Ministry of Defence: Major Projects Report 2008

Executive Summary

National Audit Office Value for Money Report

1. The Major Projects Report 2008 covers cost, time and performance [Footnote 1]  data for military equipment projects in the year ended 31 March 2008. For the main report, we examined [Footnote 2]  20 of the largest projects (shown in Figure 3 on page 8), where the main investment decision has been taken by the Ministry of Defence (the Department). The Report also covers ten projects, which are still in the Assessment Phase, where the main investment decision has not yet been taken (only limited performance data is reported for these projects, which are detailed in Appendix 2). Six projects are new to this year’s Report. Future Lynx, Modernised Target Acquisition Designation Sight/Pilots Night Vision Sensor, Naval Extremely High Frequency/Super High Frequency Satellite Communication Terminals and Typhoon Future Capability Programme projects are all new in the post-main investment decision population, as well as the Advanced Jet Trainer project, which has previously featured as an Assessment Phase project. Project Eagle, to upgrade the mission system of the E-3D Sentry aircraft, is new in the Assessment Phase project population. Project Summary Sheets, on which our analysis is based, are compiled by the Department and summarise progress to date for each of the 30 projects. These are contained in Volume II of this Report.
   

2. The Department has reported to Parliament on its delivery of major defence equipment projects for over 20 years. Over the last 10 years the Department has introduced a number of major reforms of defence acquisition. While progress has been made, performance remains variable, partly reflecting the complexity of defence acquisition and rapidly changing operational requirements. To deliver battle-winning advantage defence equipments are often based on advanced technologies and have complex delivery arrangements which bring together a range of commercial partners and/or involve co-operation with other countries. In part, the performance shown in the Major Projects Report also reflects the inclusion of some projects which pre-date these reforms and, therefore, do not fully reflect the improvements which the Department expects to achieve.
   

   
   Findings

3. For the period of the Report, the forecast aggregate costs of the projects  [Footnote 3]  increased by £205 million  [Footnote 4] and there was an additional 96 months aggregate slippage (Figure 1). The forecast cost increase is largely as a result of growth in the Beyond Visual Range Air-to-Air Missile project and Nimrod Maritime Reconnaissance and Attack Mk 4 aircraft, both of which were initiated before the most recent procurement reforms by the Department. Nine projects have experienced slippage over the past year with three, Terrier, Naval Extremely High Frequency/Super High Frequency Satellite Communications Terminals and Soothsayer, accounting for around two-thirds of this delay. Of the 20 projects, 15 are currently forecasting to meet all of their Key User Requirements, compared to 17 last year. Sixteen individual Key User Requirements are reported as ‘at risk’ on six projects, compared to 12 Key User Requirements across seven projects last year, but there is mitigation action in place that is intended to address these risks.
   
4. The total forecast costs for all projects is £28 billion, an increase of 12 per cent (£3 billion) compared with the budgeted cost when the main investment decision was taken. Ninety three per cent of the £3 billion is historic cost growth and reported in previous Major Projects Reports, with £205 million added in-year. In aggregate the projects are now predicted to achieve their In Service Dates 483 months later than predicted when first approved. This slippage represents a 36 per cent increase in their expected timescales since the main investment decision, four-fifths of that is historic slippage reported in previous Major Projects Reports.
   
   

   Programme and project management decisions

5. Changes to the perceived threat, and the desire to achieve a more cost-effective integration on to the Typhoon aircraft, led the Department to review the Beyond Visual Range Air-to-Air Missile project. The Department has chosen to introduce the Beyond Visual Range Air-to-Air Missile capability for Typhoon three years later in July 2015, when the threat could be expected to have materialised. This decision is seeking to create a more cost-effective integration programme for the United Kingdom, by aligning the integration of the Beyond Visual Range Air-to-Air Missile and the Typhoon with both the planned delivery of a major enhancements package to the aircraft and the missile integration timescales of the other Eurofighter Nations. This rescheduling of the integration will, however, result in a number of additional short-term cost increases, contributing to an overall in year cost growth of £111 million.
   
6. On two projects, the Department has worked with its industrial and international partners to deliver urgently needed operational capabilities:
   
   a Watchkeeper is an unmanned aerial vehicle that is designed to provide significantly improved intelligence, surveillance, target acquisition and reconnaissance capabilities from 2010. With an urgent operational need in Iraq and Afghanistan, the Department worked with the Watchkeeper contractor, Thales, to deliver the Hermes 450 system by mid-2007. The air vehicle and sensors of Hermes 450 have similarities with those used for Watchkeeper and have delivered essential capability as well as helping mitigate risk to the final delivery of Watchkeeper. A six month in-year slippage on Watchkeeper has principally been caused by a delay in the availability of a suitable trials site.
   
   b Naval Extremely High Frequency/Super High Frequency Satellite Communications Terminals is a communications project mainly designed for submarines. Satellite capacity and the necessary equipments are being sourced through the United States’ Department of Defense. The project is running 31 months behind schedule because of delays to United States’ projects still in development, which the Department cannot directly influence. The Department has developed low cost interim solutions for both the existing Trafalgar Class submarines and the new Astute Class submarines which will mitigate the most significant effects of the potential capability gap. 
   
