Select Committee on Defence Written Evidence

Sixth memorandum from the Ministry of Defence


1.   For Key Target 2, actual average new time slippage was 0.7 months which was below the target of 1 month. Performance against this target used to be calculated on the basis of the 20 largest projects but, from April 2004, has been calculated on all projects over £20 million. Is the good performance on a large number of smaller value projects compensating for poorer performance on the largest projects?

  Analysis of the data shows that category C projects (ie those valued between £20 million and £100 million) encounter similar levels of delay as those with higher values. For example in 2005-06, there were 13 Cat Cs in a Key Target population of 46. On average the in year delay to those Cat Cs was one month per project so they scored slightly worse than the overall average.

  It is relevant to recall the reasons for introducing the changes in setting this KT in 2004. It was considered that a larger project population gave a more representative measure of DPA performance than just the top 20 projects by value. It is also more appropriate because timely delivery of lower value projects may be just as important operationally as those in the higher cost bracket. From this time, performance has also been measured by comparing at the 50% confidence level. Previously comparisons had been made against the 90% confidence level which included contingency. The new regime is a tougher and more relevant measure of performance in delivering against the originally planned timescales.

2.   Delivering projects to time may be assisted by setting realistic in-service dates, procuring equipment off-the-shelf, and providing incentives for the contractor. To what extent have each of these played a role in the DPA's improved performance relating to time slippage?

  We see each of these factors as being relevant. We are focusing more closely on due diligence and in factoring in more appropriate incentive for industry to deliver on time. Off-the-shelf products, where available, reduce risk. The JAVELIN medium range anti-tank guided weapon is good example of mitigating some schedule risk by buying off-the-shelf. Although it has been in-service with the United States since 1996, JAVELIN did require an element of modification to meet UK specific requirements and to address inter-operability issues. A consistent and robust approach to this procurement, and close co-operation between the DPA and DLO, the US Army programme office, the Javelin Joint Venture, enabled it to be delivered 13 months in advance of the date approved at Main Gate.

3.   In its Major Projects Report 2005, the NAO reported that the decreases in forecast costs in 2004-05 were "primarily due to reductions in the numbers or capability of the equipment". To what extent did reducing the numbers of equipment ordered or reducing the capabilities of equipment contribute to the DPA achieving Key Target 3 relating to cost growth in 2005-06?

  Re-examining the numbers of equipment ordered and equipment capabilities led us to identify opportunities to reduce cost growth by some £145 million in 2005-06.

4.   What was the actual in-year cost growth for the defence equipment projects covered by Key Target 3?

  The actual cost growth was £65.674 million.

5.   Key Target 4 required the DPA to deliver greater than 90%, by value, of its forecast asset deliveries and the DPA delivered 107%. Does the DPA's achievement represent a catching up of previous slippages, or getting ahead of schedule for future years? Are Urgent Operational Requirements (UORs) included in the delivery figure?

  The Agency has achieved its asset delivery targets for the last two years, delivering 100% in FY 2004-05 and 107% in 2005-06. The target is based on forecasts set at the beginning of each financial year. There is therefore there is no catching up.

  UORs contribute to the over-achievement seen in FY 2005-06 as these were not part of deliveries planned at the outset of the year. At £99 million they represented some 3% of the total deliveries of some £3.3 billion.

  UORs that emerge in year are excluded from the baseline calculation but included in the overall delivery figure. This is on the basis that project resources could be refocused on delivering the UOR rather than the planned programme.

6.   The DPA delivered new equipment valued at £3.3 billion in 2005-06, but in 2004-05 the DPA delivered new equipment valued at £8.3 billion. Why was the value of new equipment delivered in 2005-06 so much lower compared with 2004-05?

  When equipment is delivered to the front line the value of the equipment itself is transferred and, at an appropriate point, so is the value of the investment made in developing the capability. There were significant development costs delivered in 2004-05 (£4.7 billion) for Typhoon which distorted the delivery picture. If these were excluded, the figures are more consistent (2004-05: £3.6 billion; 2005-06: £3.3 billion).

7.   In 2005-06 the DPA met, for the first time, all its Key Targets and delivered against the MoD's Public Service Agreement targets. What are the main factors that have contributed to the DPA's improved performance?

