SMART ACQUISITION: EFFORTS TO IMPROVE PROCUREMENT
26. Smart Acquisition requires projects to produce
three-point cost and timescale estimates at 30 percent, 50 percent
and 90 percent confidence levels. In giving evidence to our predecessors
on the Major Projects Report 1994, the Department stated that
three-point estimating was used routinely on all projects and
undertaken thoroughly. Yet the National Audit Office found that
only two of the ten assessment phase projects had reliable three-point
cost and time estimates. Asked why this was so, the Department
could not justify its record and agreed that it was not satisfactory
that it had failed to fulfil its assurance to the Committee. But
it did point out that since 31st March 2000 (the datum
of the National Audit Office report) there were only three projects
without three-point estimates. As part of the changed procurement
strategy the Department had asked bidders for enough data to support
three point estimates and promised the Committee would see these
as soon as they were available.
27. In response to questioning on whether there was
a major project that it was proud of, the Department listed Trident,
Tomahawk and the recovery of the Challenger 2 programme. When
it was suggested that Trident and Tomahawk were largely off-the-shelf
projects where the Department did not have a great deal of scope
to alter the specification the Chief of Defence Procurement responded
that the nuclear propulsion plant did not feel off-the-shelf to
28. The contract for the Type 45 Destroyer is arbitrated
under British law, whilst the contract for its PAAMS missile system
has been placed under French law. The Department was asked what
would happen if the two systems did not work together and it was
not clear which half was the problem. The Department admitted
that it carried the risk, but was confident that PAAMS was required
to conform to all of the interface specifications which had been
agreed with the ship project.
29. In giving evidence on the Major Projects Report
1998 the Chief of Defence Procurement stated that there were Athe
best industry people in the world@
working on BOWMAN and that Athey
were close to a cost-effective solution@.
Since the competition has subsequently been re-opened, some 12
years after the requirement was first raised the Department was
asked why it had not seen the difficulties with the ARCHER industrial
collaboration earlier and why it had taken so long to decide what
to do. The Department said that ARCHER was completely re-energised
in 1999 as a result of the consortium being managed properly by
BAE SYSTEMS. They had brought in new staff and were supported
by their consortium members both from the United States and from
France, with the best people that could be found. The Department
had, however, been very keen to make sure that a decision on whether
or not to continue with ARCHER was based on their final bid and,
right until the last few days of the bid, it was not clear whether
it was going to be satisfactory or not. The Department said that
it was very careful about contractors'
extravagant promises, particularly when they were made near the
deadline on the basis that it had become a must-win project for
them. The fact that ARCHER put so many changes into their bid
in the last few days had caused the Department to look closely
at whether they would be able to live up to their promises.
30. The Department was asked why technical delays
had emerged on the Hercules C-130J programme, since at the time
the contract was awarded there were categorical assurances from
Lockheed-Martin and also the RAF that there would be no delays.
The Department said that the Hercules C-130J was a new aircraft
with new engines, propellers and avionics and that Lockheed Martin
had underestimated the development content. The Department did
not understand why the company made an under-estimate because
they built its predecessor, the C-130K, and knew more about this
aircraft than anybody else in the world.
The Department also said it recovered substantial liquidated damages
from Lockheed-Martin as they fell due, which had at least compensated
it for the running costs of the existing United Kingdom C-130K's.
31. The Chief of Defence Procurement believed that
the Department needed to find better ways of incentivising contractors
to deliver on time. The Department had plenty of >sticks'
but needed to balance them with >carrots'.
For example, the Eurofighter programme included some incentives
for doing things on time by using the retentions on the progress
payments on the contract, which were planned to be withheld to
the end. Now, if industry delivered the first, eighth and final
Tranche 1 aircraft on time they would receive bonuses.
32. Our predecessor's
report on the 1994 Major Projects Report recorded that the Department
had stated that it used three-point estimates on all major projects.
It is therefore surprising that only two of the ten assessment
phase projects in the Major Projects Report 2000 had three-point
estimates for time and cost at 31 March 2000. The Department could
not justify this failure, although it did make progress quickly
in generating three-point estimates after the National Audit Office
had highlighted the problem. We also note the Department's
assurance that three-point estimates for Bowman will be available
soon and expect all projects in the Major Projects Report 2001
to have robustly generated three-point estimates.
33. The Department highlighted the Tomahawk Land
Attack Missile and Trident missiles as successful projects. One
obvious common factor is that both of these projects were largely
off-the-shelf purchases from the United States, but the Department
should look to identify other common features which may enable
it to emulate these successes in future.
34. The Type 45 destroyer is an anti-air warship
being procured in two parts comprising the warship and the Principal
Anti-Air Missile System (PAAMS). The Department recognised the
risks but assured us that it was confident there would be no interface
problems between the warship and PAAMS. That would be a significant
achievement, and we look forward to hearing whether the Department
has achieved it.
35. The Department said that it was now more cautious
about accepting over optimistic bids from industry. For example,
it had not continued with the ARCHER industrial prime collaboration
contractor on BOWMAN because it believed that the company was
making extravagant promises that would not be deliverable. Such
scepticism is a welcome development.
36. The Department seeks to transfer the cost risk
of resolving technical difficulties and the delays it causes to
industry by using performance based contracts. For example, the
Department received substantial liquidated damages from Lockheed
Martin in respect of the delays to the Hercules C-130J. Whilst
liquidated damages may offset the costs of delays the Department
still bears the operational implications of the delays, a fact
which re-emphasises the importance of planning to and agreeing
realistic timescales at the outset.
37. The Department regards control of costs through
contracts as straightforward, but believes that incentivising
contractors to deliver on time is more difficult. The principle
of incentivising contractors to deliver on time is a good one,
but it is important that incentives are based on a thorough understanding
of what is achievable and are effective in securing added performance.
The Department needs to ensure that it does not give contractors
extra benefits for simply doing what they should be doing anyway
under the contract.
39 Qs 207B209 Back
40 Q209 Back
42 Q8 Back
43 Q285 Back
44 Q286 Back
45 Q278 Back