Report

by the Comptroller
and Auditor General

Ministry of Defence

Major Projects Report 2015 and the Equipment Plan 2015 to 2025

HC 488-I Session 2015-16 22 October 2015

Our vision is to help the nation spend wisely.

Our public audit perspective helps Parliament hold government to account and improve public services.

The National Audit Office scrutinises public spending for Parliament and is independent of government. The Comptroller and Auditor General (C&AG), Sir Amyas Morse KCB, is an Officer of the House of Commons and leads the NAO, which employs some 810 people. The C&AG certifies the accounts of all government departments and many other public sector bodies. He has statutory authority to examine and report to Parliament on whether departments and the bodies they fund have used their resources efficiently, effectively, and with economy. Our studies evaluate the value for money of public spending, nationally and locally. Our recommendations and reports on good practice help government improve public services, and our work led to audited savings of £1.15 billion in 2014.

Ordered by the House of Commons to be printed on 22 October 2015

This report has been prepared under Section 6 of the National Audit Act 1983 for presentation to the House of Commons in accordance with Section 9 of the Act

Sir Amyas Morse KCB
Comptroller and Auditor General
National Audit Office

20 October 2015

This volume has been published alongside a second volume comprising Ministry of Defence: Major Projects Report 2015 and the Equipment Plan 2015 to 2025 (Appendices and project summary sheets)

This report combines the Major Projects Report and the Equipment Plan to give a rounded view of the Ministry of Defence’s progress and maintenance of its equipment portfolio.

© National Audit Office 2015

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10814 10/15 NAO

The National Audit Office study team consisted of:
Alex Black, Jeremy Gostick, Matt Hemsley, Will Rollo, Michael Slater, Rohan Soni, Lee Staley, Daniel Vulkan and Tom White, under the direction of Lee Summerfield.

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Key facts

Summary

Scope of the report

1 Since 2012, the Ministry of Defence (the Department) has published an annual Affordability Statement on the affordability of its 10-year plan to deliver and support the equipment that the Armed Forces require to meet their objectives.1 We report on the robustness of the assumptions underlying the Statement.

2 Each year the Department also presents to the Committee of Public Accounts a Major Projects Report, which provides data on the cost, time and performance of the largest defence projects.2 We review the information underlying in-year variations to cost, time and performance.

3 The Equipment Plan is the Department’s forecast budget to cover the costs of procurement and support of military equipment for the next 10 years. In 2012, the Department adopted a new approach to generate greater stability in its procurement activity. This involved developing a budget for a ‘core programme’ of key equipment projects, with additional sums set aside for contingency and emerging requirements. The Equipment Plan is updated annually. For the period 2015 to 2025, the equipment budget is £166 billion, made up of procurement (£69 billion) and support (£84 billion) budgets, a central contingency reserve (£4.3 billion), and an unallocated budget (£9.5 billion) that the Department has not yet committed to specific programmes. The Plan is funded from the Department’s overall budget, and makes up more than 40% of its planned spend.

4 This report combines the Major Projects Report and the Equipment Plan to give a rounded view of the Department’s progress and maintenance of its equipment portfolio. We have selected a sample of 17 projects as the basis for reporting on performance and to support our review of affordability.3 For continuity, we have used the same sample as in 2014. Together these projects make up a significant proportion of the Department’s equipment spend.

5 Fiscal responsibility for the Equipment Plan is delegated to the three Front Line Commands of Air, Army and Navy, the Joint Forces Command and the Strategic Programmes Directorate within Head Office (collectively known as ‘the Commands’). Responsibility for project delivery remains principally with the Defence Equipment and Support organisation with delivery of Information Systems and Services the responsibility of the Joint Forces Command.

6 We have not set out to offer a definitive view on the affordability of the Equipment Plan as it is, by its nature, based on assumptions about the future that will inevitably change. Rather, we review the assumptions that underpin the forecast costs and funding to assess whether they were reasonable and consistently applied when they were made. We explain our approach in Part One. We look at: the Department’s assumptions underpinning the forecast costs of the Equipment Plan (Part Two); and the assumptions underpinning available future funding (Part Three). Parts Two and Three define whether the plan is affordable. In Part Four we review whether the disclosures in the Department’s statement are sufficient for the reader to understand fully the sensitivities of the affordability position. Appendices One and Two contain full details of our audit procedures, and Figure 14 gives an overview of the projects included in our analysis. Summaries of the projects in our sample are included at Appendix Four. The full set of information for each project is set out in the project summary sheets prepared by project teams, which are included as Volume II of this report.

