Ministry of Defence: Major Projects Report 2007

Executive Summary

National Audit Office Value for Money Report

1. The Major Projects Report 2007 covers cost, time and performance data for military equipment projects in the year ended 31 March 2007. We examined[Footnote 1] 20 of the largest projects (detailed in Figure 1 - not included in this HTML version of the Executive Summary), where the main investment decision has been taken by the Ministry of Defence (the Department); and ten projects still in the Assessment Phase (detailed in Appendix 2). Seven projects are new to this year’s Report.[Footnote 2] Detailed Summary Sheets for each of the 30 Projects are in Volume II of this Report. There have been significant developments of Parliamentary interest on a project that appeared in the Major Projects Report until 2002-03, the Landing Ship Dock (Auxiliary)[Footnote 3] and our detailed findings are in Volume III.
   
   

   Overall the Department is in a similar position to the Major Projects Report 2006 for forecast cost and performance, but there continue to be time delays

   
   
2. The current total forecast cost for the 19[Footnote 4] largest projects is £28 billion, an increase of 11 per cent compared with the ‘most likely’ (budgeted) cost when the main investment decision was taken. The Department expects ten projects to deliver within their ‘most likely’ cost, and was again pro-active in limiting potential in-year cost increases, with 13 projects showing a fall in their forecast costs, and one project reporting no change. Progress on a small number of older projects has been of concern in the past, and there has been significant net cost growth in-year in the production of the Type 45 Destroyer (£354 million) and the Astute Class Submarine (£142 million).
   
   
3. As in the Major Projects Report 2006 the Department has reduced the forecast costs of its projects by reducing quantities of equipments and re-assessing requirements (£81 million; £226 million over two years) and by re-allocating expenditure to other projects or budget lines (£609 million, making a total of over £1 billion over two years). The Department’s rationale for continuing to re-allocate budgets and expenditure is to better measure the performance of individual teams in controlling their project costs and to distinguish the costs of maintaining defence-critical industrial capability in accordance with the Defence Industrial Strategy, which are more appropriately overseen at a corporate level. This year, the largest component (£305 million) relates to maintaining industrial capacity and capability in line with the Maritime Industrial Strategy (Paragraph 8 to 12). We would not expect to see this level of re-allocation in existing projects in future reports.
   
   
4. Although the principle of allocating budgets to those best placed to manage them is sensible and results in savings to the individual projects, many of the same project teams continue to be responsible for the transferred budgets. For example, the budget relating to warranty costs of £64 million for the Support Vehicles project was re-categorised as In-Service costs, but this is still being managed by the same project team. This is not a saving to Defence as a whole. Two equipments, the Guided Multiple Launch Rocket System and Sting Ray torpedo, met their Sponsor’s5 agreed definition of In-Service during 2006-07, bringing the total number of projects covered by the Report that are In-Service to six.6 For the remaining equipments the Department predicts no additional slippage on eight projects and that five may be delayed further. The total in-year slippage was 38 months, compared to 33 months in the Major Projects Report 2006.
   
   
5. Two equipments, the Guided Multiple Launch Rocket System and Sting Ray torpedo, met their Sponsor’s[Footnote 5] agreed definition of In-Service during 2006-07, bringing the total number of projects covered by the Report that are In-Service to six.[Footnote 6] For the remaining equipments the Department predicts no additional slippage on eight projects and that five may be delayed further. The total in-year slippage was 38 months, compared to 33 months in the Major Projects Report 2006.
   
   
6. The Department still expects to meet all the Key User Requirements on 17 of the 20 largest projects. Key User Requirements are selected because they are critical to the successful employment of the equipment; however mission needs may change because of changes in the threat. Key User Requirements are therefore subject to continual review. Seven projects have identified risks to the delivery of one or more of their Key User Requirements (12 in total) as at 31 March 2007, and the Department is taking mitigating action to address these.
   
