Select Committee on Public Accounts Third Report

2  Handling large complex projects

11. One of the principles underpinning Smart Acquisition is to invest more in the early project phases. Under the Smart Acquisition lifecycle, projects progress through six stages: Concept, Assessment, Demonstration, Manufacture, In-service, and Disposal. The main investment decision, called Main Gate, occurs at the end of the assessment phase. Performing sufficient work in the assessment phase is essential to allow a fully-informed investment decision to be made. The Department's own guidance says that up to 15% of the overall procurement budget should be spent at this phase, although the exact amount will depend upon the complexity of the project.[14] For example, the Department spent 4.7% on the assessment phase of the Successor Identification Friend or Foe system and delivered it within time and cost. Assessment phase spending should not necessarily reach 15% for each project, but the Department accepted that it ought to be significantly higher than current levels. Historic levels have been as low as 1% on complex programmes such as the Astute Class submarine and Nimrod MRA4 aircraft where significant problems have arisen in the subsequent demonstration and manufacture phases.[15]

12. The Department said it had now implemented procedures to confirm that all projects seeking Main Gate approval from the Investment Appraisals Board had undertaken sufficient assessment phase work. For all business cases submitted to the Board, the onus would be on the sponsors of the submission to demonstrate how much assessment phase work had been done, and how that amount of work had led to an informed business case for an investment decision. The amount spent on the assessment phase as a percentage of the total estimated procurement cost would be shown, and differences from the 15% target would need to be explained.[16]

13. The Chief of Defence Procurement acknowledged that too many inappropriate contracts for high technology projects had been let in the past. Where projects were challenging, risky or where requirements were hard to define from the outset, the Department needed to explore new avenues such as different contracting mechanisms or a different customer-industry relationship.[17]

14. The Department aims to match appropriate procurement strategies to individual projects on a case-by-case basis. The different strategies employed include Private Finance Initiative / Public Private Partnerships, leasing, multi-nation collaborative programmes, partnering, and Alliancing. The decision to adopt a particular strategy will be affected by factors such as affordability, technological risk, and the possibilities of sharing technology, risks or rewards with industry or other nations. But different strategies carry different risks. The multi-nation collaborative route, for example, has often led to delays while other partner nations reach agreement on the Memorandum of Understanding or the contract. This has happened on the Typhoon aircraft, Beyond Visual Range Air-to-Air Missile (BVRAAM), and the A400M heavy lift aircraft in each case resulting in significant time and cost overruns.[18]

15. The Department plans to run the Future Aircraft Carrier project under an Alliance strategy. Although Alliances have been used by the Australian Ministry of Defence, and in the oil and gas industries, this will be the first Departmental procurement using this strategy. Alliancing allows the customer to pool the best elements from different packages and different contractors with a joint sharing of risks and rewards amongst the Alliance members. For Alliancing to succeed, there must be a strong relationship between the Alliance members. An independent review of the Future Aircraft Carrier project by the Office of Government Commerce concluded that for a project with this high level of risk, Alliancing is an appropriate way of proceeding, and this view has been supported by the Treasury. The Future Carrier Aircraft is further complicated by the complexity of the project with high construction and integration risk, and the role of Physical Integrator has been created to specifically oversee this. Where the Department has reason to believe that prospective members of an Alliance will not be able to work smoothly with other Alliance members or stakeholders in the project, it needs to exclude them from the arrangement. [19]

16. Given the long timescales of defence procurements, which can span 15 years from the main investment decision to delivery of the equipment into service, planning for capabilities involves making assumptions about the nature of future military operations. The process starts with the Defence Strategic Guidance, which considers what the world will look like in the timescale. The Department then produces possible future scenarios based on the Guidance, with illustrative campaign plans. It then undertakes an audit of capability, produces a prioritised list of capabilities, and undertakes work to understand how those capabilities might be translated into platforms and equipment. It is important that all relevant stakeholders (including industry) engage in this early stage to ascertain the requirement and feasibility of projects, as illustrated in Figure 3. Cost increases often occur on projects where requirements are changed some way into the demonstration and manufacture phase. Early and full discussion with the capability customer and industry helps to minimise this risk.[20]

Figure 3: The key stakeholders in the Department's acquisition community

Source: National Audit Office

17. The setting of capability is further complicated by the need to balance cost effectiveness with the complexity of the project. Equipment which can fulfil more than one role may be more effective than buying different types of equipment which are single role. However, building more roles into a piece of equipment will increase its complexity.[21] Typhoon, for example, was originally designed to be an air-to-air superiority fighter to combat the Soviet threat. Since it was approved in 1988, the shape of the world and military operations has changed, and there is now a greater need for aircraft which can perform precision attack of surface targets. The updating of capabilities on Typhoon has been designed to deliver a multi-role capability with air-to-air and air-to-surface attack, but has also resulted in some large cost overruns.[22]

18. The role of Senior Responsible Owner is another mechanism designed to aid the running of large complex programmes. The post has been created for projects which have novel elements, high integration risk or cover an unusually large number of stakeholders. The Carrier Strike capability, for example, comprises the Future Aircraft Carrier, the Future Joint Combat Aircraft and the Maritime Airborne Surveillance Control platform. Rotorcraft, similarly, involves a number of different helicopters. The Department has limited the number of Senior Responsible Owners to a few, to highlight the extra level of complexity on the programme. On all other programmes, there are single points of accountability. They perform the same role filled by the directors of equipment capability who manage clusters of project teams.[23]

14   C&AG's Report, paras 1.15-1.16 Back

15   Qq 74-76; C&AG's Report, Figure 8 Back

16   Q 77 Back

17   Q 72 Back

18   C&AG's Report, Figure 8 Back

19   Q 13 Back

20   Qq 32-33 Back

21   Qq 37-39 Back

22   C&AG's Report, Volume 2, HC 1159-II, p111 Back

23   Qq 109-112 Back

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Prepared 13 October 2005