Key findings

The Department’s ability to fund the Equipment Plan

7 The forecast cost of the Equipment Plan 2015 to 2025 is £0.7 billion higher than the forecast cost of the 2014 to 2024 Equipment Plan across the 9 years they have in common. Overall, the forecast cost of the Equipment Plan 2015 to 2025 is £3.5 billion higher, mainly due to the effect of bringing 2025 into the 10-year planning period. The forecast cost of the plan for 2015 to 2025 is £166.4 billion compared with £162.9 billion for the period 2014 to 2024 (see Figure 1). Since 2012, the Department has emphasised the importance of the affordability of its core equipment programme. For the Department to have confidence that the Equipment Plan is affordable, the combined cost forecasts for its core programme of projects need to be contained within the sums made available by HM Treasury, allowing for the non-equipment commitments of the Department. The Department has held funding back for the period beyond 2021-22 to preserve flexibility ahead of the outcomes of the Spending Review and Strategic Defence and Security Review (paragraphs 2.2 and 2.3).

8 The Department was prudent in planning its Equipment Plan funding for 2015-16 on the basis of the previous year’s assumptions about future funding of its core budget. Government announcements about future funding of the defence budget have confirmed that Defence can continue to plan on growing the Equipment Plan budget by 1% above inflation year-on-year for the remainder of this Parliament (although this is not guaranteed for the full period of the Equipment Plan). The Department can choose to spend more of its core budget than that on equipment procurement and support (paragraphs 3.3, 3.4 and 3.16).

9 Any judgement about whether funding levels will be adequate in the future depends upon the results of the government’s Spending Review, due in November 2015, and Strategic Defence and Security Review. Government announcements about future funding of the defence budget in July 2015 confirmed the realism of the Department’s March 2015 assumptions about money available for the 2015 Equipment Plan until 2020-21.In the meantime, the Department has budgeted prudently for the years beyond 2020-21 to maintain financial flexibility ahead of the Spending Review (paragraphs 3.2 and 3.4 to 3.5).

10 The Department’s contingency may not be enough to mitigate the combined effects of underestimates in project team costs and equipment plan budgets. The Department has a £4.3 billion contingency budget across the 10-year Plan to mitigate potential cost increases within the core Equipment Plan. This is £0.7 billion less than the current ‘realistic’ estimate of cost outturn of the Equipment Plan made by the Department’s Cost Assurance and Analysis Service. If this estimate proves to be correct, the Department may need to draw on the £9.5 billion it has set aside to deliver wider defence capability, which is not currently included in the core programme (paragraphs 2.13 and 3.9 to 3.11).

11 The Department’s Affordability Statement should be clearer about uncertainties in the costs within the Equipment Plan. The Statement does not explain the range of possible cost outcomes across projects, even though it is good practice to express forecasts in these terms in recognition of the uncertainties within forecasts. Nor does it quantify risks not included in cost forecasts (paragraph 4.5).

Confidence in performance of major procurement projects

12 Our review of the forecast cost of 13 major projects where the Department has decided to buy equipment shows that in aggregate the cost and performance of these projects has remained stable during 2014-15. The forecast cost of these projects has reduced by £247 million (0.4%). This was largely due to an accounting adjustment on the Typhoon fighter jet project. Forecast costs reduced on 5 other projects and increased in 3, notably the Astute submarine project. The Department forecasts the projects will achieve 99% of their intended capability (paragraphs 2.6, 2.7 and Appendix Three).

13 With one notable exception, projects across our sample have reduced the overall level of time slippage compared to last year. During 2014-15 there were in-year time variations totalling a net 60 months (compared with 14 months in 2013-14) for 5 out of 12 projects. Most of this was a net 52-month deferment of the final stage of the Core Production Capability project. This was done to accommodate the production of an additional reactor core for HMS Vanguard and to maintain the capability to supply a further core for HMS Victorious, if required. This was a new requirement that the project team could not have foreseen and which was outside their control. The remaining projects had a net variation of 8 months, compared with 14 months in 2013-14 (Appendix Three).

14 The longstanding annual review of Major Projects does not align with the Department’s more extensive internal performance reporting processes. Over the coming months the Department and the National Audit Office (NAO) will work together to develop a more cost-effective approach to keeping Parliament informed about the progress of major defence projects, capitalising on expected improvements in data quality to reduce the resources required for data validation (paragraphs 1.11 and 1.12).

