Ministry of Defence: The Major Projects Report 2011 - Public Accounts Committee Contents

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

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Prepared 10 February 2012