Summary
In 1998 the Ministry of Defence (the Department) assured the Committee of Public Accounts that it was confident of delivering the project for the construction of nuclear submarine facilities at Devonport at the target cost of £576 million. Since then there have been very large cost overruns; and in August 2002 costs were estimated to total £933 million. The Department will meet nearly all of this, paying £890 million in total, £314 million more than its previous assurances to the Committee. By its own admission the Department has partly funded poor performance by Devonport Management Limited (DML), the prime contractor, met the cost increases resulting from nuclear safety regulation, and borne the cost of all other risks originally transferred to DML. Any further increases in the project's costs will be funded by DML but recovered from the Department via the submarine refit programme as an overhead charge.
The Department considered that the prime contract transferred the majority of risks to DML. In practice, however, the Department retained significant risks. It shared the design risk, as well as responsibility for satisfying the nuclear regulators. Because of the importance of the facilities to the UK's strategic nuclear deterrent, the Department could not accept any slippage. DML had limited funds and had negotiated a £35 million maximum liability and, if DML were to breach the contract, the Department would have had to bear the cost of completing the facilities—a risk highlighted by the Committee in 1998. Despite all these factors, the Department originally took a 'hands off' approach to the management of the project.
On the basis of a Report by the Comptroller and Auditor General we took evidence from the Department, the Nuclear Installations Inspectorate, and DML on 7 April.[1] We considered the need for the main parties to work together; whether the Department's attitude to risk transfer was realistic; and the risk of further increases in the final cost to the taxpayer.
We draw the following main conclusions from our examination.
- The main parties to this project did not come together early enough to engage on those issues which were key to its successful implementation. The Department, DML, and the nuclear regulator began work on the project four years before contract signature. Despite this, work on the detailed design, safety cases and construction did not progress smoothly. The parties failed to establish in advance how the civil nuclear regulatory regime would apply, and what the role and responsibilities of each would be. As a result, there were unforeseen additional requirements and design and construction work had to be redone at significant cost.
- The Department's attitude to risk transfer was unrealistic. As it considered that it had transferred the great majority of risk to DML, it took a hands-off approach to the project's management. In certain areas, however, risks were shared with the Department retaining significant design and nuclear responsibilities. The true extent of any transfer had also been limited by DML's maximum liability, and there were higher-level risks which the Department could not transfer, such as the impact on the United Kingdom's strategic nuclear deterrent if the facilities were late. Before entering into a contract, departments should undertake risk assessments which cover not only the risk allocation explicitly set out in the contract but also those higher-level risks which lie outside it. Contracts should contain the necessary monitoring and control mechanisms to enable departments to manage effectively those risks they retain.
- From a situation where DML supposedly bore the majority of risk, the Department now bears virtually all risk itself. It has agreed to meet the great majority of the cost increase to date, and has, in effect, assumed liability for any further cost overruns as it has placed no limits on DML's capitalisation of additional costs. The Department will also contract separately for the final phase of the project. It will need to exert tight control over the remainder of the project to avoid further increases in the cost to the taxpayer.
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