1 Project performance
1. In taking evidence from the Ministry of Defence
(the Department) on its 15 largest equipment projects, we found
a welcome improving trend in project-level performance.[3]
Since 2008, there has been no net cost increase ensuing from technical
procurement challenges at the project level, although £53
million was added in 2010-11. However overall, the total cost
increase for the 15 major projects in 2010-11 was £466 million.[4]
Decisions made by the Department have contributed to a large part
of this increase, although there are some factors - such as variations
in foreign exchange - which are largely outside the Department's
control (Figure 1). In total, forecast costs for these projects
now amounts to approximately £60 billion, some £6.1
billion (11.4%) over budget. The timetable for delivering the
equipment also slipped a further 30 months in the year, taking
the total delay to 322 months since the original estimates were
first approved.[5]
Figure 1: Breakdown of 2010-11 cost increase [6]
| Reason for cost increase
| £ million |
| Central planning decisions made by the Department:
| |
| Decisions to delay spending on projects
| £124 |
| Decisions to enhance equipment capabilities
| £113 |
| Macro-economic factors such as exchange rate changes
| £176 |
| Project-level difficulties such as design and contracting issues
| £53 |
| Total cost increase
| £466 |
2. For the third successive year, central planning decisions taken
by the Department to delay expenditure and reduce equipment numbers
have been the major cause of cost growth.[7]
In the past three years, the Department has delayed projects to
balance the defence budget in the short term. These decisions
have added long-term costs to the defence programme. For example,
the Department has had to extend the build programme of the Astute
submarines (with extra costs) to fill the gap in production arising
from deferring the introduction of the Successor nuclear deterrent
programme.[8] These decisions
added to a total delay across all seven Astute submarines since
2003 of 297 months.[9]
This delay cost £1 billion and, combined with cost
increases due to technical difficulties and capability changes,
means that the total overspend on this project is now £1.9
billion.[10]
3. Cutting equipment numbers after contracts have
been signed usually represents poor value for money, as it invariably
increases unit costs.[11]
The Department has recently decided to reduce the number of Puma
and Chinook helicopters by four and ten respectively, and is buying
three fewer A400M aircraft. In the latter case this has contributed
to an increase of 46% in the unit cost of each aircraft.[12]
4. The Department has also attempted to balance the
defence budget by cancelling programmes. In the 2010 Strategic
Defence and Security Review it decided to cancel the Nimrod aircraft.[13]
The Department cancelled the project to save an estimated £1.9
billion in support costs over the next ten years.[14]
The Department had already spent £3.4 billion on Nimrod without
any benefit to the defence forces and the Department will incur
new costs from cancelling contracts and from substituting alternative
capabilities. We have asked the C&AG to look in greater detail
at the value for money of decisions taken on both Nimrod and the
Harrier jets.
5. The Department accepted that there would be additional
costs to fulfilling capability shortfalls left from this cancellation,
but could not tell us exactly what they were.[15]
This illustrates the Department taking decisions without full
knowledge of the cost implications or the impact on defence capability[16]
6. The Department told us that once the defence budget
is back in balance it will no longer defer spending and reduce
equipment numbers purely for reasons of affordability.[17]
Until the budget is balanced, however, there remain significant
risks to cutting or cancelling existing projects, such as Specialist
Vehicles.[18]
3 Q2 Back
4
Q 144; C&AG's Report, paragraph 3, Figure 8 Back
5
C&AG's Report, paragraph 3, Figure 2 Back
6
C&AG's Report, paragraph 3 & 1.5 Back
7
Q 17 Back
8
Qq22,74 Back
9
Qq 23-26. C&AG's Report (paragraphs 11 & 3.5) notes an
average delay of 28 months to each of the seven Astute Class submarines
since 2009. The total delay of 297 months to the seven boats ismeasuredfromwhentheAstuteprogrammewasreapprovedin2003. Back
10
Qq 27-29, 33-37 Back
11
Qq 105, 144 Back
12
Qq 136-137 Back
13
Q 59 Back
14
Qq 75-76; C&AG's Report, paragraph 14 Back
15
Q 76 Back
16
Qq 78-79 Back
17
Qq 18, 130 Back
18
Qq 51-54 Back
| 
