12. The Major Projects Report 2001 showed that the
Department was expecting to meet the majority of its Customer's
technical requirements, but not always within time and cost. However,
there was evidence that the Department was continuing to improve
cost control and beginning to bring delays under control, although
slippage remained a problem on some projects.
Options for more flexible contracting for development
work should be explored
13. The Department saw fixed price contracting as
some protection against cost overruns in the wake of Main Gate
decisions. Even on very advanced work, it contracted with industry
on a fixed price basis and very rarely moved away from that. Industry
would probably not want to start work if they did not think that
it was sensible to undertake the work on a fixed price basis.
14. Procurements often spanning many years need to
take account of changing technology and lessons from conflicts
such as Afghanistan. The Department said that flexibility did
not sit well with fixed price contracting, which relied on a tight
specification of what the Department wanted the contractor to
achieve. Fixed price contracting meant that it was less prone
and less able to change requirements during contract execution.
It was therefore questionable whether fixed price contracting
for development was the proper vehicle for testing the boundaries
of what was technically possible. The United States would argue
that there was no sensible way to set a price for something when
you did not know how you were going to achieve it. The Department
had more work to do to find a more flexible framework within which
to deliver value for money from development work.
The Department, with industry, should ensure that
risks are appropriately managed
15. The Department seeks to transfer the cost risk
of resolving technical difficulties, and the delays they cause
to industry, by using performance based contracts, but still bears
the operational implications of delays.
Responsibility for managing risks to delivery of equipment therefore
rests jointly with the Department and industry. The Swiftsure
and Trafalgar Class Submarine Update and the Advanced Short Range
Air-to-Air Missile (ASRAAM) are two projects which provide further
evidence of cost increases and delays stemming, in part, from
industry and the Department underestimating the technical task
and failing to properly manage the associated risks.
16. In the last year, technical factors have caused
12 months slippage and a cost increase of £18 million on
the Swiftsure and Trafalgar Class Submarine Update programme.
Software testing has shown that transfer of data between different
parts of the integrated sonar set (Sonar 2076) is a far more complex
engineering feat than the contractor or the Department had appreciated
and there was more work to be accomplished than they had understood.
17. ASRAAM has been delayed by six months in the
last year due to technical factors, building on earlier difficulties.
The Department believed that it would soon successfully resolve
the dispute with the missile manufacturer that had prevented ASRAAM
from entering service in April 2001 as planned. The Minister for
Defence Procurement subsequently wrote to us confirming that the
Department had resolved the dispute and that the arrangements
agreed for bringing ASRAAM into service would not incur any additional
costs to the Department. Delivery of the first batch of interim
standard missiles offering a significant improvement over the
current Sidewinder missile would begin in January 2002 and delivery
of missiles at a higher interim standard would begin in mid-2002.
Following a continuous development programme, involving
further software upgrades, the Department was hoping to achieve
full operational capability by the end of 2003, but certainly
no later than 2005.
The Department endeavour to recover slippage wherever
18. Asked why there had again been no recovery of
slippage on any of the projects in the Major Projects Report 2001,
the Department told us that it now expected to recover two months
slippage on the Landing Platform Dock (Replacement) programme,
which would bring the in-service date forward from March 2003
to January 2003. In-service dates for programmes were ambitious,
and people within the Department worked hard to try to hold programmes
to them. Once a project slipped, however, the resource earmarked
for sustaining that project was easily absorbed in balancing the
defence budget each year.
The Department over-programmed the defence budget by around seven
per cent, so the first seven per cent of slippage was swallowed
up merely by the defence budget coming back on track.
Incremental acquisition should be planned from
the outset where appropriate
19. Incremental acquisition is one of the principles
of Smart Acquisition by which the Department expects to be able
to bring capability into service earlier and at reduced cost by
reducing the risk of technological difficulties and obsolescence.
In the case of the ASRAAM, the Department was reverting to incremental
acquisition principles because of technological difficulties encountered
and consequential delays to the introduction of the capability.
The Department wanted the full requirement but, given the current
threat most likely to be faced, was prepared to accept a slightly
lower requirement whilst developing a route map to the full requirement
should it need it.
Confidence levels should be shown for Key User
Requirement forecasts in the Major Projects Report
20. In the 2001 Report the Department forecast that
it would meet 93 per cent of the Key User Requirements for
equipment agreed with the Equipment Capability Customer compared
to 98 per cent in 2000.
Although disappointed not to be meeting the higher target, the
lower proportion did indicated that the Department was taking
a tougher view of whether or not it was going to deliver equipment
that met Key User Requirements. Under Smart Acquisition there
was more rigorous scrutiny of the evidence and projects had to
justify to the Equipment Capability Customer how they were going
to meet Key User Requirements.
