Part 6: Programme configuration

6.1
In this Part, we describe EQC's progress against our 2013 recommendation about programme configuration.

6.2
We recommended that EQC continue to review and, if necessary, adjust the configuration of repair and project management services in the programme to deliver the best value and results in the circumstances and treat homeowners fairly and consistently.

6.3
The Appendix provides further information on what we found and recommended in 2013 about EQC's management of the programme configuration.

Summary

6.4
EQC has reviewed and adjusted the configuration of repair hubs and has signed a contract variation with Fletcher Construction for completing repairs from 1 May 2015.

6.5
EQC has continued to manage the cost of actual repairs well, but the project management component of total programme costs has increased.

Improvements and continued activities

Improvements

6.6
Since 2013, EQC has:

• reviewed and adjusted the hub configuration of repair and project management services but has not achieved the intended direct cost savings;
• signed a variation to the project management services contract with Fletcher Construction on 18 May 2015 – the contract variation covers the completion of repairs from 1 May 2015;
• implemented a new financial information system;
• proposed strategic work on information management; and
• started using three definitions of a completed repair:
  • primary substantive repair completed;
  • three-month defects fixed, deferred scope completed, known quality issue or complaints resolved; and
  • EQR repair record closeout completed (repair file complete, costs finalised, contractor paid).

Continued activities

6.7
EQC has continued to manage actual repair costs well (excluding programme management costs) using the rates ceiling book and contractor management approaches we described in our 2013 report.

6.8
As at 30 June 2014, EQC estimates that the cost of a repair is, on average, 14.2% higher than it was in February 2011. In comparison, the Canterbury inflation rate for purchasing a new house, which will have been affected by similar cost pressures and industry cost structures as home repair work, was 30.9% during roughly the same period. EQC told us that its underlying labour rates for repair work have not increased since April 2014. The Canterbury inflation rate for the cost of a new house increased by 3.96% in 2014/15.

6.9
EQC has also continued to take contractor performance into account when allocating repair work.

6.10
There is ongoing use of legacy systems and poor practices with the use of technology. As we discussed in paragraph 4.9, EQC decided to continue using legacy systems and not make any fundamental changes to its systems. This was a deliberate business decision to not incur the significant risk of a major change to systems while responding to events in Canterbury. However, EQC is focused on how its systems can be upgraded in the future.

6.11
EQC's investigations team has continued to carry out fraud investigations. We described that team and its work in detail in Part 6 of our 2013 report. That team's investigations have focused on both customer and contractor fraud. EQC has told us that the level of fraud has been lower than normal expectations within the insurance industry. The focus on contractor fraud is to support completing repairs to scope and of an appropriate quality.

Repair costs have been generally managed well

EQC has continued to manage the cost of actual repairs well. Although it is not possible to definitively compare EQC's programme management costs with other information, the costs are indicatively at the upper end of the New Zealand indicators that we have and are higher than what EQC was aiming for. Overall, EQC's claims-handling costs are in the middle of a large international reinsurer's cost range. That reinsurer told us that it is difficult to make international cost comparisons because disaster repair costs typically depend on context.

6.12
As we said in our 2013 report, there is no directly comparable information available about the market cost of project management services for a home-repair programme. Instead, we have obtained several indicators of project management costs from various sources. These include the sources we used in our 2013 report and some new indicators.

6.13
The New Zealand indicators of project management costs that were the same as those we used in our 2013 report are:

• the professional assessment of the cost of project management services in the two shortlisted bids received by EQC;
• the actual project management costs in the programme compared to those anticipated in the successful bid, noting that assumptions were made at the time of the bid that have proved to be invalid because of multiple earthquakes;
• professional advice to an insurer assessing the market price for project management services (we have agreed to maintain the confidentiality of this information);
• the actual project management costs paid by an insurer involved in the recovery (we have agreed to maintain the confidentiality of this information);
• the actual margins paid by an entity on a range of construction jobs (we have agreed to maintain the confidentiality of this information);
• independent advice provided to EQC on aspects of project management costs for different types of building projects; and
• a reinsurer's report about EQC's claims-handling costs (we have agreed to maintain the confidentiality of this information).

6.14
The new indicators are:

• advice from BRANZ on the cost of project management services based on a survey of time use by builders (we have agreed to maintain the confidentiality of this information);
• publicly available information about Southern Response's project management costs;
• advice from a senior quantity surveyor working in Christchurch (we have agreed to maintain the confidentiality of this information);
• advice from a large international reinsurer about claims-handling costs; and
• Quotable Value's cost builder information.

6.15
We have looked at the most relevant information from each of these indicators and the equivalent aspects of actual project management costs in the programme. The indicators do not provide a definitive view on the appropriateness of the project management costs, but they do provide indicative information. This information shows that project management costs are generally at the upper end of what we consider to be reasonable in the circumstances.

