Select Committee on Public Accounts Twenty-Ninth Report


TWENTY-NINTH REPORT


The Committee of Public Accounts has agreed to the following Report:

NON-COMPETITIVE PROCUREMENT IN THE MINISTRY OF DEFENCE

INTRODUCTION AND LIST OF CONCLUSIONS AND RECOMMENDATIONS

1. It is a long-standing principle of public procurement that effective competition between suppliers is likely to be the best means of achieving value for money. The policy of the Ministry of Defence (the Department) is to use non-competitive procurement to acquire its military equipment only where there are compelling reasons. It may not be practicable or sensible, however, to use competitive procurement on every occasion, and over the last five years one quarter of the Department's annual expenditure of £9 billion on equipment has been spent on non-competitive projects.[1]

2. In the context of non-competitive procurement, the Department has processes which aim to replicate the pressures that apply in competition. These processes include a long-standing agreement between the Government and the Confederation of British Industry (the 1968 Agreement), and the No Acceptable Price No Contract (NAPNOC) policy. All non-competitive contracts valued at over £1million are negotiated in accordance with this policy. Since 1998, the Department has also been applying Smart Acquisition to improve value for money in all its procurement.[2]

3. On the basis of a Report by the Comptroller and Auditor General, the Committee examined the Department's approach to non-competitive procurement. Our main conclusions arising from this examination are:

      (i)  The concentration and globalisation of the defence industry means that, over time, the competitive options open to the Department are likely to decrease. At the same time the technological complexity of much defence equipment is increasing and it is expected to remain in service for longer periods. Defence acquisition is thus likely to become characterised by the establishment of long-term relationships with a smaller group of top-tier suppliers. In this environment achieving value for money from non-competitive procurement will be vital.

      (ii)  The Department's existing procedures generally work well but could be enhanced to make non-competitive procurement more effective and to ensure that good practices are applied consistently to all of its procurement activities.

      (iii)  The National Audit Office Report includes a dozen helpful recommendations[3] to improve further the way the Department places and manages non-competitive contracts by ensuring its processes are consistently applied and evolve to reflect lessons learned. The Department should act upon all of these recommendations.

4. Our specific conclusions and recommendations are as follows.

Improving non-competitive procurement

      (i)  The Department's 75 per cent target for the level of procurement subject to competition is of limited utility. It should be replaced by a monitoring system, the primary objective of which should be to understand the long-term trends influencing types of procurement activity (paragraph 13).

      (ii)  The Department has only ever terminated two "No Acceptable Price No Contract" negotiations, out of 1,850 such contracts placed. In future the Department should distinguish the need to agree a price at the outset from the need to agree an acceptable price. It should be prepared to revisit the original procurement strategy and requirement if an acceptable price cannot be agreed within a reasonable timescale (paragraph 14).

      (iii)  NAPNOC is mandatory for all non-competitive contracts above £1million. It is also recommended best practice for contracts below this threshold and the Department assured us that it was obtaining the same value for money on these contracts as for those subject to NAPNOC procedures. The Department should monitor lower value contracts to demonstrate that value for money is being secured in practice (paragraph 15).

      (iv)  The Department acknowledged that it had failed to adhere to its policy that an Equality of Information Statement should be signed on every NAPNOC contract. The Department should adhere more strictly to its guidance in future and make sure every NAPNOC contract has such Statements (paragraph 16).

      (v)  In our reports on major projects we have often expressed concerns over the timely introduction of new capabilities.[4] In the absence of competitive pressures, contract negotiations may take longer to agree an 'acceptable' price. Recognising this possibility, the Department, in preparing its procurement strategy, should check that the process of negotiation is started early enough to ensure timely delivery of the equipment (paragraph 17).

      (vi)  It may be a false economy for the Department to cut back on its pricing staff, who play a key role in securing value for money on non-competitive contracts. In deciding the resources available for pricing work, the Department should take account of the benefits expected from it (paragraph 18).

      (vii)  The Department should ensure that prime contractors compete sub-contracts where feasible, and that it has greater oversight of the work undertaken by sub-contractors (paragraph 19).

Wider improvements in the Department's approach to procurement

      (viii)  The Department has 31 partnering arrangements in place. These are designed to promote more co-operation with suppliers and lead to the achievement of better value for money. The Department and the Office for Government Commerce should review the lessons to be learned from its growing experience of partnering and consider the scope for its wider application both within the Department and across Government (paragraph 23).

      (ix)  In applying the Earned Value Management technique the Department should ensure that its project management staff develop the expertise necessary to use it and work closely with other government departments and industry to ensure that the potential benefits are fully secured (paragraph 24).

      (x)  Joint risk registers are a useful innovation and the Department should act on the Chief of Defence Procurement's statement that they should now be used on all contracts over £1million (paragraph 25).

