable for the financial management of the entire organisation, where the parallel projects and the full organisational structure of the enterprise should be taken into account (eds Guthrie et al. 2014).

The applicability of the described approach to the case of the Specialized Emergency Care Hospital is quite. The reason is in the considerable scale of the project, the transfer of risks to the private participant, with their subsequent compensation by the government, and the potential disadvantage of the latter caused by the low expertise in the field of project management. As a result, the representatives of the public sector may not have sufficient control over the financial resources used for the implementation of the initiative, meaning that the risk of the emergence of unnecessary expenditures as well as missing the deadlines is quite significant (eds Akintoye, Beck & Kumaraswamy 2016). In this regard, the government is to monitor the changes in the accounting data of the project, including the one provided by the third parties, and react to any of those that do not correspond to the plan (eds Pattberg et al 2012). To ensure the maximum efficiency of this activity, it is necessary to focus on the value management at the initial stage of the project. Accordingly, it is crucial to combine the basic planning procedures (the determination of the scope of work, calculation of the schedule, and assessment of resources) into a single plan comprising the detailed measurable elements (plans). Each of those must have its permanent supervisor, preferably a representative of the public sector or a private contractor that collaborates with the former. Consequently, such consolidation will effectively direct the efforts of the managerial staff at monitoring the implementation of each of the described plans (eds Guthrie et al. 2014), meaning that control over the flow of resources will be comprehensive.

The benefits from constant tracking of the earned value (the performed amount of work indicated in the budget) and other indicators (actual cost, planned value, and others) allow the project manager to predict both success of its completion and risks related to overstepping the deadlines or budget (eds Guthrie et al. 2014). In turn, the overall process of creation of the Specialized Emergency Care Hospital will become more cost-effective. Furthermore, it will potentially strengthen the cooperation between the public and private sector of the country in the field of health care (bilateral data exchange, collaboration in monitoring, and others), thereby laying the foundation for similar projects in the future (eds Pattberg et al 2012).

Question 4

As it was mentioned before, the partnership between the public and private sector introduces the new factors and variables that affect the project as well as the new risks that threaten the process of its implementation. To reduce their adverse effect, it is imperative to identify, analyse, and manage them. The process of identification of the risks must be performed regularly during the implementation of the project, involving as many participants as possible, including project managers, future customers, and independent specialists. The coordination of efforts between the government and the private organisation is particularly important in case the method of brainstorming is utilised to identify the most significant challenges presented to the project managers (Lam 2014). It can be complemented by the analysis of the task updates performed by the working group members to identify the problem areas and bottlenecks. In fact, such progress can be tracked through the use of the Gantt chart (Sadgrove 2015). Additionally, it is possible to propose displaying the critical path of the creation of the Specialized Emergency Care Hospital, which is to represent the tasks that affect it in the most significant way. Importantly, they must be analysed immediately to establish the risks associated with scheduling and address them.

The analysis of risks associated with the implementation of the Specialized Emergency Care Hospital project can be performed with the help of risk matrix. In this case, every identified risk will be characterised by the two values, namely the probability of its occurrence and a number of losses it may bring. The qualitative estimates of the probability and damage can be obtained in the two ways. First, they can be determined from the quantitative estimates (Sadgrove 2015). As it was mentioned before, the Specialized Emergency Care Hospital is one of the numerous health care projects that are reliant on the public-private partnership, meaning that the amount of statistical data required to make an estimate is quite high. Still, the analysis can be complemented by the use of subjective probabilities or expert assessments, as such approach often contributes to the reliability of risk matrix, giving the possibility to identify the challenges that have to be immediately addressed (Sadgrove 2015).

Finally, the management of risks that were identified as the most dangerous for the project is to focus on developing ways and identifying actions to increase opportunities and reduce threats to project objectives. The planned operations to respond to risks must correspond to the severity of the risk and be cost-effective, timely, realistic in the context of the project, and agreed with all participants. In general, it is possible to choose from the four types of response to the risk, namely avoidance, transference, mitigation, and acceptance (Lam 2014). In the case of the Specialized Emergency Care Hospital, the risks have already been transferred to the private participants and cannot be avoided due to the considerable scale of the project. Thus, their mitigation through the adoption of preventive measures is the most feasible course of actions. Specifically, the early resolution of architectural risks through the regular audit of the shipments by the suppliers can reduce the likelihood of dissatisfaction with the end result (Sadgrove 2015). Moreover, a part of the project team is likely to be dismissed in the course of implementation (the assistance of independent specialists may not be required once the risks and costs of the initiative have been identified and calculated). Thus, the introduction of additional human resources at the initial stage reduces the losses from the dismissal of team members since the entry costs for new participants, which may threaten the financial stability of the project, will be absent (Sadgrove 2015).