3 Understanding and managing risk
10. The Department lacks a good knowledge of
risk on individual equipment acquisitions and across the portfolio
of projects in the Equipment Plan. Frequently, projects proceed
without a rigorous assessment of the risks arising from: how well
understood the technologies being applied are; whether there are
potential compatability problems with other equipments; if the
commercial arrangements will incentivise industry; and whether
the right project management skills are available in the Department
and industry to deliver the project.[28]
11. Regular, objective assessments of the likelihood
of these different risks materialising would enable the Department
to measure, compare and communicate the extent of the risks affecting
individual projects and to better understand where there are common
risks which could affect, for example, the portfolio of projects
the Department has with an individual contractor. The assessments
would also direct where more work is required to reduce risk,
or where the Department needs to start trading off time, cost
and performance against each other.[29]
12. Early adoption of these assessments in each
project's life, and at portfolio level, will help ensure that
the Department prioritises and directs scarce resources effectively
to reduce or eliminate risk before both the initial and main investment
decisions. This is a fundamental prerequisite to achieving a balanced
and stable Defence budget over the long-term.[30]
13. The Department accepts that delaying projects
after contracts have been signed inevitably results in increased
costs to the taxpayer, delays in delivery and possible capability
gaps.[31] Changing timetables
and requirements before contracts are agreed is an inherent part
of negotiation. Trading between cost, time and performance, supported
by robust risk analysis and clear operational requirements, is
a sign of healthy project management. By comparison, substantially
changing contracts after they have been signed inevitably erodes
value for money, and delays or creates gaps in military capability.
Specifically, costs increase for three principal reasons:
- Sustaining industrial capacity.
Industry's fixed costs, for example, the employment of design
teams at shipyards, have to be sustained over a longer period
of time. Invariably, it is the Department that bears the cost
when this period of time is extended;[32]
- Reducing efficiencies.
Obligations on contractors to operate efficiently are greatly
reduced as industrial partners are able to apportion cost increases
to the Department's decision to slow down the build of the equipment,[33]
and
- Changing requirements.
Opportunities for industrial partners to lower costs are reduced
by the unpredictability and changing nature of the project and
planned efficiencies are rendered impotent by constant changes
to requirements.[34]
14. As a case in point, the Department was apparently
unaware in summer 2008 of the gap between the planned defence
budget and forecast spend when the multi-billion pound Queen Elizabeth
Class aircraft carrier contract was signed.[35]
Yet only seven months later the Department chose to delay the
whole project, adding £674 million to forecast costs.[36]
Had the Department delayed signature of the carrier contract until
they had adjusted the spending profile to make the project affordable,
then their contractual position would have been far stronger than
it subsequently became after contract signature.[37]
If the Department had then stuck to an agreed plan it would have
given industry a clearer incentive to introduce more efficient
ways of working in the medium term, and ensured that the Department
were better able to hold commercial partners to account in the
longer term.[38]
28 Review of Acquisition for the Secretary of State
for Defence: An independent report by Bernard Gray, October
2009, pages 137-141 Back
29
Qq 118-119 Back
30
Qq 127 and 128 Back
31
Qq 3, 5 and 117 Back
32
Review of Acquisition for the Secretary of State for Defence:
An independent report by Bernard Gray, October 2009, pages
135-136, Appendix G Back
33
Qq 3, 36, 40 and 90 Back
34
Review of Acquisition for the Secretary of State for Defence:
An independent report by Bernard Gray, October 2009, pages
142-143, Appendix G Back
35
Q 120 Back
36
Qq 87-89 Back
37
Qq 3, 5 and 106 Back
38
Q 90 Back
|