Press Notice No. 43 of Session 2003-04, dated 21 October 2004
FORTY-THIRD REPORT: MINISTRY OF DEFENCE: MAJOR PROJECTS REPORT 2003 (HC 383)
Mr Edward Leigh MP, Chairman of the Committee of Public Accounts, said today that slippage of £3 billion and nine months on major defence projects during a single year was a poor performance which denied new equipment to servicemen and women at the front line, and urged the Ministry of Defence to properly apply the sound principles of Smart Acquisition.
Mr Leigh was speaking as the Committee published its 43rd Report of this Session, which examined the impact of the large cost overruns and delays in the Ministry of Defence's major projects; how the Department understands and manages risk; what more the Department and industry can do to develop a more constructive relationship; and the way ahead to prevent such poor procurement performance being repeated in future.
For the 20 largest projects where the main investment decision has been taken, the Ministry of Defence (the Department) forecast the costs (excluding two commercially sensitive ones) to be £51.9 billion, an increase of £3.1 billion in the last year and some 6% over approval. The 20 Projects have slipped an average of 18 months beyond their expected delivery dates, with 9 months of this delay occurring in the last year. The Department expects all projects to meet their key user requirements on delivery.
The Committee found that the cost overruns and schedule slippages recorded in the Major Projects Report 2003 mean that the services will not receive the equipments they need when they have said they need them. Where cost and time overruns on individual projects are significant the Department should better understand and be able to explain the adverse effect on the future Equipment Programme and the operational capabilities which the Armed Forces will have to forgo.
The Department has accepted a greater share of risk on the Astute and Nimrod projects, yet was unable to give firm assurances on timescales and costs. By the time of the next Major Projects Report the costs should be well understood, and the Department should clarify the implications of the risks they are assuming.
The Department has developed Technical and Integration Readiness Levels to help understand programme risk. Developing a constructive relationship with industry is central to successful project delivery. The Department should develop Commercial Readiness Levels to provide a quantified basis upon which to assess the strength of its relationships with industry on individual projects.
The Department's policy is to spend 15% of the initial procurement costs of a system in the Assessment Phase. Yet it currently spends less than 5%. It should follow its own policy.
In a number of cases, such as the Astute submarine and the Support Vehicle, the Department and industry made poor decisions and committed to unrealistic programmes. The Department is in a long lasting relationship with many of its suppliers where success will only be achieved by establishing programmes which hold the prospect of securing a fair risk and reward balance. The Department and industry should explore how better to share information on costs, risks and potential opportunities for mutual gain to help both partners to structure deals appropriate to the circumstances of individual programmes.
Experience on, among others, the Nimrod and Astute programmes, highlights that agreeing long-term fixed price contracts covering both development and production for complex defence equipment programmes is not workable.
In the past, the relationship between the Department and its contractors has too often been characterised by an emphasis on what to do in case of failure and a culture based on the apportionment of blame. In agreeing future programmes the Department and industry should define commercial arrangements which provide a financial incentive to both parties to improve on cost, time and performance estimates, without setting targets which are easy to beat and so provide a false impression of success.
The definition of value for money in the Defence Industrial White Paper is broad and, in theory, embraces the concerns of government and industry. However, tensions and misunderstandings remain. In making future decisions it will be important for the Department fully to involve other government departments and industry from the outset in evaluating the full range of potential outcomes, including implications for industrial capacity and skills.
Appointing Senior Responsible Owners to co-ordinate the delivery of major capabilities such as Carrier/Strike is sensible. As envisaged by the Department, however, the role seems to be without direct managerial or budgetary control. The Department should provide a clearer account of exactly how Senior Responsible Owners will fit into the procurement system.
The Department should develop measures for the whole equipment lifecycle covering time, cost and quality issues. The measures which the Department is introducing to measure improvements in procurement performance focus mainly on the acquisition stage.
Mr Leigh said today:
"Cost overruns of £3 billion and delays of nine months on average on major defence projects during a single year is a poor performance. Our servicemen and women will be without the equipment promised, and will have to continue to use older kit planned to be withdrawn. For example, for over three and a half years the Armed Forces will have to do without the increased capability to operate in coastal waters, better intelligence gathering and improved Special Forces deployment capacity which the Astute submarine will offer. The Department must properly apply the sound principles of Smart Acquisition, and ensure that where cost overruns and delays do occur it identifies what new equipment capabilities are being foregone as a result."
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