The Major Projects Report 2007 provides information on the time, cost and performance of 20 of the Ministry of Defence's largest military equipment projects where the main investment decision has been taken, as well as the top ten projects in the earlier Assessment Phase.

As in the Major Projects Report 2006, the Ministry of Defence (the Department) has primarily reduced the forecast costs for its top 20 projects by reallocating expenditure to other projects or budget lines. In 2007, it has reallocated £609 million, making a total of over £1 billion reallocated over the last two years. The Department's rationale for continuing to reallocate budgets and expenditure is that it allows it to measure better the performance of individual teams in controlling their project costs, and to identify separately the costs of maintaining United Kingdom shipyards in accordance with the Defence Industrial Strategy White Paper.

Although the principle of allocating costs to those best placed to manage them is sensible for accountancy purposes, many of the same project teams continue to be responsible for the transferred budgets. In addition, there may not be a cost reduction for defence spending as a whole, and the Department may have to forego activities, which it otherwise could have afforded. And such transfers mean that the forecast costs reported to Parliament do not give the full picture of the expenditure required to bring equipment into military service as they fail to include training and logistics support costs.

The Department has estimated it needs to make payments amounting to £305 million to sustain the ship building industry. The Department does not have any mechanism to check whether it is getting value for money from such payments. The onshore defence industry also needs an order for two new aircraft carriers. The contract date slipped, along with the decision on the preferred design on the new medium weight armoured vehicles for the Army. Such delays to address short-term funding deficits can lead to higher costs throughout the life of individual projects.

Over the years, the Department has not made sufficient improvements to deliver major military equipments to time, budget and quality. It needs to change the culture amongst its own staff and the industry from one of a 'conspiracy of optimism' to one of greater realism, providing adequate incentives to its staff to deliver genuine savings and make them properly accountable for their performance.

On the basis of the annual Report from the Comptroller and Auditor General,[1] we took evidence from the Department on allocating expenditure outside the boundaries of the Major Projects Report; achieving value for money from procurement strategies; and improving performance against cost, time and quality boundaries.