IMPROVING NON-COMPETITIVE PROCUREMENT

5. We asked the Department why, given that its 75 per cent target for the level of procurement to be competed had been formally removed as a performance measure, it continued to monitor its performance against the target. The Chief of Defence Procurement said that it was an arbitrary target and that it was more important to measure trends. The Accounting Officer added that the target was a useful piece of management information to see how the pattern of procurement was going. It did not drive the work because he was more interested in value for money than in the precise proportions of competition.[5]

6. The C&AG's Report showed that, to date, only two out of the 1,850 NAPNOC negotiations had been terminated. The Accounting Officer said that NAPNOC was not about whether to place a contract because the decision would already have been made to place the contract with a particular single source supplier. The NAPNOC principle was that the Department should not place a contract until it has negotiated an acceptable price. As to the risk that the imperative to get the product would overrule the imperative for good negotiations, the Department said that walking away was not really an option if the Department needed the product and there was only one supplier.[6]

7. NAPNOC is a mandatory policy for all non-competitive contracts above £1million. We asked what the procedure was for non-competitive contracts below this threshold. The Department said that in essence the same procedures were used but with less bureaucracy, that there are checking systems throughout the organisation and contracts below £1million gave equal value for money as those above £1million.[7]

8. Equality of Information is a key part of the 1968 Agreement and means that each party should divulge material that is relevant to the agreement of a fair and reasonable price. In 1995, the Department and representatives of defence contractors agreed to introduce an Equality of Information Pricing Statement for all non-competitive contracts valued at £250,000 and above. However the National Audit Office survey found that for 31 per cent of the contracts surveyed there was no Equality of Information Statement. The Chief of Defence Procurement said that he did not regard substitutes for Equality of Information pricing statements as satisfactory, that the existence of contracts without such statements was a failure of control and that the Department had to get its act together on this matter. The Department assured us that it was now pushing very hard to make sure that statements were signed and available in all cases.[8]

9. Seven of the contracts examined in the National Audit Office survey failed to meet their original timetable for placement by as much as 12 months. The Department accepted that it needed to look at its procedures to ensure that it was not unnecessarily cumbersome and slow in agreeing contract terms. However, it did not believe that the delays had led to serious consequences in terms of introducing new equipment into service.[9]

10. The Directorate of Pricing within the Specialist Procurement Services provides the Department's pricing service. These pricing staff play a major role in the Department's examination of contractors' costing and financial management, and in pricing proposed non-competitive contracts. 90 per cent of respondents to the National Audit Office Survey were satisfied with the pricing staff's work on their contracts. Their work has also contributed to significant reductions in prices. The number of staff employed by the Directorate of Pricing has fallen in recent years, and is expected to fall by a further 20 per cent by March 2003, at a time when the demands on their expertise are likely to increase.[10]

11. The Department acknowledged that the Pricing Directorate was a scarce resource. It had to use the staff selectively in order to do so to the best effect. Asked why a scarce resource was going to be cut by 20 per cent the Chief of Defence Procurement said that the pricing staff were now part of the Defence Procurement Agency and no longer needed their own personnel management, their own training or finance staff, or their own headquarters. The Department was also making industry more aware of what it required and so the pricing service would have to spend less of their time phoning industry up and asking them for data. However, he could not guarantee that the 20 per cent reduction in staff numbers would not impact on the effectiveness of the Directorate of Pricing. The Department would manage the reduction and, if it was wrong, change it. The service had not been contracted out as industry was reluctant to share fundamental data on their performance and competitiveness with anyone other than a Government department.[11]

12. The Department's own guidance stresses the importance of ensuring that as many sub-contracts as possible are awarded competitively. The National Audit Office survey of non-competitive contracts showed, however, that sub-contracts were competed in only 24 per cent of the contracts by number. The Department expressed surprise that the competition among sub-contractors was so low and accepted that it should be looking more closely at sub-contracting. It should be made clear in the Department's codes of practice that contractors were expected to provide better information on their sub-contracting arrangements.[12]

Conclusions

13. The Department's 75 per cent target for the level of procurement subject to competition is of limited utility. It should be replaced by a monitoring system the primary objective of which should be to understand the long-term trends influencing types of procurement activity.

14. The Department has only ever terminated two "No Acceptable Price No Contract" negotiations out of 1,850 such contracts placed. In future the Department should distinguish the need to agree a price at the outset from the need to agree an acceptable price. It should be prepared to revisit the original procurement strategy and requirement if an acceptable price cannot be agreed within a reasonable timescale.

15. NAPNOC is mandatory for all non-competitive contracts above £1million. It is also recommended best practice for contracts below this threshold and the Department assured us that it was obtaining the same value for money on these contracts as for those subject to NAPNOC procedures. The Department should monitor lower value contracts to demonstrate that value for money is being secured in practice.

