3 Addressing the underlying causes
of problems on projects
11. This Committee and its predecessors have examined
the problems of cost and time overruns with defence projects on
a regular basis. Figure 2 summarises some of the main areas
of current concern and the occasions in the past when we have
drawn attention to them. In response, the Department has advised
us of a number of reforms to working practices, and of more precise
implementation of existing practices. Such remedies have clearly
not proved adequate to secure the necessary improvements.
Figure 2: References to areas of current concern
made in previous Committee Reports
| CONCERN
| COMMITTEE OF PUBLIC ACCOUNTS' REPORT REFERENCE
| ISSUE
|
| Expenditure outside the Major Projects Report
| Major Projects Report 1994 44th Report, HC 487, 1994-95
| The variation between a Parliamentary Answer on the overspend on Typhoon and that reported in the Major Projects Report was due to the difference in the cost baseline.
|
| Major Projects Report 1998 33rd Report, HC 247, 1999-2000
| The Department continued to make basic errors in estimating programme costs, such as missing £2 million Value Added Tax payments. Accounting changes also had a significant affect on forecast costs, such as on the Typhoon programme where an extra £259 million had been included for research and the costs of using testing facilities. Traditionally these costs were not included in project approvals but they will be capitalised under Resource Accounting and Budgeting.
|
| Major Projects Report 2003 43rd Report, HC 383, 2003-04
| The metrics for measuring performance should cover the management of expenditure on the equipment throughout its service life and disposal, not just the acquisition phase.
|
| Cancellation
| Major Projects Report 1994 44th Report, HC 487, 1994-95
| All of the projects that had gone seriously over their forecast delivery dates had been considered for abandonment, usually on the basis of what it would cost to go on from the position the Department had reached, compared with what it would cost for an alternative.
|
| Major Projects Report 2000 5th Report, HC 368, 2001-02
| The Department believed it acts quickly once it has decided to withdraw from programmes. However, the time taken to reach the decision itself on the Common New Generation Frigate programme and Bowman was too long given the track record of problems. The Armed Services would not receive, when originally planned, the capabilities which these equipments would have provided.
|
| Major Projects Report 2003 43rd Report, HC 383, 2003-04
| In a number of cases the Department and industry made poor decisions and committed to unrealistic programmes. Given the scale of the problems, and because the Armed Forces still needed the capabilities provided by the Astute submarine and Nimrod aircraft, the Department adopted the "least bad" option and re-negotiated these contracts.
|
| Major Projects Report 2004 3rd Report, HC 410, 2005-06
| It was likely that the Department would have to cancel or delay projects to compensate for the substantial cost overruns, and that the Armed Forces would either not get or have to wait longer for the new equipment they need. There was little evidence to show that projects were in fact cancelled or changed when they breach the highest and latest approved parameters for costs or in-service dates.
|
| Opportunity costs
| Major Projects Report 1998 33rd Report, HC 247, 1999-2000
| Once programmes start to slip the trend continued and past delays were not recovered. Project slippage can impact directly on the Armed Forces' operational capability. Delay costs money through running on or modifying old equipments and extra administration.
The Department had not established a realistic defence acquisition programme or managed projects properly, and there were opportunity cost penalties to other parts of Defence.
|
| Major Projects Report 2005 50th Report, HC 889, 2005-06
| Some of the latest capability cuts were short-term expediencies which could result in an erosion of core defence capability or in higher costs throughout the life of individual projects.
|
| Measuring the benefit of Defence expenditure
| Major Projects Report 2005 50th Report, HC 889, 2005-06
| The Defence Industrial Strategy aims to promote a sustainable and globally competitive defence manufacturing sector but the Department has not traditionally quantified or measured the wider benefits of its procurement expenditure.
|
| Variations caused by technical factors
| Major Projects Report 1994 44th Report, HC 487, 1994-95
| Over one-third of all in-service date delay was due to unforeseen technical difficulties for the contractors performing the work, even though the Department was satisfied with the level of expertise available to them for projects.
|
| Major Projects Report 1997 1st Report, HC 101, 1998-99
| There was a clear relationship between how well a project was technically specified and the outcome in terms of cost and timeliness of delivery. Project management should be judged against the number of specification changes. Programme and specification changes were major causes of cost increase as the Department had a tendency to introduce late modifications to projects.