Confidence in the longer-term forecasts of performance in our sample

15 Forecast costs for our sample of projects across the 10-year Equipment Plan period are largely stable. Alongside our review of the aggregate cost changes from the previous year (paragraph 10), we also undertook a detailed review of the major cost lines for 17 of the largest procurement projects to see whether costs were stable at the project level. We found that the forecast costs for the period 2015 to 2025 increased by £0.7 billion (1.6%) compared with the forecast cost last year (paragraph 2.5).

16 Projects in our sample have improved their cost forecasting and risk management practices. Twelve of the 17 procurement projects had generated a range of potential costs in line with good practice, compared with 9 projects in 2014. Most teams’ approach to – and understanding of – risk management is now reasonable. However, we still have concerns about how a core of procurement and support teams in our sample value risks and incorporate those risks into cost models. In 7 projects we found that teams were using inflation rates which were either out-of-date or not evidence-based (paragraphs 2.16 to 2.20).

Confidence in the longer-term forecasts of performance in the Department’s portfolio

17 There is evidence that the Department and its contractors are still underspending as they struggle to carry out planned activities on schedule, which could be an indicator of future slippage in delivering these projects. The Department spent £14.47 billion in 2014-15. This was a £41 million underspend against its original equipment budget, compared with an overspend of £185 million in 2013-14. The Department again programmed additional work against its budget on the assumption that not all of the planned spend would occur in-year, amounting to around £700 million in 2014-15. Without this additional work the underspend on the programme would have been £732 million. The Cost Assurance and Analysis Service’s annual detailed review into the causes of project underspending was not available before publication of our report this year. Previous reports have shown that re-scheduling of activities to reflect slower-than-expected progress was an important contributory factor. There is evidence to support the view that this is still the case for our sample of procurement projects, which had a net underspend of £295 million in 2014-15, compared with a slight overspend in 2013-14. A significant contributory factor was the movement of activity into future years, both planned and unplanned (paragraphs 2.9 to 2.12).

18 How the Department manages a small number of very large procurement projects will be crucial in whether it maintains the affordability of the Equipment Plan. The Department’s Cost Assurance and Analysis Service estimates that procurement costs could be underestimated by as much as £2 billion. Three-quarters of this amount is attributable to 4 projects, including the Successor and Astute submarines and Type 26 warship. The Department’s Sentinel project monitoring system also gives high-risk ratings to some of these 4 projects (paragraphs 2.13 to 2.15 and Appendix Three).

19 The Department faces a continuing challenge in reining in support costs. The independent cost estimates of the Department’s Cost Assurance and Analysis Service now cover a greater proportion of the support budget. As a result, it estimates that the level of understatement of support costs within the Equipment Plan has risen from £2 billion (based on 28% coverage) to £2.8 billion in 2015 (covering the total support plan). As the Equipment Plan period rolls forward, it is encompassing the entry into service of major new equipment. As a result, the budget for support of equipment not yet in service has risen 23% in 2 years. Our validation work continues to show that cost forecasts are not as well developed for support projects (paragraphs 2.3, 2.4 and Figure 7).

Conclusion

20 The Equipmqnt Plan looks more stable than last year and progress has been maintained. Analysis of our sample of major projects indicates that the Department has continued to maintain overall stability within the costs of the 10-year Equipment Plan. There was little sign of in-year cost growth or increase in forecast costs in the rest of the 10-year planning period. There are also indications that the Equipment Plan will remain affordable for the rest of the Parliament if this stability is maintained, based on the level of funding which seems likely to be made available.

21 The Department will need to remain vigilant, however. Uncertainties about future cost increases of some very high-value projects that are still at the pre-contract stage, together with the Department’s need to make room in its budget for the support costs of a range of new equipment currently being procured, show that the drivers of cost increases remain present. The large time slippage on one project in our sample, due to a low-probability, high-impact risk materialising this year, shows the importance of incorporating such risks into cost plans and forecasts across all projects.