   
7. In the Major Projects Report 2006 we explained that by focusing on initial procurement activities, the Report in its current form does not give a complete account of the Department’s performance in delivering capability throughout the life of an equipment. As a result we have been working with the Department to develop the Report to provide a clearer representation of equipment acquisition performance, including a view on sustaining capability once it has been introduced. The original intention was that a revised format would be submitted to the Committee of Public Accounts for its approval in spring 2007, but this has now slipped to late 2007. The reason for this slippage is that the changes will be the most significant revision to the Major Projects Report in over 20 years. It is important that the measures fully reflect evolving acquisition practices and are consistent with other metrics the Department is in the process of developing. The Department aims to deliver a first report in the revised format in 2009.
   
   

   There have been some important developments on projects as a result of the Maritime Industrial Strategy

   
   
8. This year, the Department has identified costs totalling £305 million on two projects, the Type 45 Destroyer and the Astute Class Submarine, which relate to maintaining industrial capacity and capability in line with the Defence Industrial Strategy. These costs have been re-allocated to separate budget lines within the Department’s Equipment Plan and in light of this we undertook a high-level review of the progress being made in implementing the Maritime Industrial Strategy.
   
   
9. We found that the Department has made progress against its stated aims in the Maritime Industrial Strategy. It has identified the key ship and submarine building capabilities it needs to maintain in the United Kingdom, and quantified the core workload necessary to retain the key skills of the workforce in both the sectors. For the surface ship sector the Department will underwrite a core workload, which will enable Industry to plan the necessary rationalisation and long term transformation required to meet this capacity level. We recommend that Forward work plans for the nuclear sub-surface build programme should be shared with Industry, even with the proviso that they may change, because it would create more certainty and would similarly enable companies to plan for the longer term.
   
   
10. Contracts are being revised to incentivise Industry to reduce costs and improve its record on delivery of major equipments. The predicted improvements as a result of the new arrangements for the production of surface ships and the Astute Class Submarine are dependent on continued commitment, innovation and strong leadership from both the Department and Industry.
    
    
11. Restructuring of Industry, which was identified as a priority in the Maritime Industrial Strategy, is now underway, although it has taken longer than initially envisaged in the surface ship sector. Figure 2 summaries the Department’s plans and its progress against them.
    
    
    
    
12. Currently the Department collates its data on the cost of implementing individual policies and decisions made as the result of the Defence Industrial Strategy but could not provide us with an overall picture. The system for consolidating the full cost of rationalising and sustaining the Defence industrial base is immature and differences in the way costs are identified in the Planning Round make analysis over time difficult. We recommend that the Department establishes a framework with which it can measure value for money to Defence as a whole, so that it can determine the cost-effectiveness of investment in sustaining the maritime industrial base.

1.  [back from footnote 1] Our methodology is described in Appendix 1.
2.  [back from footnote 2] The Merlin Mk 1 helicopter Capability Sustainment Programme and the Soothsayer communications project are new in the post-investment decision population as well as the Falcon (Communications System) and Watchkeeper (Unmanned Air Vehicle) projects, which have previously featured as Assessment Phase projects. The Frigates and Destroyers Programme for networking of sensors and shared identical air picture, which appeared in the Major Projects Report 2005, returns to the Assessment Phase population. The Maritime Airborne Surveillance and Control project (surveillance and battle management capability) and Search and Rescue Helicopter project are included for the first time in the Assessment Phase project population.
3.  [back from footnote 3] Vessels for the deployment of troops, vehicles and equipment directly into operational areas.
4.  [back from footnote 4] One project, the Typhoon aircraft, is excluded from the analysis of costs as the information is commercially sensitive.
5.  [back from footnote 5] In previous Major Projects Reports the Sponsor was known as the Customer. The Sponsor is responsible for leading the capability change planning process and identifying the equipment and support requirements to optimise the UK’s Defence capability within allocated resources. In doing so the Equipment Capability Customer acts as the Sponsor for new and enhanced equipment and support programmes.
6.  [back from footnote 6] The Typhoon aircraft, Bowman communications system, Brimstone anti-armour weapon and C-Vehicle (rough terrain engineer vehicles) were in-Service as at 31 March 2006.