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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
|Figure 1: Anticipated benefits of the partnering arrangements between the Department and industry|
Incentivisation of performance;
Encouragement of investment through a more assured long-term relationship;
Encouragement of innovation through a willingness to share ideas;
A reduction in costs;
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.
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.
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.
C&AG's Report (HC 290, Session 2000-01), Executive Summary,
para 1 Back
ibid, Executive Summary, para 2 Back
The recommendations are reproduced at Annex A to this Report,
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
C&AG's Report, para 3.11; Qs 4-5, 148-149 Back
C&AG's Report, para 3.2; Qs 6, 81-82 Back
C&AG's Report, para 1.9; Qs 62, 108-110 Back
C&AG's Report, paras 1.12-1.14; Qs 25, 115 Back
Qs 118-119 Back
C&AG's Report, paras 2.2-2.4, 2.10-2.11 Back
Qs 17, 120-122, 126 Back
C&AG's Report, para 2.20; Qs 127, 129 Back
C&AG's Report, paras 1.17-1.18; Q14 Back
C&AG's Report, para 1.18 Back
C&AG's Report, para 1.19; Q27 Back
C&AG's Report, para 2.16; Q23 Back