House of Commons - Ministry of Defence: Major Projects Report 2009

Ministry of Defence: Major Projects Report 2009 - Public Accounts Committee Contents

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]