6.16
Figure 11 shows our analysis of the total costs of the programme since it began.

Figure 11
Analysis of total costs of the Canterbury Home Repair Programme

* These costs have been provided by EQC and are largely based on reporting to the Project Control Group. The total programme management cost differs from the $332 million in EQC's 2014/15 annual report. EQC told us that the main reason for this difference is the way contract works insurance has been treated. It was included in the "other" category in EQC's financial statements – that is, excluded from programme management costs – but was captured in the programme accounts provided above. There may also be small differences between the management information reported to the Project Control Group and the information in the financial statements.
** The costs of project management include the costs of managing completed repairs, claims that involve some stages of the project management process that did not progress to a completed repair, management of the clean heat and emergency works initiatives, the establishment of an in-house technical team that avoided some consultancy costs, and the cost of project-managing repairs when there have been delays or non-commitment by the homeowner. The effect of these factors on costs have to be considered against any cost benefits arising from the scale of the programme.
*** Programme management costs as a percentage of programme management costs plus direct repair costs.
† Staff includes contract supervisors, work managers, quantity surveyors, compliance supervisors, repair hub operation managers, and construction managers within the repair hubs.
†† Claims-handling expenses as a percentage of total costs associated with the programme. Source: EQC and EQR information.

6.17
In its Statement of Intent 2012-15, EQC set a target for claims-handling expenses to be no greater than 8.5% of total costs in 2014/15. This target was revised to 10% in the Statement of Intent 2013-16. The target was changed in the Statement of Performance Expectations 2014/15 to EQC being within 10% of the budget approved by EQC's Board. ²⁵ EQC has not met these targets. EQC told us that the higher-than-planned claims-handling expenses are because of the change in circumstances after the February 2011 earthquake.

6.18
Figure 12 shows the cumulative costs of repairs and programme management in the programme to date. These costs come to more than $2.7 billion as at 30 June 2015.

Figure 12
Cumulative costs of the programme, November 2010 to June 2015

Source: Graph based on information provided by EQC.

6.19
EQC has reviewed and adjusted the hub configuration of repair and project management services to deliver more consistent repair practices while continuing to manage the cost of actual repairs well. However, the project management component of total programme costs has increased slightly from 12.01% at 30 June 2013 to 12.72% at 30 June 2015 (see Figure 11). In total, about $340 million had been spent in the programme on project management services as at 30 June 2015. Also, EQC has incurred $59 million of direct costs associated with its own programme staff and programme management. We show average costs of a repair in 2012/13 and 2014/15 in Figure 13.

Figure 13
Average repair and management costs, 2012/13 and 2014/15

Note: This information represents total programme management costs averaged over the number of completed repairs. Costs that may not be directly related to a completed repair include working on claims that did not result in a completed repair, and clean heat and emergency works. The effect of these factors on costs have to be considered against any cost benefits arising from the scale of the programme.

Source: EQC and EQR information.

6.20
The overall cost of the programme's project management office services has increased both proportionally and absolutely. This is because the total number of expected repairs in the programme has reduced (increasing the proportional cost) and because the programme's time frame has been extended (increasing the absolute cost).

6.21
EQC's original target for ending the programme was December 2015. It brought this target forward to December 2014. In September 2013, EQC publicly said on its website that "In 2014, EQC will … repair all remaining houses in the Canterbury Home Repair Programme." EQC told us that this was a "stretch target". However, this was not made clear to customers, who might have had different expectations.

6.22
In our view, EQC should have been clearer with its communications about this so that customers had better certainty about their repairs and the extent to which they could rely on EQC's commitments. We also reviewed documents that showed EQC got assurance from EQR that it would meet the December 2014 target.

6.23
EQC says that it is "exerting every effort to ensure that the remaining settlements are completed as soon as reasonably practicable". However, EQC has not set an end date for the programme.

6.24
EQC told us that, when it did have an end date for the programme, it also had to deal with additional workloads because of the Cook Strait and Eketahuna earthquakes. The number of claims from those events were some of the largest in EQC's history, excluding the Canterbury earthquakes.

6.25
As well as missing the December 2014 target, EQC has missed some externally stated targets, including the completion of repairs valued at more than $50,000 and the completion of repairs for vulnerable people. For some customers, including 102 vulnerable people in the second quarter of 2014, EQC has also not delivered on the quarterly time frame it said their repairs would begin in. Also, EQC has not met its internally set monthly repair rate target.

6.26
EQC and Fletcher Construction have signed a variation to their project management services contract. The new commercial arrangements in the contract variation:

• extend Fletcher Construction's involvement to the end of the programme;
• appear suitable for the stage of the programme and the circumstances EQC is working in;
• involve a different set of incentives and performance measures from the original agreement – the original contract had no direct financial consequences for failing to meet time, cost, or quality goals, but the contract variation does; and
• define completion of repairs in two ways – "practical completion with customer sign-off" and "scoped, costed and either start date set with customer or referred for payment" (for repairs yet to be provided by EQC to EQR).

6.27
Extending the end date of the programme from December 2014 has increased costs. If the programme had been completed by 30 September 2015, we estimate that the additional administration costs (both project management costs and EQC costs) would have been up to $55 million. This excludes any additional repair costs resulting from repair cost inflation over a longer time period and the costs of any additional work not recoverable from contractors.

6.28
Having good repair records will be critical for effectively managing the Crown's repair liability after the programme ends. EQR is carrying out work to support the transfer of repair records to EQC when the programme ends.

25: The programme is only one component of these overall administration costs.