Select Committee on Public Accounts Third Report

1  The impact of continuing large cost overruns and delays

1. Six years since the introduction of Smart Acquisition, there is still little evidence of the Department having improved its performance in delivering projects to cost and to time. Smart Acquisition is at risk of becoming the latest in a long line of failed attempts to improve defence procurement.[4]

2. The in-year increase of £1.7 billion in the forecast costs of the projects in the Major Projects Report are in addition to the £3.1 billion recorded in the previous year, and the Department will have to cut or cancel projects to compensate for these overruns. The combined value of overruns in these two years alone is £4.8 billion. For comparison, this sum would have paid the illustrative costs of the programmes shown in Figure 1.[5]

Figure 1: Illustrative potential impact of cost overruns

Military equipment Cost
Six Type 45 destroyers ( cost estimated at approval) £5 billion
Eighteen Nimrod Maritime Patrol and Attack aircraft (currently forecast) £3.6 billion
Three Astute Class submarines (currently forecast) £3.5 billion

3. Similarly, the in-year delay of 62 months to the forecast in-service dates for those projects in the Major Projects Report is in addition to the 144 month delay recorded in the previous year. Taken together these figures mean that the 20 projects have each slipped by an average of more than 10 months in the last two years. These delays mean that the Armed Forces will have to operate existing equipment which is often less capable and less efficient, for considerably longer than planned.

4. The Department's planning process is designed to deliver the optimum capability within the resources available. Its Equipment Plan is updated annually to reflect changes in policy, technology, the means for dealing with a threat, in the allies' intentions and to cope with cost growth.[6] The large cost growth and delays in the last two years have resulted in changes in the Equipment Plan, but the Department has found it difficult to identify those programmes which have been directly cancelled or delayed because of other cost overruns. Typically, the Department considers the following actions in response to a cost overrun or delay[7]:

  • reduce the capability of equipment being procured within the project;
  • reduce the quantity of equipment being procured within the project;
  • introduce the capability more slowly than originally planned within the project or programme; or
  • try to offset overruns or delays on an individual project by savings or under-runs elsewhere.

5. Since 1999, projects have been approved on the basis of 'highest acceptable' costs, and 'latest acceptable' in-service dates, that is, projects are approved as long as they do not exceed either of these parameters. There is little evidence to show that projects are in fact cancelled or changed where they breach the highest and latest approved parameters for costs or in-service dates. Project teams are however required to seek re-approval when they exceed approved cost or in-service dates. The Department saw re-approval as not just a formality and pointed to the examples set out in Figure 2.[8]

Figure 2: Projects cancelled in the last two years

Equipment Reason for cancellation
The Medium Range TRIGAT (third-generation anti-tank missile) When the United Kingdom signed the Memorandum of Understanding in July 1999, stating its intention to proceed to Industrialisation and Production, the Department believed Belgium and the Netherlands would sign the Memorandum in a similar timescale. By July 2000, the Memorandum of Understanding had still not been completed and the uncertainty and open ended delay led the UK to decide not to proceed to the next phase.
The Multi-Role Armoured Vehicle The vehicle is not ideally suited to the type of operations now envisaged under the Strategic Review New Chapter and other developing policy work. Experience gained in recent military operations around the world has demonstrated the need for rapid deployability in expeditionary operations. This vehicle cannot meet that requirement. The capability requirement will now be pursued through the Future Rapid Effect System.
Area Defence Weapon Cancelled before approval on value for money grounds and because of operational limitations. The capability requirement will be pursued through a new project, Future Counter Mobility Capability.
Counter Anti-Radiation Missile Suite Cancelled during the Assessment Phase on value for money grounds. The capability will now be delivered by the Automated Software Adaptive Radar programme.
Mine Detection, Neutralisation and Route Marking (Route Proving) Cancelled during the Assessment Phase because the technical solutions did not provide adequate military capability.
Laser Identification Experiment Airborne Technology Demonstration Cancelled after submission of final business case on affordability and value for money grounds. It is envisaged that the capability requirement will be met via other networked enabled capability linked sensors.

Source: Ministry of Defence

6. There are a number of factors which make it difficult to cancel a project when it has breached its approval. The project is likely to be well underway and have incurred significant expenditure and contractual conditions may mean that there are little, if any, future savings. Six of the projects in the Major Projects Report 2004 have breached their cost or time approvals and yet continue as before.[9]

7. It is not always clear whether changes to the scope of projects are the result of cost increases or changes to requirements or both. For example, it was originally planned to purchase 12 Type 45 destroyers when the project was approved in 2000. The Department is now planning to acquire only eight ships. The reduction in numbers was not attributable to any one factor but to a combination of getting greater capability from each destroyer; the need to contain costs after increases in parts of the project (mainly on the Principal Air-to-Air Missiles to be fitted to the destroyers); and the reduced threat from enemy aircraft and missiles.[10]

8. Although it had previously given assurances to the Committee on improving its performance, the Department had expected 2004 to be another poor-performing year. The bulk of the latest reform programme was introduced in April 2005, after the end of the period covered by the 2004 Report. The reforms would take time to implement, and the benefits would only progressively be apparent in improved cost and time performance.[11]

9. The Department was not yet ready to commit to a definite timetable for consistent improvements in the results of the projects reported within the Major Projects Report. The Major Projects Report covers the 20 projects in the main investment phase which have the largest amounts yet to be spent, so many of the large projects remain in the report for many years. Where such projects had been approved on the basis of insufficiently informed business cases, the Department thought it quite possible that problems would continue to emerge in future.[12]

10. The Department has set the Defence Procurement Agency key targets to reduce time and cost overruns on a wider range of projects than the Major Projects Report. The Defence Procurement Agency's annual Key Targets prescribe timescales for controlling costs overruns and delays of some 65 projects each valued at over £20 million. Current published targets are for 2005-06, by which time the Agency expects to bring in-year delays to an average of 0.7 months, and in-year cost slippage to 0.4%.[13]

4   Qq 19-20 Back

5   Qq 42-45; C&AG's Report, Figure 2, p6 Back

6   Ev 16 and Ev 9, footnote 4 Back

7   Q 18; Ev 16 and Ev 9, footnote 4 Back

8   Qq 3-5 Back

9   Qq 41-45; C&AG's Report, Figure 9 Back

10   Qq 96-99 Back

11   Qq 1-2 Back

12   Qq 47-48 Back

13   Qq 2, 50; Defence Procurement Agency, Annual Report and Accounts 2003-04, HC 1079 Back

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Prepared 13 October 2005