APPENDIX 2
Supplementary Memorandum submitted by
the Chief of Defence Procurement, Ministry of Defence
MINISTRY OF DEFENCE APPROPRIATION ACCOUNTS
1996-97 (PAC 97-98/252)
QUESTION 154
BACKGROUND
1. The damage occurred during the period September
1992 to April 1993 when the 16 aircraft concerned were undergoing
modification work aimed at extending the fatigue life of the aircraft
(the 25 FI modification programme) at RAF St. Athan. The modifications
were to be carried out on up to 134 aircraft by a working party
employed by Airwork Ltd (AWL) under a contract valued at £4.8
million. It was discovered that damage prejudicial to the strength
of the aircraft structure had been caused, in the form of gouging
of metal surfaces and over-sizing and distortion of fastener holes.
After a technical appraisal of the aircraft, and supported by
legal advice, MOD decided that the damage represented a substantial
failure of performance under the AWL contract, which was terminated
in May 1993. The 25 FI modification programme was resumed satisfactorily
under RAF management and is planned to complete in 2002.
2. There was pressure to get the damaged aircraft
back to the front line because in the meantime the resumed 25
FI modification programme itself depleted the front line. Two
aircraft, believed to be representative of the sixteen, were subjected
to detailed technical examination. The findings were available
early in 1994 and, based on them and subsequent advice from the
contracted design authority, the Department decided that replacement
of the damaged fuselage centre sections of all 16 aircraft with
those from surplus Tornado F Mk 2 aircraft, in storage awaiting
disposal, was the most cost-effective, quickest and lowest risk
solution. This solution brought with it an additional benefit
since the F Mk 2 fuselages had had little use and offered a fatigue
life bonus over the aircraft which had successfully gone through
the 25FI modification programme without damage. This meant that
the ex AWL aircraft would not need to undergo a further, mid-life,
fatigue modification programme which the others were expected
to need later in their lives. The cost of this was estimated at
about £600,000 per aircraft. The value of the fatigue bonus
was accordingly estimated at £9.5 million.
NEGOTIATIONS WITH
BRICOM
3. Negotiations with Bricom (the owner of AWL
at the time of this contract) began in 1995 based on recovery
of the full cost of the rectification, initially believed to be
in excess of £20 million but which was subsequently shown
to be £19.26 million. Their initial offer of compensation,
without admission of liability, was less than the £600,000
they had been paid. Negotiations continued through 1996, and by
the end of that year the Bricom offer had increased to £5
million, but the company made it clear that it would be prepared
to defend an arbitration case rather than increase its offer further.
4. In taking stock with its legal advisers,
the Department took account of the following factors:
(a) Reassessment of the original MOD view
of the damage, based upon surveys suggesting that the two aircraft
initially subject to detailed examination may have been two of
the most serious cases, and not representative of the others,
and that the overall damage might have been less serious than
first thought;
(b) Difficulties in demonstrating to the
standards expected at an arbitration tribunal that AWL caused
all the damage found;
(c) Difficulties in wholly refuting Bricom's
contention that they did not receive the level of technical support
and assistance from RAF St. Athan to which they believed they
were entitled.
It was Counsel's opinion that these considerations
would have substantially reduced any award to the MOD. Recognising
that the legal and administrative costs of arbitration (estimated
at £1.5 million) might not be recovered the Department's
judgement, fully supported by Treasury Solicitor and Counsel,
was that the amounted offered by Bricom should be accepted.
5. There have been two complementary studies
into the lessons to be drawn from this case. The first reported
in December 1993, with recommendations addressing quality management
and the monitoring of training given to contractor's personnel.
Once settlement was reached with Bricom a wider study was initiated
to look at, inter alia, how the case was managed after discovery
of the damage and how legal advice had been brought to bear
in preparing the claim. That study reported in September
1997 and its recommendations are in the process of being implemented.
Chief of Defence Procurement
Procurement Executive, Ministry of Defence
14 April 1998
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