Select Committee on Public Accounts Third Report

Conclusions and recommendations

1.  The £4.8 billion of cost overruns recorded in the Major Projects Reports 2003 and 2004 will put further pressure on an already tightly-stretched defence budget. Although the Department has introduced some measures to improve performance, the cost overruns in 2003 and 2004 are worse than at any time in the last decade. It is likely that the Department will have to cancel or delay projects to compensate for the substantial cost overruns, and that the Armed Forces will either not get or have to wait longer for the new equipment they need.

2.  The Department could not say when it expected to see consistent year-on-year improvements on the cost and time performance of the 20 major projects responsible for some 75% of annual expenditure on equipment. The Department has, however, set the Defence Procurement Agency key targets to reduce time and cost overruns on some 65 projects each costing over £20 million. This population includes the 17 projects in the Major Projects Report which have not yet achieved their in-service date. The Department will need to focus particularly closely on the 20 largest projects because they represent the real management challenge and are where most money is lost.

3.  The amount of work undertaken in the assessment phase is still not sufficient to enable sensible investment decisions to be taken. The Department's own Smart Acquisition guideline suggests that up to 15% of the cost of a project should be spent in the assessment phase. The actual amount of money spent in the Assessment phase is only 5%, but in any case the Department should focus less on the input and more on the actual progress achieved. It should only approve business cases if the project can be shown to have reached the appropriate level of maturity in all aspects. The Department should develop measures of maturity for procurement strategy, supplier relationships, technical risk and finance for projects.

4.  The Department is seeking to design appropriate procurement strategies for complex projects, including innovative approaches such as the Alliance under which it plans to run the Carrier Strike programme. Such innovations recognise that conventional approaches to assigning risk to the main contractor do not necessarily put the risk where it can best be managed. Under the Alliance, all parties work together to achieve a common objective, with a collective sharing of risks and rewards. Where Alliances are used, the Department should develop explicit criteria to select the right partners, and be ready to exclude contractors from an Alliance if they do not measure up.

5.  In the past, the Department and industry have sought to provide the most advanced capability possible to the Armed Forces. There has been a lack of willingness to trade off capability, time and cost to manage cost increases and to ensure more timely delivery of an effective level of capability. The Department needs to be willing to sacrifice specific elements of capability on particular programmes to meet time and cost constraints, if it is to deliver timely and cost effective capability from the defence budget as a whole.

6.  The Department's latest programme of reform to improve defence procurement, DPA Forward, will require better joint working amongst various Departmental stakeholders to ensure success. Strong leadership will be crucial in determining the success of the reform programme. The Department needs to be able to evaluate the strength and consistency of the leadership of the programme at all levels using, for example, performance against targets and 360 degree reporting mechanisms.

7.  The placing of Financial Controllers in project teams should support better financial management and decision making on projects. The Department should consider whether it lacks other key skills required to deliver a complex acquisition programme, such as project financing and relationship management, in the light of its increasing use of innovative procurement strategies.

8.  This Report once again records the woeful performance of the Department in procuring defence equipment, and its inability even to follow its own, broadly sensible, procurement rules. To all appearances however, no-one is ever held responsible for these failures, and the careers of those involved remain unaffected.

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Prepared 13 October 2005