  The corporate performance improvement programme, "DPA Forward" underpins the improvements we are seeing. This has introduced new and rigorous processes right across the Agency's project activity, to ensure that estimates of time, cost and performance that form the basis of major decisions are sound and take account of risk. It has included improvements to the Agency's governance and links with industry. DPA Forward accelerated a process of continuous improvement that has in turn been built on with the changes proposed as part of the implementation of the Defence Acquisition Change programme.

8.   We have just passed the half way mark in the financial year 2006-07. How is the DPA doing against its 2006-07 Key Targets midway through the year?

  The Agency's Key Targets remain challenging, as they should be to remain relevant and appropriate in demanding year on year improvements. KT3 is under pressure because of further potential cost growth from the long standing legacy projects ASTUTE and T45. KT4 is at risk because of the re-timing of deliveries compared with the schedules set at the beginning of the financial year. Performance against those targets is being actively managed by the DPA Executive Board to mitigate the corporate impact of the project specific problems.


9.   Many of the changes in the "DPA Forward" programme are due to be implemented by late 2006. Will all the changes be implemented by the end of the year? If not, which planned changes will not have been implemented?

  In order to maintain focus on the implementation of the Defence Acquisition Change Programme, DPA Forward was brought to a controlled close in July 2006. Many of the changes introduced by the programme—such as Key Supplier Management, Performance Review & Assurance and the Corporate Management Information System—are now embedded in the normal business practices of the DPA and will be more widely adopted through the Defence Acquisition Change programme; a clear endorsement of the success for DPA Forward. Ongoing work is also being subsumed with the Defence Acquisition Change programme; this includes work on the Operating Framework, Effective Project Control, Performance, Time & Cost Trade Offs, future development of Key Supplier Management and Workforce Development and Incentivization. CDP and CDL's Joint Working initiative begun in 2003 has laid the foundations for combining DPA and DLO into the single DE&S organisation from 1 April 2007 as recommended by the McKane report on Enabling Acquisition Change.

10.   In the DPA's Annual Report and Accounts 2005-06, internal control weaknesses in the application of Earned Value Management, project cost estimating and risk management were identified. How are these weaknesses being addressed and in what timeframe?

(a)  Earned Value Management (EVM)

  From January 2006 the DPA has mandated the use of Earned Value Management (EVM) on all projects valued at £20 million or above that are entering the Demonstration Phase. To ensure consistency of application of the technique across the Agency we have created two dedicated teams. One team is responsible for policy, information and advice, training sponsorship and the maintenance of industrial links through participation in the Defence EVM Implementation Group and the Association of Project Management's EVM Specific Interest Group. The other team provides "hands on" support to IPTs in their implementation of EVM and in reviews and audits of their contractors. We have also jointly developed with industry a template for contract Terms and Conditions which ensures that all implementations of EVM are in accordance with the EVM User Guide.

(b)  Risk Management

  In 2003 a team was established to assist IPTs to improve their risk management procedures. This team has developed detailed guidance and advice, has reconfigured our approach to risk management training, and has sponsored the introduction of computer-based risk management tools. Benchmarking exercises consistently identify the DPA's risk management as "Best in Class" for the approach, although we are working to further improve our deployment of process and procedure across the Agency. The risk team has been able to demonstrate a significant increase in awareness of the need for and benefits of effective risk management in the IPTs, and has measured real improvements in IPT processes and outcomes as a result. Risk management is a key part of the governance we apply to projects, and is a major element of the Project Review and Assurance process, also introduced as part of the DPA Forward corporate performance improvement programme.

  A series of "Risk Master classes" have been initiated for IPT Leaders and other Senior Staff. These emphasise the importance of risk management to the overall business of the Agency, the linkages between project risk and corporate risk, and the cultural changes that we need to ensure a seamless and integrated approach to risk management at all levels of the organisation.

(c)  Project Cost Estimating

  The DPA has improved project estimating by taking into account trends observed in actual costs incurred for previous procurements. This recognises that it is challenging to improve on the historic trend, unless there is a step change in technology or manufacturing process. The DPA is now using this historic trend analysis to help validate project cost estimates prior to major decision points (such as CVF). This approach will be further strengthened by detailed, non-advocate advice and departmental initiatives as part of Enabling Acquisition Change to improve due diligence for major investments in the future, prior to the approval.

