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Sir John Bourn, Head of the National Audit Office, told Parliament today that the costs of this project had risen from £650 million to an estimated £933 million. Although the Ministry of Defence originally considered that it had transferred the risk of cost overruns to the private sector, in the end it funded most of the cost increase itself and will pay an estimated £849 million at 2001-02 prices.

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In 1997 the MoD contracted Devonport Management Limited to design and build new and upgraded facilities for the refitting and refuelling of the Royal Navy’s nuclear submarines, including the Vanguard class which provides the United Kingdom’s nuclear deterrent. To ensure the effectiveness of this deterrent, facilities had to be available for the refitting of the first Vanguard submarine, HMS Vanguard, in February 2002. In 1997 the MoD obtained Treasury approval for funding of £650 million and estimated that the project’s most likely cost would be £576 million.

The project has proved to be exceptionally complex, involving a number of technically challenging components whilst needing to meet exacting nuclear safety standards. Delays in design and construction occurred. After the MoD agreed to pay extra to recover these delays, key facilities were ready for HMS Vanguard to enter the dock on time in February 2002 to begin its refit – a major achievement under the circumstances. Major improvements have also been made to the facilities for non-Vanguard submarines, allowing the programme of refit work on these submarines to be maintained. However, other facilities were not ready by their due date and are still under construction or are being commissioned. Their delayed completion has not yet affected the submarine refits, but completion of these facilities remains very tight and there is little scope in the refit work programme to accommodate any further slippage.

Speeding up work and resolving other design, safety, and construction aspects has resulted in significant cost increases. Total project costs are currently estimated to be £933 million but the final costs are still uncertain as construction of some facilities is still on-going. The MoD has agreed to fund most of cost increases and will consequently pay £199 million (31 per cent) more than its 1997 budget. As a result, by its own figures, the Department has partly funded poor performance by DML and its sub-contractors, met the cost increases resulting from nuclear safety regulation, and borne the cost of all other risks that it had originally transferred to DML.

All the main parties have contributed to the cost increases encountered on this project. The practical implications, technical challenges, and subsequent cost effects of how the nuclear safety regulation regime would impact on the project were not fully appreciated by any party. The project has highlighted the problems faced in attempting to specify at the outset of a contract a scope of work that anticipates the technical and cost impact of meeting external regulatory approval. The imperative to meet milestones to support the submarine refit programme also contributed to cost increases and the facilities’ design evolved to take account of the nuclear regulators’ observations, requiring additional design and construction work.

"Despite the stated allocation of risk in the contract, the MoD agreed to fund most of the cost increases on this project, thereby accepting back risks it had originally transferred. Departments need to learn the lessons from this project and minimise the risk of this happening in the future."

Sir John Bourn


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