Conclusions and recommendations
1. Despite buying 30% fewer Typhoons than
originally planned, the cost of production and development has
risen to £20.2 billion, £3.5 billion more than the Department
first expected. This
reflects the accumulated effect of over optimism on costs. We
have commented on this issue in previous reports. Typhoon will
be in-service for another twenty years and, given the Department's
assurance that it has learned the lessons, our recommendations
in this report focus on how the Department can secure best value
on the project going forward. Good decisions are based on good
information. If the Department is to make more realistic and achievable
investment decisions in future, it needs to have a comprehensive
understanding of the balance between costs, number of aircraft
kept in service and the operational capability which the aircraft
provide.
2. The Department's calculation of unit cost
per aircraft does not include all relevant costs. The
Department calculates a unit cost of £73 million, based on
production costs alone. However, the inclusion of development
costs and the cost of capital take the total unit cost to £126
million. In order to provide a full picture of costs and enable
comparison across projects, the Department should calculate and
report its unit cost on a basis that includes all expenditure,
including development and production costs.
3. The Department was not able to demonstrate
that it had conducted a thorough cost- benefit analysis to support
its original decision to equip Typhoon with ground attack capability,
or its subsequent decision not to use it.
The Department spent £119 million giving Typhoon a ground
attack capability to replace the capability previously provided
by the Jaguar aircraft. However, in 2009 the Department decided
to retire the air defence Tornado F3 aircraft early to save costs
and re-prioritised Typhoon in air defence roles. This has meant
that Typhoon's ground attack capability is not being used. This
is an all too familiar pattern of decision making, reflecting
the overall failure to control defence spending; balancing the
books in the short term without taking into account long term
value for money. The Department should treat decisions about major
changes to the operational use of key equipment most seriously
and conduct thorough cost-benefit analyses to ensure value for
money is achieved.
4. In settling on the number of aircraft to
be ordered, the Department had to make difficult judgements on
the balance between affordability and operational risk.
The net result will be the number of aircraft being bought falling
from the planned 232 to 160 and 53 of these aircraft being taken
out of use by 2019; leaving a fleet size of 107. It is also unclear
whether the third phase of acquisitions was determined by contractual
commitments as opposed to operational imperatives. In future we
expect the Department to offer us a clearer explanation as to
why it has reached such judgements on individual capabilities
and for these judgements to be underpinned by robust cost and
operational analyses.
5. Major defence procurement contracts are
often lengthy and therefore carry an inherent risk that elements
become obsolete before projects are completed and operational.
The risk of obsolescence was exacerbated in the case of Typhoon,
which was not operational until two decades after the project
started. The Department needs to find ways to actively manage
this risk to achieve best value for money. It should consider,
for example, how to oblige contractors to manage the risk of obsolescence
throughout the life of a project, which might include in-built
flexibility for aircraft and other equipment to accommodate upgrades.
6. The Department relies on a small group
of key industrial suppliers who have the technical and design
capability to build, upgrade and support Typhoon.
In the absence of competition, the Department needs to demonstrate
it is achieving value for money from its single source supply
contracts but did not supply specific evidence that it is doing
so. We expect the Department to generate robust cost and performance
data, potentially drawing on its independent United Kingdom support
contracts with BAE Systems and Rolls Royce, to assess the value
for money of future contracts.
7. Problems with the availability of spare
parts have meant that Typhoons are not flying as many hours as
the Department requires. As a result,
the RAF only had eight of its 48 Typhoon pilots capable of undertaking
ground attack missions. This has also led to five pilots being
grounded and the Department regularly taking parts from some aircraft
to ensure it has a sufficient number to meet immediate operational
needs.
a) The Department must negotiate future contracts
so that industry delivers spare parts on time; and
b) A limited amount of 'cannibalisation', for
example, from aircraft undergoing maintenance, may be better than
incurring the additional cost of purchasing and storing large
amounts of spares, but we question whether it can be cost effective
to have three planes with a total value of £ 378 million
sitting on the ground. The Department should undertake more robust
analysis to determine the most cost effective balance between
cannibalising aircraft, buying more spares and accepting increased
operational risks.
8. The Senior Responsible Owner (SRO) on Typhoon
is not involved in key decisions, for example, those related to
exports of the aircraft.
Good practice suggests there should be one person with full responsibility
leading the delivery of key capabilities such as Typhoon. The
SRO role as applied by the Department on capabilities like Typhoon
does not have appropriate responsibilities and cannot therefore
be held to proper account. The Department should consider, as
part of the work of the Defence Reform Unit, how to give SRO's
the authority they need to manage the delivery of the equipment
for which they are accountable.
9. The form of collaboration underpinning
the Typhoon project has added cost growth and delay to the project.
Decision making within the collaboration
is a lengthy process and it can take several years for key upgrades
to be agreed and delivered. The arrangements were agreed in the
1980s and driven by political considerations rather than by commercial
or military imperatives. Done well, collaboration offers
significant potential benefits from sharing costs and developing
common capabilities with allies. To enable it to make the most
of on-going and potential new collaborative opportunities, the
Department should evaluate its portfolio of collaborative projects
to establish what has worked well, or failed, and why this has
happened.
| 
