Ministry of Defence: Major Projects Report 2006

Executive Summary

National Audit Office Value for Money Report

1. The Major Projects Report 2006 covers cost, time and performance data for projects in the year ended 31 March 2006. We examined[Footnote 1] 20 of the largest projects (detailed in Figure 1 - not provided in this HTML Executive Summary), where the main investment decision to proceed has been taken by the Ministry of Defence (the Department); and ten projects still in the Assessment Phase (detailed in Appendix 2). Five projects are new to this years Report[Footnote 2]. One project, the Private Finance Initiative (PFI) deal for Skynet 5 communications satellites, is dealt with separately in Appendix 3 so that account can be taken of its restructuring to build extra satellites as physical assurance to replace the previous insurance provision.
    
2. The Department still expects to meet 98 per cent of Key User Requirements, although performance is marginally worse than recorded in the Major Projects Report 2005. Figure 2 summarises project time and cost performance. Over their lives thus far, projects have been delayed by a total of 433 months[Footnote 3]. Thirty-three months of the total delay occurred within the year 2005-06, a lower contribution to the total than in any Major Projects Report since 2002.
   
   Figure 2 ("Forecast time & cost positions in Main Gate projects") is unavailable in this version of the executive summary.
    
3. The current total forecast cost for the population is 27 billion, an increase of eleven per cent compared with the total budgeted costs approved at Main Gate. During 2005-06, the Department undertook a review of the post-Main Gate projects to control costs better. This Review has reduced the costs of these 20 projects as recorded by the Major Projects Report by 781 million[Footnote 4], some three per cent overall and equivalent to a 21 per cent reduction in the overall cost increases on projects since Main Gate.
   
    
4. During its Review the Department paid particular attention to the past recommendations of the Committee of Public Accounts[Footnote 5] which have stressed the need for the Department to live within its means. 242 million, that is 31 per cent of the 781 million reduction is from:
    
   • the better management of commercial and contractual arrangements, for example on the Nimrod MRA4 project the Department is negotiating a one per cent cost reduction in the fee it pays to its contractor;
      
   • more cost effective means of delivery, for example on the Astute submarine project the Department made 7 million savings by devising more efficient ways to deliver safety requirements;
      
   • re-assessing quantities required, for example, on the Guided Multiple Launch Rocket System project the Department reduced the numbers of rockets being procured to save 114 million; and
      
   • more appropriate accounting treatments, for example, on the Terrier project the Department is now accruing for future milestone payments resulting in a saving of 3 million on cost of capital charges.
      
5. A further 448 million, that is 57 per cent, was achieved by either re-classifying expenditure from procurement to support or transferring expenditure to other budgets for procurement or for corporate management where they can be best managed. These re-allocations do not represent a saving to the Department as a whole. By transferring the costs elsewhere the Department potentially may have to forgo other activities, which previously could have been provided, or make corresponding efficiency gains to accommodate the expenditure.
    
6. While the principles underpinning the review are sensible, due to the basis upon which Major Projects Report is compiled, it would be inappropriate to look at in-year cost changes and trends for 2006. Our cost analyses this year have focused on how the Department has addressed the potential in-year cost increases to live within its financial means[Footnote 6]. We report in detail on the in-year performance of five projects which have experienced substantial cost movement or are representative of the Departments management of cost growth in 2005-06.
    

   The future of the Major Projects Report
   
   

7. The Department has reported annually to Parliament on its progress in procuring major pieces of defence equipment since 1984. The Major Projects Report is a key accountability document and provides much important information that underpins a number of the Departments Public Service Agreement targets and three of the Defence Procurement Agencys Key Targets.
    
8. While aspects of the Report have evolved, the methodology for selecting the projects to be included and the basis for reporting cost, time and performance have remained largely unchanged. Over the same period the challenges of defence acquisition and the Departments approach to delivering and sustaining defence capability have changed significantly. Examples of these developments are the use of the PFI; the emphasis on delivery of Through Life Capability Management[Footnote 7]; more regular use of cost, time and performance trade-offs to enable the Department to live within its budgetary means; the use of incremental acquisition and the planned merger of the Defence Procurement Agency and the Defence Logistics Organisation. The key changes are explored in more detail in Appendix 6.
    
9. The Report in its current form, focusing on initial procurement activities, does not give a complete account of the Departments performance across the spectrum of acquisition activity as the difficulties this year in providing a balanced assessment of cost performance illustrate. Over the coming months we and the Department will develop proposals for a major overhaul of the Major Projects Report to be submitted to the Committee of Public Accounts in Spring 2007, with the intention of introducing a revised Report from 2008. The review will seek to build on the strengths of the existing format and will be conducted in parallel with a wider review of performance reporting being undertaken by the Department. The result will be to provide better public information to Parliament.
    

1.  [back from footnote 1] Our methodology is described in Appendix 1.
2.  [back from footnote 2] Brimstone (Advanced Air-launched Anti-Armour Weapon), Panther (armoured personnel vehicle) and Trojan and Titan (armoured bridge-laying and obstacle breaching vehicles) in the post-Main Gate population and Future Rapid Effect Systems (medium weight armoured vehicles) and Military Afloat and Reach Sustainability (auxiliary ships) of the Assessment Phase projects.
3.  [back from footnote 3] Appendix 4 shows time variation since Main Gate Approval per project.
4.  [back from footnote 4] This includes a cost reduction of 91 million due to a rebate and exemption from HM Revenue & Customs.
5.  [back from footnote 5] C&AGs Report Ministry of Defence: Major Projects Report 2005 (HC 595, November 2005) and House of Commons Committee of Public Accounts Report Ministry of Defence: Major Projects Report 2004 (HC 410, July 2005).
6.  [back from footnote 6] For the sake of completeness, we have produced figures which show the cost variation in-year and the consumption of the cost risk differential which are available in Appendix 5. For the reasons stated above, these figures must be interpreted with care.
7.  [back from footnote 7] See Appendix 6 for details in Through Life Capability Management.