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.
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.
1: Illustrative potential impact of cost overruns
|Six Type 45 destroyers ( cost estimated at approval)
|Eighteen Nimrod Maritime Patrol and Attack aircraft (currently forecast)
|Three Astute Class submarines (currently forecast)
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.
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:
- 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.
Projects cancelled in the last two years
|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.
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.
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.
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.
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
4 Qq 19-20 Back
Qq 42-45; C&AG's Report, Figure 2, p6 Back
Ev 16 and Ev 9, footnote 4 Back
Q 18; Ev 16 and Ev 9, footnote 4 Back
Qq 3-5 Back
Qq 41-45; C&AG's Report, Figure 9 Back
Qq 96-99 Back
Qq 1-2 Back
Qq 47-48 Back
Qq 2, 50; Defence Procurement Agency, Annual Report and Accounts
2003-04, HC 1079 Back