Examination of Witnesses (Questions 1
TUESDAY 18 OCTOBER 2005
COLES CB, MR
Q1 Chairman: Good morning. Welcome
to the first evidence session of the Defence Committee of this
Parliament. It is about the Future Carrier and Joint Combat Aircraft
Programmes Inquiry. I would like to welcome everybody in the back
of the room as well as those who have kindly agreed to come and
give evidence to us. Firstly, if I might welcome Mr Coles, Mr
Cameron, Mr Geoghegan and Mr Pryor. There are a number of questions
which we need to go through. This is a very long running programme
which is absolutely essential to the country's strategy in defence
terms and we will need to come back to it over the years. I wonder
if I can begin by asking if you would pleaseperhaps this
is best addressed to you, Mr Colesset out for us how the
Alliance approach is expected to work? What will the role of the
Ministry of Defence be compared with the other Alliance partners.
That may seem a large question, but I would nevertheless be grateful
if you can cover it in five minutes, or preferably even less,
because we have got a lot of questions that we need to get through.
Mr Coles: I will try my best,
Chairman. Essentially, an Alliance for a major projectquite
common in other industrieshas a number of partners who
have specific roles and responsibilities that progress the programme,
including the clients. They are combined by an over-arching Alliance
agreement to deliver the programme which they all buy intothat
is whatever the cost applying to the schedule isor in the
risk reward, including the clients. Most importantly, each of
the contractors has a works contract which specifies precisely
what their contribution is to the various parts of the programme.
That is how it is set out in those terms. It takes a long time
to reach those agreements because each company in the Alliance
has to assess its role and its responsibilities and those of its
partner companies in the Alliance to share in the risk and reward.
It takes a long time to reach an agreement in that process. Each
company brings its own specialist skills and each other company
challenges that company to deliver them in the best way. Therefore,
we deliver the best for the project, not necessarily the best
for each company. It is a very different way of contracting and
a very different way of behaving across the companies, including
Government officials in those projects. That is a broad summary
of how it is set out to work.
Q2 Chairman: Would any of your colleagues
like to add anything to that or comment on it?
Mr Cameron: I would just add that
being part of the Alliance is being part of a co-operative relationship
which brings to bear the best intellectual capacity of the Alliance
members in the execution of this very important project. We are
very pleased to be part of that relationship in that co-operative
approach to delivering CVF.
Mr Pryor: I would like to echo
John's comment about the length of time it takes to form an Alliance.
We joined the Alliance in the latter months to bring our expertise
in the offshore industry Alliances, to meet the best investing
parts of building these aircraft carriers. It is our experience
that it takes time to settle down relationships between the companies
and between individuals in their companies so that we can present
a seamless product to each other and to the completion of the
Q3 Chairman: Would you say that two
and a half years was nevertheless quite a long time to take in
forming an Alliance and finalising those arrangements?
Mr Pryor: Chairman, I am not sure
we have been going at it for two and a half years in the form
of Alliance-building mode; the Alliance members you see in front
of you here have been at it since February this year.
Q4 Chairman: What was it that was
identified between 2003 and 2005 for the decision to prompt the
Mr Coles: We all recognise that
this project is beyond any one company to deliver. Also, we recognise
that business as usual, ie the way we have done things before,
would not be successful for this programme. We need to bring in
some different views, different talents and different experiences
of different industries to bear down on the way we have done business
in the past. That was the background to bring in the Physical
Integrator, a different perspective on how to run a complex project
on multi-sites actively bringing skills sets in. That is how the
origin of all this started to bring in a Physical Integrator.
Q5 Mr Jones: On that point, is the
reason why we have an Integrator, the fact that the contract was
awarded both to BAE Systems and Thales? What was going to happen
if previously one of those solely had been awarded the contract?
Mr Coles: Of course we would not
do it that way and we elected not to do that. We elected to bring
in a third party to bring those skills sets together, those very
skills sets this project needs to assemble it and to complete
it on many sites.
Q6 Mr Jones: The answer to that question
is if we had given it to Thales or BAE Systems it would not have
needed a Physical Integrator.
Mr Coles: If we had the prime
contract, of course we would not have done it that way round,
you are quite correct.
Q7 Mr Jones: A political fudge has
led to more cost?
Mr Coles: Indeed not; the exact
opposite, I would say. You bring in a different talent into that
Q8 Mr Jones: No. If you had awarded
it to a prime contractor you would not have needed to employ a
systems integrator, would you?
Mr Coles: Of course not.
Q9 Mr Jones: Therefore there was
a cost involved that you did not need?
Mr Coles: I do not accept that.
Q10 Chairman: With whom will the
Ministry of Defence be contracting if there is not a prime contractor?
Mr Coles: It will be contracting
with each of the companies in the Alliance separately and collectively.
Q11 Chairman: How is the allocation
of work and risk going to be sorted out if the Ministry of Defence
is contracting with everybody?
Mr Coles: The precise roles and
responsibilities of each member of the Alliance will be agreed
and they will have to accept as part of that agreement a risk
reward in the Alliance contract. Each company has a specific task
agreed un-contractually and they buy into that by taking a share
of the risk and the reward within the project. All which will
be put into the contract as the over-arching contract, the individual
contracts will say what they have to do and the risk reward is
built into that mechanism.