  The DPA also uses the Treasury's Optimism Bias (OB) model as part of the risk analysis process for cost estimating. This enables a comparison to be made between the detailed (bottom up) assessment of risk and the (top down) OB indication. Any discrepancies are thoroughly reviewed and causes identified. The scrutiny of the business case reviews the outcomes of the process. The risk maturity assessments provide assurance that the risk management processes are being correctly applied in the derivation of project cost estimating.

  Further key improvements in process have been identified for this year to provide improved project cost estimates. This includes gathering more detailed company data on competitive and non competitive contracts to inform future estimates, track progress, and analyse options. This will provide a more robust basis for trend analysis and decision support. We are working more closely with some major players in industry to assess their End To End estimating process and to be involved in the "Estimate Challenge" phase. This will provide improved confidence in industry figures and an opportunity to influence manufacturing methods.

Key Targets for the New Organisation

11.   One of the aims of the DPA/DLO merger is to improve Through Life Capability Management. How will the expected improvements be tracked? Will there be new Key Targets covering this? Following the merger, will the DPA Key Targets covering equipment acquisition still remain, so that improvements in equipment acquisition can continue to be tracked?

  Current Departmental Public Service Agreement (PSA) targets that are equivalent to current DPA Key Targets 1-3, will remain in force throughout the new organisation's first year. Similarly we have to deliver against Customer/Supplier Agreements (CSAs) that are already in advanced negotiation between the DLO and its customers, which will run to end of 2007-08. But the clear thrust of the Defence Acquisition Change programme and Defence Industrial Strategy towards improving the management of acquisition on a through-life basis will require the introduction of targets focused on the delivery of the equipment and support component of Departmental through-life acquisition targets as well as the effectiveness and efficiency of the business.

  A single target cannot capture performance appropriately across the range of roles detailed above and we recognise the need for a basket of metrics to drive improvement. MoD Head Office is leading on the definition of new targets consulting with single Service users and the NAO.


12.   As part of its inquiry the Committee selected four smaller size equipment projects to examine. Can you update us on how each of these projects is currently doing: specifically, how is each doing against their approved costs and in-service dates? Have there been any major changes to these four projects since our oral evidence session at the end of June?

  The table below provides detail on changes since the project information was provided to the Committee in June 2006.

Change in

Forecast Cost (£ million)


Change in

Forecast ISD

Anti Surface Warfare (ASUW)[2] -3.0This is the combined effect of a reduction in the VAT rating for Phalanx 1B, a change in the risk provision and programming and contractual adjustments
No Change
General Service Respirator (GSR)[3] +0.5Additional funding required for User Trials
+ 10 months (now Oct '07)Additional Performance and User Trials required by the Customer
Maritime Training System (MTS)[4] No ChangeNo Change
Thermal Sighting System (TSS)[5] No ChangeNo Change
13.   At the evidence session on 27 June the Committee asked why the four smaller projects we selected appeared to be performing better against approved costs and in-service dates than some of the larger defence equipment projects. Dr Watson told the Committee that "short projects do tend to be slightly more successful, but we do not have that kind of separation" [Q7]. Is the DPA planning to undertake such an analysis to identify relevant lessons for larger equipment projects?

  Yes. Learning From Experience is required for all projects, regardless of their size and this is shared across the organisation so that previous pitfalls can be avoided. It is through this medium that lessons from all projects are shared. We are working closely with the NAO in implementing their Gold Standard for effective project control in order to standardise good practice in controlling all projects. The NAO Gold Standard defines the drivers for successful project delivery which are applicable to projects of all sizes. In the Defence Industrial Strategy (DIS), the Department recognised specifically the benefit of adopting more flexible and agile approaches to procurement. Such approaches have been successful in delivering Urgent Operational Requirements and are currently more typical of smaller projects. DIS also recognised the importance of more agile strategies in procurement, such as better use of off-the-shelf solutions and commercial arrangements that provide more effective incentives to suppliers to deliver innovative solutions and better value for money. A particular facet of small projects is the ability for the project stakeholders, including the front-line users to work as a small, effective team in delivering the project. DIS recognised the importance of better team behaviours and relationship management as part of the core business of all our acquisition. The new DE&S organisation is being constructed in a way that will better enable stakeholder relationship management both within the Department and between the Department and suppliers.

  The Agency has already introduced new and rigorous processes to ensure that estimates of time, cost and performance are fully informed before major decisions are taken.