Recommendations

a The Department should improve the transparency of the Affordability Statement by giving more insight into how the forecast costs of projects within the Equipment Plan might vary. There are inherent uncertainties around projects at varying levels of maturity. The Department’s guidance on good practice in costing projects explains that a range of potential costs should be reported to reflect levels of uncertainty, and that high impact, low probability risks should be accounted for in plans. The Department should also apply this at the portfolio level.

b The Department needs to give urgent attention to closing systemic and project-specific capability gaps within project teams. For example, a lack of capability in finance matters continues to give rise to large accounting corrections and adjustments. The success of the Defence Equipment and Support organisation’s transformation programme relies on removing capability gaps of this sort.

c The Department should enforce compliance with mandated guidance and recognised good practice on project management and other issues by its project teams. This is integral to the Defence Equipment and Support organisation’s transformation programme.

d The Department should use the Affordability Statement to clarify its position on programming additional work in-year to ensure that it spends the equipment budget. The Department continues to rely on the programming of additional work to compensate for likely underspends on core activities in the Equipment Plan. The Department should ask the Commands to explain how they will use their new responsibilities for in-year budget management to provide incentives for contractors to either deliver contracted levels of activity or develop more realistic delivery plans. The Department should develop a clear timetable for minimising or removing reliance on over-programming to spend its budget.

e The Department should work with the NAO to produce a more timely and efficient Parliamentary accountability process to report progress on major projects. The format of the Major Projects Report, developed more than 30 years ago, does not align with the information produced by the Department’s internal systems.

1 These objectives are set out in: HM Government, A Strong Britain in an Age of Uncertainty: The National Security Strategy, Cm 7953, October 2010.

2 The project summary sheets the Department submits to Parliament are contained in Volume II of this report.

3 We also looked at the assumptions underlying a small additional sample of support projects.

Part One

Affordability of defence equipment

1.1 Since 2013 the Ministry of Defence (the Department) has published its annual Equipment Plan setting out its spending plans for the equipment the Armed Forces need to meet their objectives over the next 10 years.4 From 1 April 2015 to 31 March 2025 the Equipment Plan has a total budget of £166.4 billion for:

equipment procurement (£68.5 billion);

equipment support (£84.1 billion);

a contingency provision (£4.3 billion); and

an unallocated budget of £9.5 billion, consisting of £7.3 billion of ‘headroom’, which has previously been allocated to Commands from 2017-18, and £2.2 billion retained by the Department centrally to meet longer-term needs.

1.2 Each year the Department also presents to Parliament a Major Projects Report. This gives data, as at 31 March, on the cost, time and performance of the largest defence projects where the Department has taken the decision to proceed to the main demonstration and manufacture stages of the project. This means that it has approved a budget and timetable. The Report also gives less detailed information about the largest projects where the Department has not yet taken a decision but project development work is ongoing.

Our review of progress

1.3 In this report we use information from both the Equipment Plan and the Major Projects Report to give a full overview of the Department’s major procurement programmes. Relatively small changes to planned cost and delivery on large programmes can have an impact on the affordability of the Equipment Plan. By combining the two pieces of work, we can help Parliament to assess whether the performance of the projects supports the view that the Equipment Plan is affordable. The Equipment Plan and the Major Projects Report outline the procurement costs from the point of view of what is approved and what is expected.

1.4 This report examines whether:

the costings in the 2015 to 2025 Equipment Plan were based on broad assumptions that were reasonable and consistent. This includes how changes to the cost, time and performance of major projects beyond the 10-year period relate to overall affordability (Part Two). It draws on our examination of the data in the Department’s Major Projects Report (summarised in Appendices Three and Four);

the assumptions used in forecasting the total funding available to the Department and the funding allocated to the Equipment Plan are realistic (Part Three); and

the Department’s Affordability Statement contains enough appropriate information to make the reader aware of:

the Plan’s key assumptions and risks; and

how much the assumptions would need to change for the Equipment Plan to become unaffordable (Part Four).

Strategic Defence and Security Review 2015

1.5 The government has started its 5-yearly Strategic Defence and Security Review, which will dictate the Armed Forces’ capability and posture over the period to 2020. HM Treasury has confirmed that the Spending Review being conducted in parallel will set the Defence Budget for 5 years from 2016-17. The government expects the Spending Review to report in November 2015.

1.6 The National Audit Office (NAO) is publishing this report in October in order to provide a view of the affordability of the Equipment Plan as it stands at the point of publication of the review. We intend that Parliament will be able to use our findings as a baseline against which to assess the implications of the Reviews when they report.

Our approach

1.7 To support our review of the assumptions that underpin the forecast costs of the Equipment Plan, we looked in detail at 17 of the Department’s largest procurement projects and 4 support projects. For the sampled projects we looked at whether the assumptions used to forecast the 10-year costs were reasonable and consistent. For the 17 procurement projects, we also looked at the progress of cost, time and performance against the original approvals (that being the data included in the Major Projects Report). Summaries of the projects in our sample are included at Appendix Four. The full set of information for each project is set out in the project summary sheets completed by project teams, which are included as Volume II of this report.

