2Commercial management
Operating in a monopolistic environment
12.The defence nuclear field is a monopolistic commercial environment and very few companies are able to carry out such work; in 2018 four contractors held 97% by value of the Nuclear Enterprise contracts. The Department told us that the defence sector had become increasingly concentrated in a small number of companies, which it considered made contracting more complicated than if there was competition. As a result, it was very reliant on BAE Systems, Rolls-Royce and Babcock, as only a small number of contractors can design and construct buildings for the nuclear enterprise. The 1958 Mutual Defence Agreement with the United States also meant that only Rolls Royce has the capacity to design and manufacture nuclear propulsion systems.18
13.The contracts the Department prepared did not allow it to share the financial risk, which meant that it bore the full impact of cost increases, including those of its sub-contractors. For example, at Barrow, BAE Systems received a £65 million increase in claims from its subcontractor, which were passed on to the Department. Under the contract, BAE Systems also got an increase in its management fee, which rose along with the costs incurred.19 We pointed out that our predecessors had criticised the Department for cost-plus based contracts almost thirty years ago.20
Improving commercial arrangements
14.The Department accepted the National Audit Office’s criticism that its contracts had not been well designed in the past and said it would not operate in this way in the future. It told us that a number of steps had been taken to ensure it had more appropriate contracting mechanisms and to expunge some past practices.21 For example, before any contract is placed by its main contractors for Dreadnought work, it is scrutinised by a new contracts permissioning group chaired by the Submarine Delivery Agency Chief Executive to see what is to be delivered down the delivery chain.22 The Department said it had also made improvements to supply chain management, with 85% of contracts for MENSA moved to a fixed cost or target cost forecast basis.23
15.In addition, around £37 billion of contracts—some 252 in total—are now subject to the Single Source Contract Regulations (the Regulations), which the Department stated had helped increase transparency over costs and strengthened the Department’s position. However, although Rolls Royce had signed up to the Regulations for new contracts, so far the Department had been unable to persuade it to agree to move the Core Production Capability contract to come under the Regulations. This is subject to commercial negotiations.24 More generally, the Chief Executive of the Submarine Delivery Agency said that the body was significantly strengthening supervision and oversight of its contracts, and was recruiting people with greater contract management experience.25
18 Q 80 ; C&AG’s Report, para 3.2
19 Q 75 ; C&AG’s Report, para 3.6
20 Qq 70, 79
21 Q 79
22 Q 74
23 Q 61
24 Qq 76, 82
25 Q 85
Published: 13 May 2020