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The National Audit Office’s annual report on 20 of the top defence equipment projects shows that, while there has been progress on the majority of projects in the last year, there continue to be time delays and cost increases on some of the major projects.

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Of the fifteen projects not in service as at April 2007, eight have progressed to schedule and on two projects, the MoD has recovered time against the schedule. Five projects were delayed by a total of an extra 38 months this year, compared to 33 months on five projects in 2005-06. Of these, the most significant were the Type 45 Destroyer which has been delayed by a further 11 months and the Terrier and Next Generation Light Anti-Armour Weapon projects have each been delayed by a further 12 months.

The current total forecast cost for the 20 largest projects is £28 billion, which is £2.5 billion over the ‘most likely’ budget when the main investment decision was taken. The MoD expects ten projects to deliver within their most likely budgeted cost. Most of this cost growth occurred in earlier years but, on two projects, the Type 45 Destroyer (£354 million) and the Astute Class Submarine (£142 million), there has been significant cost growth in-year. The MoD has now agreed revised contracts on both of these projects to incentivise Industry to reduce costs.

The MoD was again pro-active in limiting potential in-year cost increases on individual projects through reassessing requirements, reducing quantities of equipments and re-allocating expenditure to other projects or budget lines. The total amount reallocated in 2006-07 was £609 million, meaning the MoD has now reallocated over £1 billion over two years. This year the largest component (£305 million) relates to maintaining industrial capacity and capability in accordance with the Maritime Industrial Strategy.

Although the principle of allocating budgets to those best placed to manage them is sensible, 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 Vehicle project has been more appropriately categorised as In-Service costs, but the same project team is still managing this money.

The Defence Industrial Strategy has now been in place for nearly two years. In the maritime sector, the MoD is making progress. It has identified the key ship and submarine building capabilities it needs to maintain in the United Kingdom, and quantified the core workload necessary. Restructuring of industry is underway. The MoD does not have an overall picture of the cost of rationalising and sustaining the Defence Industrial Base against which it can assess the overall value for money to defence of investment in industrial sustainment.

There have been substantial cost increases and delays on the Landing Ship Dock (Auxiliary) project, which appeared in the Major Projects Report until 2002-03. We have conducted a detailed review of the project in order to understand why problems arose. NAO analysis shows that the project was initiated on an unrealistic basis but, once the problems became clear, the MoD responded well, taking action to limit its exposure to risk and put itself in a position to successfully deliver all four vessels into service.

“While there has been progress on the majority of projects in the Report, it is disappointing that a small number continue to suffer from significant cost increases and timescale slippages.

“MoD, working with its industry partners, has made progress towards transforming the maritime industrial base. In taking the Defence Industrial Strategy forward it will be important that MoD 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.”

Sir John Bourn, head of the NAO


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