1.8 Our approach to examining the 10-year Equipment Plan was to look at the audit evidence that the costs are sufficiently robust for planning purposes by reviewing: the cost modelling; risk management; the Department’s own assurance processes; and in-year performance against budget. We also worked closely with the Cost Assurance and Analysis Service of the Department to understand the work it has done through its independent cost reviews and estimates, both for the projects we sampled but also on the wider Equipment Plan, as well as their cost forecasting work on behalf of project teams.

1.9 The Equipment Plan covers a 10-year period, whereas the project approvals analysed in Appendix Three can cover a longer period. Therefore, the Equipment Plan and Major Projects Report measure the Department’s performance in different ways. This is illustrated by Figure 2, which shows the cycle of the procurement projects and the sub-set of costs that are included in the 10-year Equipment Plan. The sample of support costs is shown in Appendix Two.

The path to a reasonable assurance engagement

1.10 The NAO and the Department wish to move to a position whereby the Department is able to take much greater ownership of the information contained in the project summary sheets compiled by project teams in Defence Equipment and Support and Information Systems and Services (Volume II of this report, as summarised in Appendix Four and analysed in Appendix Three), and to develop a more efficient and sustainable means of producing and validating their content.

1.11 The process of preparing and validating the project summary sheet reports requires considerable effort on the part of our staff and that of Defence Equipment and Support and Information Systems and Services. This is because the format, developed more than 30 years ago, does not align with the information that the Department’s internal systems produce to measure project progress. These systems have themselves been identified by Defence Equipment and Support’s new private sector partners as priority areas for improvement during the organisation’s current transformation. Over the coming months, we and the Department will work together to develop a more cost-effective way of keeping Parliament informed about the progress of major defence projects. We will take advantage of expected improvements in the quality of data to reduce the resources needed to validate data.

1.12 We will continue to provide assurance to Parliament each year about the affordability of the Equipment Plan by reviewing its underlying assumptions. Through our ongoing work to assess the capability and capacity of the Cost Assurance and Analysis Service we hope to reach a position where we can rely on the Department’s internal controls. Having evidence that strong controls are in place will allow the Department to show stakeholders, particularly industry, that it is negotiating from a stable and credible position.

4 The Armed Forces’ objectives are set out in: HM Government, A Strong Britain in an Age of Uncertainty: The National Security Strategy, Cm 7953, October 2010; HM Government, Securing Britain in an Age of Uncertainty: The Strategic Defence and Security Review, Cm 7948, October 2010.

Part Two

Robustness of assumptions underpinning costs

2.1 The £166.4 billion Equipment Plan budget for the next 10 years (paragraph 1.1) consists of a core programme of procurement projects, and associated support budgets, and funds held in reserve. The core programme consists of projects identified as priorities by the Ministry of Defence (the Department). We have examined:

changes to forecast project costs and budgets at the aggregate level and for a sample of 17 procurement projects (paragraphs 2.2 to 2.7); and

the quality of cost forecasts for the procurement sample and 4 support projects (paragraphs 2.8 to 2.20).

Changes in forecast budgets and costs

Changes in forecast budgets

2.2 Figure 3 describes the changes in budget totals since 2014-15 and the 10-year budget profile.

2.3 Between the 2013-14 and 2014-15 Equipment Plans there has been a net increase of £3.5 billion in the total Equipment Plan budget. This is entirely accounted for by increased funding for equipment support, split between support for new and in-service equipment. This partly offsets the £4.1 billion taken as efficiency savings from last year’s support budget. As shown in Figure 4, the main impact of this increase is to use room in the budget created by the 2013-14 reductions to accommodate new support requirements for the Army, Navy and Air commands into the 2020s.

2.4 The support budget is split between support for equipment in-service and support for equipment being brought into service (such as the projects in our sample). In the past 2 years the support budget as a whole has fallen by 4%. The Department has managed to do this while making room in the budget to support major new equipment being brought into service, the provision for which has increased by 23% over the same period.

