Select Committee on Public Accounts Fifth Report



SMART ACQUISITION: EFFORTS TO IMPROVE PROCUREMENT PERFORMANCE

26. Smart Acquisition requires projects to produce three-point cost and timescale estimates at 30 percent, 50 percent and 90 percent confidence levels. In giving evidence to our predecessors on the Major Projects Report 1994, the Department stated that three-point estimating was used routinely on all projects and undertaken thoroughly. Yet the National Audit Office found that only two of the ten assessment phase projects had reliable three-point cost and time estimates. Asked why this was so, the Department could not justify its record and agreed that it was not satisfactory that it had failed to fulfil its assurance to the Committee. But it did point out that since 31st March 2000 (the datum of the National Audit Office report) there were only three projects without three-point estimates. As part of the changed procurement strategy the Department had asked bidders for enough data to support three point estimates and promised the Committee would see these as soon as they were available.[39]

27. In response to questioning on whether there was a major project that it was proud of, the Department listed Trident, Tomahawk and the recovery of the Challenger 2 programme. When it was suggested that Trident and Tomahawk were largely off-the-shelf projects where the Department did not have a great deal of scope to alter the specification the Chief of Defence Procurement responded that the nuclear propulsion plant did not feel off-the-shelf to him.[40]

28. The contract for the Type 45 Destroyer is arbitrated under British law, whilst the contract for its PAAMS missile system has been placed under French law. The Department was asked what would happen if the two systems did not work together and it was not clear which half was the problem. The Department admitted that it carried the risk, but was confident that PAAMS was required to conform to all of the interface specifications which had been agreed with the ship project.[41]

29. In giving evidence on the Major Projects Report 1998 the Chief of Defence Procurement stated that there were Athe best industry people in the world@ working on BOWMAN and that Athey were close to a cost-effective solution@. Since the competition has subsequently been re-opened, some 12 years after the requirement was first raised the Department was asked why it had not seen the difficulties with the ARCHER industrial collaboration earlier and why it had taken so long to decide what to do. The Department said that ARCHER was completely re-energised in 1999 as a result of the consortium being managed properly by BAE SYSTEMS. They had brought in new staff and were supported by their consortium members both from the United States and from France, with the best people that could be found. The Department had, however, been very keen to make sure that a decision on whether or not to continue with ARCHER was based on their final bid and, right until the last few days of the bid, it was not clear whether it was going to be satisfactory or not. The Department said that it was very careful about contractors' extravagant promises, particularly when they were made near the deadline on the basis that it had become a must-win project for them. The fact that ARCHER put so many changes into their bid in the last few days had caused the Department to look closely at whether they would be able to live up to their promises.[42]

30. The Department was asked why technical delays had emerged on the Hercules C-130J programme, since at the time the contract was awarded there were categorical assurances from Lockheed-Martin and also the RAF that there would be no delays. The Department said that the Hercules C-130J was a new aircraft with new engines, propellers and avionics and that Lockheed Martin had underestimated the development content. The Department did not understand why the company made an under-estimate because they built its predecessor, the C-130K, and knew more about this aircraft than anybody else in the world.[43] The Department also said it recovered substantial liquidated damages from Lockheed-Martin as they fell due, which had at least compensated it for the running costs of the existing United Kingdom C-130K's.[44]

31. The Chief of Defence Procurement believed that the Department needed to find better ways of incentivising contractors to deliver on time. The Department had plenty of >sticks' but needed to balance them with >carrots'. For example, the Eurofighter programme included some incentives for doing things on time by using the retentions on the progress payments on the contract, which were planned to be withheld to the end. Now, if industry delivered the first, eighth and final Tranche 1 aircraft on time they would receive bonuses.[45]

Conclusions

32. Our predecessor's report on the 1994 Major Projects Report recorded that the Department had stated that it used three-point estimates on all major projects. It is therefore surprising that only two of the ten assessment phase projects in the Major Projects Report 2000 had three-point estimates for time and cost at 31 March 2000. The Department could not justify this failure, although it did make progress quickly in generating three-point estimates after the National Audit Office had highlighted the problem. We also note the Department's assurance that three-point estimates for Bowman will be available soon and expect all projects in the Major Projects Report 2001 to have robustly generated three-point estimates.

33. The Department highlighted the Tomahawk Land Attack Missile and Trident missiles as successful projects. One obvious common factor is that both of these projects were largely off-the-shelf purchases from the United States, but the Department should look to identify other common features which may enable it to emulate these successes in future.

34. The Type 45 destroyer is an anti-air warship being procured in two parts comprising the warship and the Principal Anti-Air Missile System (PAAMS). The Department recognised the risks but assured us that it was confident there would be no interface problems between the warship and PAAMS. That would be a significant achievement, and we look forward to hearing whether the Department has achieved it.

35. The Department said that it was now more cautious about accepting over optimistic bids from industry. For example, it had not continued with the ARCHER industrial prime collaboration contractor on BOWMAN because it believed that the company was making extravagant promises that would not be deliverable. Such scepticism is a welcome development.

36. The Department seeks to transfer the cost risk of resolving technical difficulties and the delays it causes to industry by using performance based contracts. For example, the Department received substantial liquidated damages from Lockheed Martin in respect of the delays to the Hercules C-130J. Whilst liquidated damages may offset the costs of delays the Department still bears the operational implications of the delays, a fact which re-emphasises the importance of planning to and agreeing realistic timescales at the outset.

37. The Department regards control of costs through contracts as straightforward, but believes that incentivising contractors to deliver on time is more difficult. The principle of incentivising contractors to deliver on time is a good one, but it is important that incentives are based on a thorough understanding of what is achievable and are effective in securing added performance. The Department needs to ensure that it does not give contractors extra benefits for simply doing what they should be doing anyway under the contract.


39  Qs 207B209 Back

40  Q209 Back

41  Qs 185B186  Back

42  Q8 Back

43  Q285 Back

44  Q286 Back

45  Q278 Back


 
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Prepared 28 November 2001