21. Failure on some Key User Requirements had resulted
from changed budgetary priorities. The Department reviewed its
priorities for the delivery of particular equipments in response
to the nature of the operations it faced and lessons learned in
those operations. There was not the same degree of stability about
the nature of the threat as in the days of the Cold War. Technology
was also developing very fast in some areas, a generation being
perhaps 18 months in some of the information and communications
areas. There was
a trade-off between costs and capabilities, provided of course
that the need foreseen for the equipment would still be met.
22. Smart Acquisition is intended to enable the Department
to buy equipment 'cheaper, faster and better' and over time, noticeable
improvements in the Department's performance against cost, time
and technical parameters should be evident.
The Department has introduced Smart Acquisition reforms across
the Department and needs to measure its impact coherently and
through the life of the equipment.
Clearer and more coherent measures of the impact
of Smart Acquisition are needed
23. The Department's different Smart Acquisition
cost reduction targets - £2 billion over ten years in the
Strategic Defence Review, £750 million over three years in
the Public Service Agreement and £200 million annually
in the Business Plan - are confusing and difficult to relate together
to get a clear picture of total reductions achieved or being aimed
for under Smart Acquisition. The Department told us that the total
cost reductions added up to around £3 billion, some
five per cent of the equipment programme over ten years or a little
more than one per cent of the defence budget.
24. The Department said that the £2 billion
required to meet the Strategic Defence Review target had been
removed from its budget.
Some 70 per cent of the reductions were expected to arise on only
12 of the 80 or so largest projects
In the whole population of projects there were other savings that
could properly be categorised under Smart Acquisition though they
had not been classified in this way. For example, through a combination
of later delivery and a number of other measures associated with
optimising construction, the Astute submarine would save about
£90 million, but it had not been categorised under Smart
Acquisition because it was seen as normal business.
25. The Department had just about achieved the £750
million Public Service Agreement target but believed that it would
struggle year on year to find another £200 million as
called for by the Business Plan and could not continue to do so
projects had very tight estimates and the Department was cautious
about assuming that there must be scope for saving money.
More important was a determination to secure cost efficiencies
by working closer with industry and making sure that project teams
worked more closely together across the Department.
Progress towards the Department's Strategic Goal
should be reflected in the Major Projects Report
26. The Defence Procurement Agency has set itself
a Strategic Goal to deliver 90 per cent of major projects
within approved time, cost and performance parameters by 2005.
The rationale for the 90 per cent was that the population of major
projects making up the Strategic Goal would, at any one time,
be made up of some recently approved that were likely to be on
track and some further advanced, of which 90 per cent might be
expected to be on track as their approved limits for time, cost
and performance were set at 90 per cent confidence. Thus on average,
95 per cent of projects would be on track and achieve their approved
time, cost and performance parameters. There were also many legacy
projects which would not have worked their way out of the system
by 2005, so the best the Department could achieve if every project
stayed within limits was 90 per cent of projects within approval
by 2005. The Department's long-term goal was to get to 95 per
27. The Strategic Goal required 90 per cent of the
major projects to be within approval on all three factors, time,
cost and performance, so that they could not shelter behind one
another. In just
the last year, however, nine of the 20 projects in the 2001 Report
have failed on one or more of the three factors
and several of the others may fail somewhere else over their life,
so the Agency is a long way from getting to its 90 per cent Strategic
Goal. The Department said that the Agency's Strategic Goal was
a tough one, but it was confident of achieving it because the
project approvals against which it would be measured would have
been set more analytically than for projects in the 2001 Report,
which were predominantly legacy projects.
1 C&AG's Report, Ministry of Defence: Major
Projects Report 2001 (HC 330, Session 2001-02), Executive
Summary paras 1-2 Back
C&AG's Report, Parts 1-3 Back
C&AG's Report, para 2.1 Back
5th Report from the Committee of Public Accounts, Ministry
of Defence: Major Projects Report 2000 (HC 368, Session 2001-02) Back
C&AG's Report, para 2.7 Back
Qs 4-8 Back
C&AG's Report, para 1.24 Back
para 1.11 Back
Qs 1-2 Back
Qs 17-18 Back
C&AG's Report, para 1.3 Back
Qs 89, 102 Back
5th Report from the Committee of Public Accounts, Ministry
of Defence: Major Projects Report 2000 (HC 368, Session 2001-02),
para 36 Back
Qs 45, 64 Back
C&AG's Report, Appendix 2, p38 Back
Ev 18 Back
Qs 65-66 Back
Qs 68-69 Back
C&AG's Report, para 3.7 Back
C&AG's Report, para 1.29 Back
C&AG's Report, para 3.1 Back
ibid, para 3.12 Back
Qs 53-56 Back
C&AG's Report, Figure 16 Back
Qs 50-51 Back
Defined as post-Main Gate projects with a forecast spend in excess
of £20 million and yet to enter service Back
C&AG's Report, para 1.3 Back
C&AG's Report, Figure 1 Back