Q12 Mr Hancock: If that is the case,
who carries the risk if one element of the Alliance fails to deliver
on time so causing a cost-overrun to another member of the Alliance
partnership? Who then meets the cost, the Alliance generally or
Mr Coles: The individual parties
will all share in the risk, that is the difference. Each party
is carrying the risk in part for its colleagues. Perhaps one of
my colleagues will be able to amplify that.
Mr Pryor: Perhaps I can build
on that point. The point of the Alliance is that we all sink or
swim together, so if one of my Alliance colleagues or partners
fails in his scope of work, I take the risk on that failure, likewise
he is taking the failure on my scope of work. We believe that
it is a stronger bond to deliver the outcome of the project than
being independent and saying, "It is your fault, it is not
my fault". That is another reason why it takes so long to
build the Alliance because we have to agree the risks that are
being handled by my partners and they have to agree the risks
that we are handling and the quantification of those risks in
monetary terms. That is part of the time it takes to nail that
down, as John said, in the collective agreement, which would be
the Alliance contract, which is a binding contract, and the individual
works' contracts from the Ministry of Defence on the individual
Q13 Mr Harvard: If it is awarded
to one company, then you do not need the Physical Integrator,
but we have now got two, so you need the Physical Integrator.
Potentially we may even have three, of course, if the French get
involved; we will get on to that later on. The point my colleague
made about extra costs, surely what we are really seeing here
is that the Physical Integrator is an extra cost because of the
deficiencies. It seems to me that you have just described a very
differentiated process of contract negotiation and contract compliance
which also needs to be done now as well which you might not have
needed in quite the same way if you had awarded it to one organisation.
I think we are seeing, are we not, the fact that project management
skills and various other skills were deficient in the DPA and
possibly in the MoD and this is some sort of policeman gatekeeper
contract compliance organisation that is going to run in order
to make a project work in any event, is it? You make the savings
because you get it right rather than get it wrong, but there is
an extra cost.
Mr Coles: In any project you would
need all the skills sets that a Physical Integrator in this project
would bring. You would need them anyway, someone would have to
do that. Whether it is done within one company and you will bring
a second or a third company to it is not really the issue, it
is that skills set they bring, that experience and knowledge base
they bring to what has been our way of doing it before.
Mr Geoghegan: I think it is worth
noting that from the outset, even when this competition was run
essentially under the heading of "prime contractorship",
both of the competing companies, Thales and BAE Systems, put forward
teams of companies to respond to that competition. Both sides
recognised that it would require a number of companies to come
together, both in terms of skills and capacities, to respond to
this project. Whether it be through a prime contractor or whether
it be through the current proposed Alliance structure, there would
have been a series of interfacing contracts that would have to
have been put in place. In many cases the prime contractor would
have been handling that interface process. This is another form
of dealing with a complex set of project interfaces of contracts.
Q14 Chairman: Sir Dick Evans told
this Committee last year that he was worried about the whole thing
developing into a sort of procurement committee. Do you think
he was wrong to express concerns about that?
Mr Geoghegan: I think those concerns
come with looking at something which is new and seeing a lot of
interfaces. A lot of the attention that we have been putting on
the programme over the last 12 months has been trying to identify
the minimum number of interfaces that are required within this
Alliance and putting the required governance around those.
Q15 Mr Jones: I do like straight
answers, but the quick answer to it is you have put an extra layer
in here because the prime contractor would have been doing that
job. My fear isand I think Sir Dick Evans said thisthat
you are going to get a procurement committee here, are you not?
The fact is that if you had awarded it to BAE Systems or Thales
they would have been the main integrator, you would not have then
had to appoint a system integrator to do that because they would
have done it. Surely there is an added cost there. I will try
again but obviously you are not going to answer it.
Mr Coles: I will answer it again
and if anyone wants to add anything, they can. The same task would
need to be performed whether in an Alliance or in a prime contract
or a joint venture, the same task would need to be done, so it
is not an extra task we are bringing in.
Q16 Mr Jones: It is an extra cost.
Mr Coles: It is not an extra cost
either. It is a question of who does that task and the experience
they bring to execute that task from other industries and other
knowledge bases that we may not have brought in the past. That
is how Alliances work. We bring together the skills of a number
of parties who combine together to produce a superior outcome.
Q17 Mr Jones: What was wrong with
BAE Systems, for example, or Thales being the prime contractor?
As your colleague said, clearly you had to negotiate with different
companies, but why have you got two possible prime contractors
now with another organisation sitting above them as an integrator?
That must add a cost. You cannot tell me it has not.
Mr Coles: I do not agree that
it adds a cost, it is a different way of running the project.
Q18 Mr Jones: It is a bureaucratic
way of doing it.
Mr Cameron: I would not agree
with that. If you look at the experience of the offshore industry
in particular and the construction industry, the use of Alliances
to drive out cost and change behaviour can be instrumental in
bringing on some of these projects, which would never have gone
ahead without an Alliance, and we want to bring that focus to
this particular project.
Q19 Mr Jones: Are you saying that
either Thales or BAE Systems were not capable on their own of
being the prime contractor?
Mr Coles: We needed all the skills
sets, both Thales, BAE Systems and others to bring this project
on. It is a complex project.