Sir John Bourn, head of the National Audit Office, told Parliament today that the top 25 Ministry of Defence equipment projects were, at 31 March 1999, forecast to cost £2.7 billion more than originally estimated. Including beneficial revised costings for the Eurofighter programme, cost overruns have reduced from the £2.9 billion reported in 1998. The projects will, on average, enter service nearly four years later than first forecast compared with a 1998 figure of over three and a half years. The additional delays since 1998 have occurred mostly in the early stages of projects before their main investment decision point.
The National Audit Office’s analysis is based on data produced annually by the Ministry of Defence detailing progress on the 25 largest defence equipment projects. The great majority of the cost overruns and delays recorded in the Report are not new, rather they have accumulated over a number of years since the projects were first approved. The main causes of cost overruns and delays are largely the same as in previous years.
The National Audit Office found that, in cost terms:
- for the projects in the 1999 Report, expenditure for the approved stages totals £37.6 billion and expenditure on subsequent stages of £38.4 billion is expected;
- thirteen projects are forecast to exceed their original cost estimates, 11 are expected to be under budget and one project is expected to cost the same as originally forecast. Costs on six of the 13 projects forecast to overrun are expected to be no more than five per cent above their originally approved estimates;
- four projects – Eurofighter, the Merlin Mark 1 helicopter, the Spearfish heavyweight torpedo and studies on the Bowman communications system – contribute the vast majority (94 per cent) of the cost overruns. Most of the cost escalation on the exceptionally large Eurofighter programme occurred during the earlier stages of development and the rate of cost increase has slowed markedly; and
- excluding the Eurofighter programme, cost overruns on projects have increased by £22 million from £1,338 million (5.9 per cent) in the 1998 Report to £1,360 million (6.3 per cent) in the 1999 Report. Including the Eurofighter programme, cost overruns have reduced from £2,889 million to £2,732 million.
The National Audit Office found that, in timescale terms:
- the average in-service date delay has increased by four months to 47 months since the1998 Report;
- twenty three projects in the 1999 Report have, or are expected to, enter service later than originally estimated. Fifteen of these projects entered or are expected to enter service at least 3 years late;
- two projects new to the 1999 Report, Tactical Reconnaissance Armoured Combat Equipment Requirement (TRACER) and Future Offensive Air System (FOAS), have been delayed by 46 months and 24 months respectively. Ten projects have been subject to additional delay since the 1998 Report, with seven being delayed by a further year or more; and
- since 1993, the average delay on the eight projects common to all Major Projects Reports has more than doubled and is now 64 months.
The timescale slippage recorded on 17 of the projects in the 1999 Report is expected to increase the net costs (mainly support costs) borne by the Ministry of Defence by £426 million, although this is accompanied by the deferral of acquisition expenditure. The Report also shows that whilst slippage delays the introduction of improved military capability, the impact of the delay will depend on whether the equipment would actually have been utilised in an operational scenario and whether the original in-service date was accurately specified. The National Audit Office examined the impact of slippage on the operational capability and costs of four specific equipments – the Air-launched Anti-Armour Weapon, the Medium Range TRIGAT anti-tank weapon, the Bowman communications system and the Common New Generation Frigate – and found that:
- on the Air-Launched Anti-Armour Weapon, delays have led to a significant capability gap which has only been partially offset by upgrades; and
- the lower operating costs of the equipments to be replaced by Medium Range TRIGAT and the Air-Launched Anti-Armour Weapon have reduced the costs borne by the Department during the period of slippage by £59 million and £32 million respectively. Conversely, delays to the Common New Generation Frigate programme and Bowman have increased the costs borne by the Department by £537 million and £9 million respectively.
The Ministry of Defence are changing the way they organise and conduct their procurement business under the banner of ‘Smart Procurement’. The changes are intended to address the time and cost overruns on defence equipment projects highlighted in successive Major Projects Reports. Measures such as placing greater emphasis on risk reduction before main investment decisions are made, introducing Integrated Project Teams with industry representation, establishing a clear customer-supplier relationship, improving estimating and using incremental acquisition, should help to reduce project slippage.