Select Committee on Public Accounts Forty-Third Report

1 The impact of the large cost overruns and delays

1. The Department accepted that the £3.1 billion increase in forecast costs and 9 month average increase in delays on projects in the last year were not satisfactory. It recognised that this poor performance would mean that the men and women on the frontline would be without the capability promised and that the life of existing equipment would have to be extended. For example, delays on the Astute submarine programme will mean that some existing submarines will have to be kept in service longer than planned. For at least an extra 3½ years the Armed Forces will have to do without the increased capability to operate in coastal waters, better intelligence gathering and improved Special Forces deployment capacity which Astute will offer. The Department does not yet know if it will need to refit existing submarines performing similar roles.[3]

2. The cost increases recorded in the Major Projects Report will occur over a number of years and, given that the Department has limited resources, will adversely affect the funding available for other projects. The Military and, ultimately, Ministers will determine which projects should be reduced in scope, delayed or have their lives extended through the annual Equipment Planning process. The process is intended to ensure the Department has a balanced, coherent and affordable 10-year defence equipment programme which best meets changing defence priorities. It is not however designed to identify what new equipment capabilities are being foregone to compensate for cost overruns and delays an individual programmes.[4]

3. Four older projects which began before Smart Acquisition was introduced in 1999, account for 87% of the predicted cost overruns and 79% of the in-year slippage in the Major Projects Report 2003. These projects are the Astute Class Submarine; Nimrod MRA4 aircraft; Brimstone (the Advanced Air-Launched Anti-Armour Weapon); and the Eurofighter Typhoon aircraft. Figure 1 provides further details on the four projects.Figure 1: The "problem" projects in the Major Projects Report 2003
Project and main problems Implications including total predicted cost and time overruns Actions being taken to resolve the problems
The Astute submarine programme suffered from technical and project management difficulties. The Department and BAE Systems acknowledge that they had misunderstood the risks and costs and underestimated the impact of the move of submarine design from the Department to a Prime Contractor. In particular, they underestimated the shortfall in skills and expertise in submarine design.[5] Predicted cost overrun of £1 billion and time slippage of 43 months. BAE Systems bear increased costs of £250 million.

The delay in delivering Astute has meant that the Department does not have the additional capability that Astute will bring - in better intelligence gathering; land attack and improved operation in coastal waters.[6]

The programme has been restructured with the Department and BAE System sharing the cost increases.

The Department and BAE Systems have addressed skills shortages, project management failings and technical difficulties in using computer aided design[7]

The Nimrod aircraft programme has had a history of programme management, technical and commercial difficulties. The predicted cost overrun is £394 million and time slippage of six years. BAE Systems bear increased costs of £800 million.[8]

There will be three less aircraft than planned.[9]

The programme has been restructured with the Department and BAE System sharing the cost increases. The Department has staff co-located with BAE Systems and greater access to cost and programme data.[10]
Brimstone is an air launched anti armour missile. Development has been delayed by 12 months to allow trials of other higher priority weapons (Storm Shadow) to be completed for deployment in Iraq. It has also been delayed a six months to investigate a potential safety issue - a risk of missile collision with the aircraft after launch[11] Predicted cost overrun of £139 million and time slippage of 31 months. Firing trials are continuing.
Typhoon is a fighter aircraft with an air defence and ground attack capability. It was approved in November 1987 to be delivered in 1998 at a cost of £17.4 billion. Typhoon was delivered in June 2003 (four and half years late) and is now expected to cost £19.7 billion, some £2.3 billion more than approved. [12]

The aircraft will have limited operational capability by 2006.

The Department is confident Typhoon will be a very versatile aircraft with great export potential. BAE Systems said that Typhoon represented very good value for money in terms of its capability and its cost.[13]

4. Figure 2 shows that the in-year forecast overruns on the four projects did not all reflect additional payments to contractors. Some 43% of the cost increase reflected internal resource costs, mostly additional interest on capital charges because of delays to the projects. Interest on capital is a non-cash cost that reflects the opportunity cost to the Government of the capital resources the Department has invested, based on the return the Government could have achieved by using the resources elsewhere. The Department acknowledged that the introduction of resource accounting had helped it to recognise that "time is money", imposing a discipline to get on with a project and helping them to make time, cost and performance trade-offs.[14]Figure 2: Breakdown of in-year cost overruns on the four older "problem" programmes
Projects Interest on capital


Additional capability


Payments to industry


Astute 224 100 679
Brimstone 64 - 62
Nimrod 225 10 303
Typhoon 649 97 291
Total £1,162m (43%) £207m (8%) £1,335m (49%)

5. Given the scale of the problems on the projects, and because the Armed Forces still needed the capabilities provided by the Astute submarine and Nimrod aircraft, the Department had been forced to adopt the "least bad" option and re-negotiate these contracts. On whether it was confident that the revised arrangements would deliver Astute and Nimrod to time and cost, the Department pointed to a number of encouraging developments but said it would be unable to give us any firm assurance until next year.[15] The key features of the new arrangements are that:

  • the Department will bear 70% of any cost overruns but receive only 30% of any savings, which looks to be an unfavourable balance;
  • design and development has been split from production and no price has been agreed for the subsequent production stage.

6. The Astute and Nimrod projects are not the only ones where contract negotiations have run into difficulties. In 2000, the Department reduced the number of Brimstone missiles it required by 25% and entered discussions with the contractor, MBDA, over the level of savings that might be released as a result. Brimstone is being procured under a fixed price contract and the Department and MBDA have not been able to reach agreement on an acceptable level of savings. The Department has therefore reinstated the requirement for the original number of missiles at no additional cost to the original price. The Department continues to negotiate with MBDA on other possible options such as allowing MBDA to buy back 25% of the missiles for sale overseas.[16]

3   Qq 1-2, 92-93, 305-306 Back

4   Qq 94-97, 178-182; Ev 20-22 Back

5   Qq 16-22 Back

6   Qq 2-3 Back

7   C&AG's Report, paras 3.2-3.15; Qq 77-84  Back

8   C&AG's Report, paras 3.16-3.23 Back

9   Qq 28-42, 60-61  Back

10   C&AG's Report, paras 3.16-3.23; Q 22 Back

11   C&AG's Report, paras 3.24-3.29  Back

12   ibid, paras 3.30-3.37  Back

13   Qq 6-8, 55, 74, 135 Back

14   Qq 6, 68, 177, 180, 184, 259-268; Ev 39 Back

15   Qq 25-42, 60-61, 69-72  Back

16   Qq 44-49, 55, 64, 180  Back

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Prepared 21 October 2004