Changes in forecast costs

2.5 Across the 25 main cost lines in our sample of 17 projects, forecast procurement costs for the period 2015 to 2025 have increased on 8 projects and decreased on 9. The net effect has been an increase in procurement costs for our sample of £0.7 billion (Figure 5) across the 10-year period 2015 to 2025 (a 1.6% net increase in forecast project costs since 2014). Around £330 million of this is due to increases in the forecast production costs of the Type 26 Global Combat Ship project, partly due to the inclusion of the costs of the ship’s 5-inch gun within the project, which was previously accounted for separately. Since the Department has approved expenditure on the demonstration phase and long-lead items associated with the manufacture phase for Type 26, but has not yet formally considered a business case for full investment in the manufacture phase, the costs may increase or decrease as understanding of the project improves.

Changes in forecast costs against project approvals

2.6 We reviewed the cost movements for the elements of the 13 projects in our sample where the Department has approved at least some expenditure on the main demonstration and manufacture stages of the project (see Appendix Three). These approvals, which cover a specific stage of the project in each case, might cover periods of less or more than the 10 years in the Equipment Plan. Although there were in-year variations against approved costs on 8 individual projects, the costs of the sample at the aggregate level were stable, with a net reduction in forecast costs against approvals of £247 million (0.4% of the current forecast costs for the sample).

2.7 The project with the largest variation was the Typhoon fighter aircraft. This had an overall net reduction of £202 million, mainly driven by an accounting adjustment after an examination of project costs by the Department’s Cost Assurance and Analysis Service. Within the overall reduction of £247 million there was a net increase of £147 million across Astute submarines, made up of many individual variations with a range of causes. At the time of publication, the Department was considering its response to a report from the contractors of a potential increase of less than 1% in forecast costs by the contractors on the Queen Elizabeth Carriers project.

Quality of project team forecasting

2.8 The uncertainties about the likelihood of different scenarios and risks impacting on large defence projects mean that each project has a range of potential outturn costs. The Department requires project cost estimates in the Equipment Plan to be forecast at the median of the potential cost range; this is referred to as the ‘50th percentile cost’. At this point, each project is as likely to cost less than this estimate as it is to cost more. Some variation against this single point estimate is therefore to be expected. Forecasting requires judgement, so costs are not absolute and can be over- or understated. Nevertheless, the affordability of the Equipment Plan rests on the ability of the 50th percentile costs for each project within it being accurate enough for variances to be accommodated within the Department’s contingency provisions.

Accuracy of cost forecasting in-year

2.9 If in-year expenditure is significantly above planned levels this will have an immediate impact on the Department’s budgetary management. If it is significantly below, this will have implications for spending in future years as it is likely to indicate delays in project progress.

2.10 Figure 6 shows that the Department programmed around £700 million of additional work to its core equipment budget of £14.5 billion during 2014-15 on the assumption, based on past experience, that not all of the planned spend would occur in-year, with the result that it spent within £41 million (0.3%) of its original budget. This is a much closer matching of expenditure to budget than in previous years. In 2013-14 we reported that the Department underspent on equipment by £948 million against the total value of its work programme for the year. For 2014-15 the equivalent figure was £732 million. From 2015-16 Commands will take on the responsibility for forecasting and managing their equipment programmes in-year. This will present additional challenges in managing the Department’s overall spend against budget.

2.11 The projects in our sample had a net underspend of £295 million (6%) in 2014-15, compared with a £60 million overspend in 2013-14. The main reasons for this underspend were accounting errors and activity moving into later years:

£238 million ‘underspend’ on the Typhoon project, which was largely due to a legacy accounting error recognised in the 2013-14 accounts.

£75 million underspend on the A400M transport aircraft, which reflects differences between forecast and actual foreign exchange rates in 2014-15, a change in the accounting treatment for assets under construction and a re-profiling of aircraft deliveries.

£53 million underspend on the FASGW(H) missile, reflecting scheduling changes following contract award.

£51 million underspend on the Queen Elizabeth Carriers due to the contractors not achieving expected levels of activity.

2.12 By comparison, the Scout specialist vehicle project spent £79 million more than originally planned. This reflected the Army’s decision to accelerate the project as explained in last year’s report.5

Accuracy of cost forecasting over the longer term

2.13 Each year the Department’s Cost Assurance and Analysis Service estimates the extent to which project teams may be underestimating the real costs of projects in the cost forecasts that together make up the 10-year Equipment Plan. Figure 7 shows how the estimates have changed since last year. The Service has extended its coverage to the point where it is willing to give a forecast estimate for the Plan as a whole, both procurement and support. It reports that the cost of the Plan as a whole is likely to be underestimated by £5 billion. The Service’s estimates are built on in-depth cost estimates for 38 of the largest procurement projects and 24 of the largest support projects. The equivalent figure for 2013-14, based on a less complete analysis, was £5.2 billion. Since this estimate covers the period 2015 to 2025 the level of understatement is reduced by any costs the Service has moved outside of the 10-year period because it considers current timetables to be unrealistic.

