Metro Tunnel faces cost blowout on early construction work, watchdog reveals

The cost of early construction work on the $11 billion Metro Tunnel is set to blowout by $150 million, the Auditor-General has revealed.

Victoria's financial watchdog has found that construction work done in the early stages of the project has exceeded the original approved budget of $476 million, with a final forecast cost of $625.5 million.

Metro Tunnel's North Melbourne siteCredit: Joe Armao

The 31.2 per cent increase has been covered by contingency funds, but the Auditor-General warns this could mean the project eventually exceeds its $11 billion price tag.

The financial watchdog says the government's heavy reliance on the rapidly decreasing back-up funds, which are meant to last for the length of the entire project, serves as an "early warning flag" of a project cost blowout.

"With at least five years of complex and risky construction to go, this raises some risk that the project may exceed the publicly announced $11 billion budget," Auditor-General Andrew Greaves warns in his report released on Thursday morning.

The nine-kilometre Metro Tunnel will run under the city between South Kensington and South Yarra.

Once complete, the tunnel will join the Cranbourne-Pakenham and Sunbury train lines, and include five new underground stations: North Melbourne, Parkville, State Library, Town Hall and Anzac. It is expected to be finished in 2025.

The total budget of the "early works phase" was originally set at $1.2 billion. But it is now forecast to cost $1.3 billion, an increase of $95.8 million, or 7.6 per cent, the report says.

Transport Infrastructure Minister Jacinta Allan said the report states "the project is ahead of time and is within overall project budget".

The minister attributed the cost increases to a decision to expand the scope of those works, and bring tunnelling forward.

"The tunnelling package was brought into the early works package primarily to de-risk the project and get a fast start," she said.

The blowout has been partly driven by unexpected issues at the State Library station precinct.

Rail Projects Victoria (RPV) originally budgeted the State Library works at $75.7 million. By March 2019, its final forecast cost was $201 million. This is an increase of $125.3 million, or 165.5 per cent, the report says.

Ms Allan said the State Library was one of the most complex sites in the project, due to the need to make a connection to the existing Melbourne Central station, and build "an enormous cavern" beneath the library.

"There needs to be enormous service relocations," she said.

RPV acted on advice from consultants who said that using an early works package would help cut costs and reduce the project's timeframe.

But the early works package, which enabled the government to bring forward the project's completion date by a year - from 2026 to 2025 - has ultimately led to higher costs, the report says.

That is despite the government deciding to take on financial and legal responsibility for parts of the early works to avoid a private contractor inflating the cost.

The auditor found that the first stage of work has been successful in preparing the project for the main construction phase and that land acquisitions had cost less than expected.

"Notwithstanding these positive results, the early works phase has taken longer than originally planned and has cost more than originally budgeted," the report says.

Bringing forward the completion date meant the government became responsible for any extra costs that arose in constructing deep access shafts at the tunnel sites in the CBD.

There were unforseen issues relating to geological conditions, delayed designs and difficulties building in a physically constrained construction environment at the State Library station, the report says. RPV also underestimated the "likely costs and technical challenges of deep access shafts".

Expanding the scope of the project to include managing road closures and the flow of traffic, has also increased costs.

The state's decision to bring in a "delegate" to help resolve delays and design issues cost an extra $68 million.

An additional $172 million in recommended variations to the project was paid out of the state's contingency funds.

The report also casts doubt on the modelling underpinning the project, which has not been updated to include the suburban rail loop, the airport rail link and Wyndham Vale and Melton electrification projects.

This means that estimated passenger demand for the Metro Tunnel could no longer be correct, the report says.

It presents a risk that "new stations may not have enough entrance and exit capacity to meet future demand or enough elevators or escalators in the stations".