   

   Problems on Projects

7. Five projects have suffered significant cost or schedule problems in the last year. The specific issues affecting the Beyond Visual Range Air-to-Air Missile are covered in paragraphs 5 and 2.32-2.38. There are a number of issues related to the remaining four projects – the Nimrod Maritime Reconnaissance and Attack Mk4 aircraft, Terrier armoured engineering vehicle, Soothsayer electronic warfare system, and Naval Extremely High Frequency/Super High Frequency Satellite Communications Terminals. Some examples are outlined below and summarised in Figure 2:
   
   Figure 2 (Common issues emerging from our analysis of four projects with significant cost or schedule developments) is unavailable in this version of the executive summary.
   
   a Industry project management shortcomings and the Department acting as an intelligent customer (four of the four projects). On Soothsayer the technical immaturity and late delivery of components, together with problems identified during trials, have resulted in 16 months slippage with five Key User Requirements “at risk”. The problems reflect shortcomings in Lockheed Martin’s management of the project, in particular underestimating its scale and technological complexity. The Department could have done more to monitor progress and work in concert with Lockheed Martin when problems were identified.
   
    b A lack of realism at the outset (two of the four). In response to normal competitive pressures and to keep costs down, industry bidders for the Terrier contract included only one prototype vehicle. When the steering was shown to be unreliable on the prototype it took four months to resolve and meant that the later demonstrator vehicles had to be used more intensively to demonstrate reliability. The overall effect of these problems and quality issues with components has been to delay the forecast In Service Date by 27 months.
   
    c Failure to identify the key dependencies (two of the four). Significant elements of the Naval Extremely High Frequency/Super High Frequency Satellite Communications Terminals project are sourced from the United States. On the Soothsayer project, as agreed with the Department, the project managers for the contractor were originally based in the United States, which compounded the difficulties involved in resolving technical problems when they emerged. In both cases this dependency has caused slippage. The Department has a long experience of the risks associated with having very little real power to influence United States’ projects. This key dependency was not identified as one of the top risks when the main investment decision was taken for the Naval Extremely High Frequency/Super High Frequency Satellite Communications Terminals project. Similarly the difficulty of managing a project from a distance was not recognised when the main investment decision was taken for Soothsayer.
   
    d Under-estimating costs (one of the four). On the Nimrod Maritime Reconnaissance and Attack Mk4 aircraft project, the cost of bringing the trials aircraft up to full production standard was under-estimated, resulting in additional conversion costs which have been provisionally estimated at £50 million. Similarly, the Department made a provision of £5 million to address the impact of an issue that emerged during the flight test programme on the production aircraft. This amount proved to be an under-estimate, with a £20 million cost increase being identified this year. 
   
8. We have analysed the projects in the current Major Projects Report population to identify the main causes of cost increases and time delays in these. This analysis is against four broad categories – changed customer requirements, associated projects, procurement management and technical factors. The analysis only includes projects on which the main investment decision has been taken, the point at which the Department considers risk has been reduced to the extent that the project should be delivered within narrowly defined time, cost and performance parameters.
   
9. For the projects analysed, procurement management issues and changed customer requirements are the principal causes of both slippage and cost growth in the earlier period after the main investment decision has been taken. From the middle half of the procurement lifecycle, technical factors become the main reason for cost increases and slippages to In-Service Dates. The impact of these problems suggests that the risks associated with the technical challenges of these projects are under-estimated when the main investment decisions are being made. From 2009 it is planned that the Major Projects Report will analyse in more detail the level of project maturity at the point at which the main investment decision is taken.
   
   

   Overall Conclusion

10. The Department has taken reasonable decisions to either accelerate the delivery of urgently needed capabilities or re-programme individual projects to reflect current defence priorities: we address some examples in this Report. While progress has been made, it is too early to judge whether the lessons from past projects are feeding through into consistently improved performance. The Department has worked closely with commercial partners on the delivery of Urgent Operational Requirements, and needs to examine what lessons might be applied to the more demanding projects that feature in the Major Projects Report. Meanwhile, best value for money is still not consistently being achieved on the Department’s most complex equipment. Figure 2 identifies some of the underlying issues emerging from our review, on which the Department and its commercial partners need to increasingly focus if the performance of newer projects is to provide a more affordable and timely enhancement of capability than has been the case in the past.
    
    Figure 3 (Major Projects Report Summary of Post Main Gate Projects) is unavailable in this version of the executive summary.

1. [back from footnote 1] Performance in this context refers to whether a piece of equipment is expected to meet all of its Key User Requirements, which are defined by the User, and are approved when the project receives the main investment decision.
2. [back from footnote 2] Our methodology is described in Appendix 1.
3. [back from footnote 3] Typhoon has been excluded from the analysis because the numbers are commercially sensitive.
4. [back from footnote 4] The forecast costs for projects already include an assumption for inflation.