2.14 The Service has found that potential underestimates of costs are increasingly concentrated in a handful of large projects. The Type 26 Global Combat Ship, Astute submarines, Successor submarine platform and composite risks across the fixed wing portfolio between them account for 75% of the total underestimate on equipment procurement projects. We discuss some of these projects in Appendix Three. At the same time, the proportion of the total underestimate attributable to support costs now constitutes more than half of the total Equipment Plan variation.

2.15 These variances can be partly explained by the level of uncertainty around projects that are not ‘on contract’. These uncertainties can be accounted for in very different ways. For example, the Service may try to reduce the level of uncertainty by costing projects to a higher level of confidence, whereas the project team is required in almost all cases to forecast at a 50% confidence level.

Treatment of inflation in forecast costs

2.16 Headline rates of inflation are currently very low, but it is important to incorporate realistic estimates of inflation as these can be a significant element of future costs in defence projects due to the particular market conditions that apply in the sector and the long timescales for major defence procurements. Across our sample of procurement and support projects, we identified 7 cases where we had concerns about the treatment of inflation either because central guidance is not being followed or rates are not being revisited regularly. Overall there has been no improvement since last year in the treatment of inflation.

Cost modelling

2.17 Generating a range of probable costs is good practice as a means of allowing for the uncertainties around projects under development, and helpful in understanding risk. Projects need to be aware of the likelihood and potential cost of risks that are not built into projects’ budget lines (‘risks outside costing’). Of the 17 procurement projects we examined, 12 had generated a range of potential costs in line with good practice, and could put a value on ‘risks outside cost’, an improvement on 9 projects in 2014. The total impact of these risks would be £2.4 billion if all risks were realised.

2.18 As with last year, the support projects in our sample are more likely to display poor practice in their cost modelling than the procurement projects, although this year we noted a number of improvements in the support elements of the Lightning fighter project. Last year, for example, we noted the lack of robust cost forecasts for the Typhoon In-Service Support project. The team have worked since last year to better understand costs and risks, and have continued to identify cost reductions for the project. The project has several separate cost models which have been reviewed by HM Treasury and which represent separate international and national contracts within their overall approved support budget. The Project team do not have an overarching cost model for Typhoon support costs as a whole, but will work towards achieving this.

Accounting for risk

2.19 All 17 procurement projects we reviewed had a formal process for assessing risk. It is not unreasonable to exclude some risks from the forecast costs, for example where they are low probability but high impact, or when the risk is outside the team’s control. The degree to which teams are able to pursue good practice can also be affected by the stage reached by the project, although most projects in our sample are now at a mature stage of development. Most teams have developed an acceptable approach to risk management and understanding, but we consider that 6 procurement and support teams continue to display poor practice in their valuation of risks and incorporation of those risks into cost models.

2.20 Last year we reported that the Defence Equipment and Support organisation had set up a cost forecasting improvement programme. This ran until February 2015. The key proposal that has emerged from it is the setting up of a new professional function within the organisation around project controls. This is designed to improve organisational capability in risk management, schedule management, cost estimating and cost controls. The organisation is defining standards and the relevant staff will be trained as part of the organisation’s transformation programme to demonstrate clear improvements in these areas by April 2017. The Department has a risk contingency in the Equipment Plan that it considers addresses some of these financial risks (see paragraph 3.9).

5 Comptroller and Auditor General, Major Projects Report 2014 and the Equipment Plan 2014 to 2024, Session 2014-15, HC 941-I, National Audit Office, January 2015.

Part Three

Assumptions underpinning funding

3.1 The Ministry of Defence (the Department) funds the Equipment Plan, with the budget allocated by HM Treasury through the Spending Review process. The Department has to allocate its budget for equipment costs internally, ensuring that there is also enough budget to meet non-equipment costs, such as the management of the Defence Estate and costs of Armed Forces personnel. The Department is planning to spend £14.9 billion on equipment procurement and support in 2015-16. This is 43% of its core budget in 2015-16 (see Figure 8).