16. The Department acknowledged that it had failed to adhere to its policy that an Equality of Information Statement should be signed on every NAPNOC contract. The Department should adhere more strictly to its guidance in future and make sure every NAPNOC contract has such Statements.

17. In our reports on major projects we have often expressed concerns over the timely introduction of new capabilities. In the absence of competitive pressures, contract negotiations may take longer to agree an 'acceptable' price. Recognising this possibility, the Department, in preparing its procurement strategy, should check that the process of negotiation is started early enough to ensure timely delivery of the equipment.

18. It may be a false economy for the Department to cut back on its pricing staff, who play a key role in securing value for money on non-competitive contracts. In deciding the resources available for pricing work, the Department should take account of the benefits expected from it.

19. The Department should ensure that prime contractors compete sub-contracts where feasible, and that it has greater oversight of the work undertaken by sub-contractors.

WIDER IMPROVEMENTS IN THE DEPARTMENT'S APPROACH TO PROCUREMENT

20. A key theme of Smart Acquisition is a change to a better, more open and interactive relationship between the Department and industry through the use of partnering to deliver improved long-term value for money. The Department believed that partnering offered suppliers the stability of a long-term relationship with a Department and the opportunity to innovate and find new ways of resolving issues so as to give better value for money throughout the life of a contract. Some of the other potential benefits of partnering are listed in Figure 1. Partnering was also being strongly advocated by the Office of Government Commerce for application across government. The Department currently has 31 partnering arrangements in place and expects the benefits to become clear in the near future.[13]

Figure 1: Anticipated benefits of the partnering arrangements between the Department and industry[14]
  
Incentivisation of performance;
  
Encouragement of investment through a more assured long-term relationship;
  
Encouragement of innovation through a willingness to share ideas;
  
Transparency;
  
A reduction in costs;
  
Fewer disputes;
  
Exploitation of spare capacity; and
  
Encouragement of a sensible allocation of risk.



21. The project management technique of Earned Value Management is intended to enable a contractor to monitor progress not just on the basis of cost and schedule performance but also the value added. It is believed to provide a much clearer indication of progress on complex programmes than traditional monitoring techniques. The Department is already using it on a number of projects, including the Future Offensive Air Capability programme. The Department told us it was convinced that Earned Value Management was best practice project management and it was increasingly an expected, though not mandated, feature of defence contracts. The Department saw itself as something of a leader in the United Kingdom public sector in using this technique.[15]

22. A risk register is a way of codifying a project team's risk assessment of a project, and includes the pricing period as well as the execution of contracts. It can then be used as a tool for managing the project as it matures. The Department's latest guidance, introduced in 1998, encouraged the use of risk registers compiled jointly with industry as an aid to pricing contracts. The survey conducted by the National Audit Office found that very few contracts used joint risk registers. The Chief of Defence Procurement said that there should be joint risk registers on all contracts worth over £1 million, although there would also be a need for each party to maintain a separate risk register.[16]

Conclusions

23. The Department has 31 partnering arrangements in place. These are designed to promote more co-operation with suppliers and lead to the achievement of better value for money. The Department and the Office for Government Commerce should review the lessons to be learned from its growing experience of partnering and consider the scope for its wider application both within the Department and across Government.

24. In applying the Earned Value Management technique the Department should ensure that its project management staff develop the expertise necessary to use it and work closely with other government departments and industry to ensure that the potential benefits are fully secured.

25. Joint risk registers are a useful innovation and the Department should act on the Chief of Defence Procurement's statement that they should now be used on all contracts over £1million.


1  
C&AG's Report (HC 290, Session 2000-01), Executive Summary, para 1 Back

2   ibid, Executive Summary, para 2 Back

3   The recommendations are reproduced at Annex A to this Report, p11 Back

4   5th Report of the Committee of Public Accounts (HC 368, Session 2001-02), Ministry of Defence: Major Projects Report 2000, paras 4 and 5(vi). 33rd Report of the Committee of Public Accounts (HC 247, Session 1999-2000), Ministry of Defence: Major Projects Report 1998, para 5(ix). Back

5   C&AG's Report, para 3.11; Qs 4-5, 148-149 Back

6   C&AG's Report, para 3.2; Qs 6, 81-82 Back

7   C&AG's Report, para 1.9; Qs 62, 108-110 Back

8   C&AG's Report, paras 1.12-1.14; Qs 25, 115 Back

9   Qs 118-119 Back

10   C&AG's Report, paras 2.2-2.4, 2.10-2.11 Back

11   Qs 17, 120-122, 126 Back

12   C&AG's Report, para 2.20; Qs 127, 129 Back

13   C&AG's Report, paras 1.17-1.18; Q14 Back

14   C&AG's Report, para 1.18 Back

15   C&AG's Report, para 1.19; Q27 Back

16   C&AG's Report, para 2.16; Q23 Back


 
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