  The Department is also developing an Acquisition Operating Framework, based on work that emerged from the DPA Forward initiative, which will create a consistent and clearly defined framework for how we conduct, govern and control our projects. As part of the pilot phase for the Acquisition Operating Framework, small project teams will be assessed alongside larger teams and good practice pulled through into the framework that will be applied to all projects in future. The Programme and Project Management section of the AOF will be foundation for project management and control in the new Defence Equipment & Support organisation.

14.   What are the main reasons why smaller size equipment projects tend to be more successful than some of the larger equipment projects?

  There are a variety of reasons why smaller projects could be deemed more successful than some of the larger projects, particularly from an in year cost variation position. Smaller projects, that is, the Category C projects between £20 million-£100 million may involve less risk, be less technically demanding, be of shorter duration, have less integration issues, are unlikely to involve collaboration and have fewer stakeholders. This is not to say that some smaller value projects do not involve some or all of these. By contrast the level of technical difficulty is often greater in the larger projects because there is a much greater element of development to meet more demanding performance criteria. The Department has recognised that the degree of complexity in a project is an important factor in assessing how it should be managed. We are working closely with the Australian DMO in defining project complexity and pulling together a skills competence framework that will improve the Department's ability to manage large, complex projects. Larger projects, for example warships, also tend to involve higher degrees of integration and dependencies with other programmes which also adds to their risk and complexity.


15.   Defense News of 2 October 2006 reported that "French industry has slashed the chances of building a second aircraft carrier, reducing the prospective value of French shipbuilder DCN and the amount Thales will pay for its 25% stake". There have been reports that there is uncertainty as to whether the French will proceed with building a second aircraft carrier. Are these reports of concern and, if true, are they likely to impact on the UK's carrier programme?

  It is for France to comment on their programme. The reports have no direct impact on the UK programme. Co-operation was only agreed on the basis that it must deliver savings without delaying the UK CVF (or French PA2) programmes, so the UK programme is not directly affected by any changes to the PA2 programme. We continue to co-operate during the demonstration phase to produce a Common Baseline Design that will meet requirements for CVF and PA2 and to explore areas of commonality which will bring savings in design costs, procurement, in-service support and through life technology insertion.


16.   What impact will the recent UORs for Armoured Fighting Vehicles (AFV) have on the FRES programme? In order to be consistent with the Defence Industrial Strategy should the AFV fleet be addressed as a whole rather than for FRES to be treated in isolation?

  Operational experience, especially in Iraq, has illustrated the rapidly developing threat to our troops on the ground; particularly the threat posed by mines and improvised explosive devices. The majority of UORs that have been applied to in-service armoured vehicles have been aimed at providing improved protection against these and other threats. This experience has reinforced the need for adequately protected armoured vehicles, a factor that is being taken fully into account in taking FRES forward. The way forward on FRES is being developed within an overall AFV strategy that is consistent with the Defence Industrial Strategy, at the same time ensuring that the unique challenges presented by FRES are properly addressed.


17.   When is the new acquisition strategy for FRES expected to be finalised?

  Confirmation of the optimum acquisition strategy for FRES is one of the key objectives of the initial Assessment Phase. Senior stakeholders are fully engaged and we expect to put proposals to HMT and OGDs this autumn with a view to making a public announcement before the end of the year.

18.   How will the MoD ensure that the new acquisition strategy for FRES will be stable?

  The stability of the programme will be achieved by agreeing an incremental delivery of capability with the Army sponsor; by careful selection of the companies best suited to deliver this challenging capability through life, and by high quality due diligence before each investment decision.

19.   How will the new acquisition strategy for FRES take account of the Defence Industrial Strategy?

  The Defence Industrial Strategy sets the context within which the FRES acquisition strategy is being developed. We will secure the appropriate level of operational sovereignty through life by proactive management of IPR matters. We will secure value for money in a strategic alliance which will benefit from a stable programme of incremental development which will sustain an efficient production programme and a rolling programme of technology insertions through life.

25 October 2006

2   Defensive weapons for use against fast attack craft. Back

3   Replacement of the in service respirator to improve levels of protection, equipment compatibility and to be more user friendly. Back

4   Shore based Warfare Operator Training capability for legacy platforms & the T45 Destroyer. Back

5   A Thermal Sighting System for the Self Propelled High Velocity Missile Weapon System. Back

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Prepared 8 December 2006