Ottawa’s auditor general says construction costs for the Lansdowne 2.0 project could be understated by more than $74 million, potentially raising the project’s price tag to just short of half a billion dollars.
In the first report from a so-called “agile audit” released Thursday, the Office of the Auditor General (OAG) warns of cost escalation due to delays and says the city hadn’t included a sufficient contingency fund to cover its risks.
The report also found that the city could stand to collect far less revenue than expected over the four-decade life of its partnership with Ottawa Sports and Entertainment Group (OSEG), potentially cutting into money it was counting on to repay debt.
In a report to council in November, staff estimated the total cost of the redevelopment project at $419 million.
Council subsequently approved a financial model based on that number, which was meant as a rough figure that could change as the project goes to tender. Councillors will still have a chance to review an updated price tag.
The OAG found that the November estimate relied on solid expertise and due diligence, but was still off base. Its report hiked the projected cost of the project by 17.7 per cent to $493.4 million.
“We believe the City, in some instances, chose estimates that were on the lower end of existing ranges,” the report said.
“Given the inherent risks related to construction, and this project in particular, we believe this approach has resulted in some construction estimates that are optimistic.”
‘Insufficient consideration of risk’
The report says the city did not follow its own guidelines for setting up a contingency fund that would allow it to cover cost overruns. In the OAG’s view, the $51 million it set aside was about $44 million too low.
“The OAG believes that there was insufficient consideration of risk commensurate to this project when establishing their contingency amount,” it said.
It said much the same thing for the cost of moving utilities for construction work, which could be understated by about $8 million.
Then there are the delays. The report noted the timelines for both the event centre and the north side stadium stands have been pushed back in the months since November. That adds to the risk of getting pricier bids when the project goes to tender.
“We believe that these delays have likely already impacted the reasonableness of estimated construction cost escalations,” the report said. “Further delays would continue to compound the magnitude of this impact.”
A separate cost estimate of $18.6 million to build a city parking garage at Lansdowne is also too low, according to the report, given that parking structure costs have jumped more than 12 per cent in one year.
Higher costs could mean more debt
The city was aiming to fund the $419-million cost from its November estimate through a combination of $310 million in debt and several other revenue sources, including by selling the rights to build two towers over the stands.
The auditor’s report said the city will “most likely” have to take out more debt than expected if construction costs are indeed understated.
Moreover, the city was planning to pay back all that debt through the so-called “waterfall” of profits it’s agreeing to split with OSEG. But the auditor’s report pointed to several risk factors that could cut into the revenues those profits rely on.
“Should proforma projections associated with the partnership fall short, distributions from the waterfall will not be available to the City to support debt servicing,” it said.
The report notes that revenue growth for the Ottawa Redblacks has already fallen short. It found that more conservative growth rates could cut into profits over the life of the partnership by tens of millions of dollars.
The operating cost side of the ledger is also a risk, and the auditor report views the city’s guess as too optimistic, perhaps by $30 million over the course of the partnership.
City staff dispute cost finding
Council made amendments to the staff plan when it considered the project in November, including by boosting the height of the towers and setting aside more money for affordable housing.
The OAG said its report did not factor in those adjustments.
City staff have accepted the auditor general’s recommendation on updating the waterfall estimates, but disputed part of a separate recommendation on construction costs.
“There appears to be a fundamental disagreement with the basis of the finding as Management has indicated that they followed the Guide and incorporated risk into the determination of their estimates,” the auditor general’s office said.
“It is the OAG’s perspective’s that the Guide was not followed for the determination of the utilities allowance and the determination of overall contingency.”