2 Improving the Department's skills in
cost estimation
6. Although the Department and Treasury have
recently worked to improve cost estimating by agreeing a rolling
10-year planning horizon, pressure on the Equipment Plan is significantly
affected by wider defence budget pressures.[20]
These include: Armed Forces' pay, pensions, receipts from Defence
Estates, adverse movements in foreign exchange, and pressure to
shift funds to support current operations.[21]
For example, the Department noted that successive Armed
Forces' pay reviews had recommended pay rises that exceeded the
level of inflation built into the Comprehensive Spending Review
settlement, adding 'several hundred million' in costs per year
over the past three years.[22]
Foreign exchange movements had added a further £1.3 billion
over four years.[23]
7. To find the money to cover these cost increases,
the Department has deliberately delayed equipment projects to
generate short-term savings, even though such delays invariably
result in poor value for money.[24]
Longer term, given the wider economic position, the funding provided
for defence as a whole, including the slice allocated for equipment
acquisition, will undoubtedly be under considerable pressure.
The Department told us it would model the implications of a range
of budget settlements over a 10-year horizon so that future decisions
were carefully planned, rather than the knee-jerk reactions of
late.[25]
8. Critically, the Department does not have any
contingency funding in place within its budget to address either
external pressures or cost growth from within the Equipment Plan.
Currently, projects are budgeted on the 'most likely' cost (the
expected cost of the project) and not their 'not to exceed cost'
(the highest cost estimate approved). A recent report showed average
project costs of 40% more than their 'not to exceed' cost by the
time they are completed, putting the overall affordability of
the Equipment Plan at risk.[26]
9. The Department acknowledged that its historic
over-optimism on project costs has contributed to cost growth.
This trend has been so marked that, of the projects in this year's
Major Projects Report, the total cost over-run is in excess of
£4.5 billion—an average of over £300 million per
project. A dedicated cost estimation team is being established
to support all acquisition work, and it is critical that its work
is both independent and authoritative.[27]
20 Qq 16 and 59 Back
21
Qq 1-2 and 36; C&AG's Report, para 7 Back
22
Qq 1, 13 and 14 Back
23
Qq 2 and 25 Back
24
Qq 1 and 104-106 Back
25
Q 6 Back
26
Review of Acquisition for the Secretary of State for Defence:
An independent report by Bernard Gray, October 2009, page
7 Back
27
Qq 116 and 121-124 Back
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