|
| Staff accountability
| Major Projects Report 1997 1st Report, HC 101, 1998-99
| The need to improve the quality of financial forecasting, information and accounting should be reflected in personal and organisational objectives, and hence contribute to the internal accountability of Departmental staff.
|
| Major Projects Report 2003 43rd Report, HC 383, 2003-04
| The Department should provide a clearer account of exactly how Senior Responsible Owners would fit into the procurement system.
|
| Major Projects Report 2004 3rd Report, HC 410, 2005-06
| The Department's performance in procuring defence equipment was woeful and £4.8 billion of cost overruns recorded in the Major Projects Reports 2003 and 2004 would put further pressure on an already tightly-stretched defence budget. The Department was unable even to follow its own, broadly sensible, procurement rules and to all appearances no-one was ever held responsible for these failures. The careers of those involved remain unaffected.
|
| Over-optimistic estimates
| Major Projects Report 1994 44th Report, HC 487, 1994-95
| Half of the total cost overrun on projects was due to over-optimistic cost estimates or the method for calculating inflation on contracts.
|
| Major Projects Report 1997 1st Report, HC 101, 1998-99
| Unrealistic initial estimates of project costs and timescales led to overruns, which were then likely to result in further cost increases and delays across a range of projects.
|
| Major Projects Report 2006 46th Report, HC 295, 2006-07
| The Department generally made investment decisions without an expert independent assessor's examination of the technical, financial and commercial maturity of the major projects and the likelihood they will deliver military benefits anticipated and so projects were based upon inaccurate forecasts.
|
Source: NAO summaries of previous Committee Reports
12. We recognise that procuring complex and cutting-edge
defence equipment often entails unavoidable technical risks, and
that accurate advanced specification and estimating time and cost
for large and novel projects are no easy tasks. The Department's
emphasis on 'de-risking', so that it does not take the main investment
decision until sufficient work has been done to understand the
technical aspects of projects, is commendable. In addition, the
scale of time and cost overruns due to technical factors is showing
signs of reducing on the projects approved since 2004. However,
while better designed procurement strategies may be contributing
to this improvement, technical problems tend to arise after the
sixth year of a project, and particularly during trials, and the
newest projects have not reached this stage.[14]
13. The Department needs to address the systemic
weaknesses that lie behind cost increases and time delays. There
is a 'conspiracy of optimism' in the project teams and industry
which also extends to the leadership of the Department, who often
appear willing to accept an estimate that is the nearest match
to the available resources.[15]
There is a perception that equipment can be brought into service
at a lower price, but with little hard evidence to support such
an assumption. For example, the original budget for the Landing
Ship Dock (Auxiliary) project has been proved to be wholly unrealistic—the
final cost was some 80% higher than the initial contract of £332
million. Historical trend analysis, using costs of similar past
projects and those of other nations, showed the price of £589
million for the four ships to be within the expected likely range.[16]
14. It is not enough for the Department to build
up skills, such as licensed project managers, and to require independent
review of cost estimates to manage and militate against problems
on acquisition projects. The Department must also change its culture.
Teams must be given incentives to deliver genuine cost reductions,
such as allowing them the opportunity to re-invest a portion of
the savings in additional upgrades, rather than losing their budget
to other, poorly controlled projects.
15. The Department claims to have learned from its
experience on the Bowman project and identified Senior Responsible
Owners for some of the 20 projects in the Major Projects Report.
However, there is just one Senior Responsible Owner who is full
time in the role: overseeing the Carrier Strike capability which
includes both the Joint Combat Aircraft and the Future Aircraft
Carrier (one of the ten Assessment Phase projects) Projects. It
is disappointing that, on some projects, the Department has chosen
only to rebadge existing posts of Programme or Project Sponsors,
rather than enhance the roles. The Department's structure is such
that there are multiple parties with an interest in an equipment
project, and without sufficient authority, time and resources
to devote to the task, these Programme or Project Sponsors will
not be able to deliver military capability any more successfully
than existing project leaders.[17]
14 Qq 36, 82, 108-111 Back
15
Qq 81, 118 Back
16
Qq 118-119; C&AG's Report, Volume III, page 12 Back
17
Qq 120-123 Back
|