Sufficiency of departmental funding

Level of funding over the 10-year Equipment Plan

3.2 The Department’s budget for the 2015 to 2025 Equipment Plan was based on assumptions made before the 2015-16 budget. Announcements in the budget confirmed the realism of the Department’s March 2015 assumptions about money available for the 2015 Equipment Plan until 2020-21. The government has also committed to meeting the NATO target of spending 2% of GDP on defence for the rest of the decade. Under the existing NATO definition, which allows the government to include all defence spending and military pensions within the calculation, the government should meet this target until 2022-23 on current plans.

3.3 In Figure 9 we show funding for the 2015 Equipment Plan; the likely level of future funding within the core departmental budget from which the Equipment Plan is drawn (based on assumptions at March 2015); and the Department’s funding against the NATO target.

Proportion of funding allocated to the Equipment Plan

3.4 Equipment Plan funding for the remainder of the Parliament remains in line with the Equipment Plan funding settlement set out by HM Treasury in July 2011, for spending on the Plan to increase by 1% above inflation to 2020-21. In our scenario the 10-year Equipment Plan’s share of the core budget would have increased from 44% in 2013-14 to 46% in 2015-16, and would average 47% across the 10-year period (see Figure 9). The Department does not aim for a particular percentage of the core budget to be allocated to the Equipment Plan. Instead, it responds to changes in its register of capability risks. In July the Government announced that the whole defence budget would increase by 0.5% above inflation until 2020-21. In practice this makes little difference to the projected amount available for the Equipment Plan in the future, as resulting increases are offset by reductions in the latest forecast rates of inflation.

3.5 The proportion of the Department’s total budget that is available for the Equipment Plan depends on the settlement that will be agreed with HM Treasury in the next Spending Review. The Department has budgeted conservatively for the latter years of the Equipment Plan (see Figure 3). Beyond 2021-22 the amounts within the 2015 Plan are lower compared with the 2014 and 2013 Plans. Whether the Department can allocate a greater proportion of its budget to the Equipment Plan also depends on whether it can achieve plans to reduce staff and its Defence Estate.

Funding changes between 2014 and 2015

3.6 The Department’s ability to fund non-equipment costs is also dependent on it controlling planned growth in the Equipment Plan. There is a net increase of £3.5 billion to £166.4 billion between the 2014 to 2024 and 2015 to 2025 Plans. However, across the 9 years that the two plans have in common (2015–2024) there is a smaller increase of £0.7 billion (see Figure 10). Since April 2014 Commands have had control of equipment budgets. They have increased commitments to specific projects, partly by drawing money from headroom and contingency provisions.

Management of costs and risks at portfolio level

Progress in making savings within the Equipment Plan

3.7 Maintaining the affordability of the Equipment Plan depends, among other things, on achieving billions of pounds of savings built into the Plan. The main savings initiatives are shown in Figure 11. They cover different time periods and were developed using different methodologies, and the Department cannot therefore measure the degree to which they are ‘on target’. There are 3 main initiatives:

The 2014 to 2024 plan removed £4.1 billion from support budgets in anticipation of the Commands making savings, working with the support of external contractors. The actual savings made so far are higher than £2.5 billion, but some are required to offset increases in the cost of projects that were not reflected in forecasts within the Plan.

The Complex Weapons procurement approach estimated financial benefits of £1.2 billion over 10 years from 2010. This represents the forecast net savings to be delivered through the current ‘partnered portfolio management’ procurement approach compared to open competition. A review by the Cost Assurance and Analysis Service in September 2015 judged that the target remained achievable, albeit highly dependent on successful execution of its component projects and the value and sequencing of the programme being broadly maintained.

The Submarine Enterprise Performance Programme involves the Department and its industrial partners working together to realise savings in the submarines and nuclear deterrent programmes.

3.8 The Department also needs to identify £553 million of savings over the 10-year period from the Defence Core Network Services programme, part of our sample of support projects. The programme was a group of interrelated IT projects, which was separated into its component parts at the end of 2013-14. This followed a report by the Major Projects Authority which concluded that the programme was too large and complex to be delivered successfully. The savings are the amount by which current cost estimates across all the projects exceed provision for them within the Equipment Plan.

Sufficiency of contingency

3.9 Contingency funding is intended to cover the risk of:

cost growth;

failures to meet savings targets;

risks materialising;

unexpected events that have financial impacts; and

over-optimism in project teams’ costings.

3.10 The Equipment Plan contingency funding of £4.26 billion is available for use from 2017-18 onwards, and is included within the Plan to mitigate increased uncertainty in forecasting costs in later years. During 2014-15 £340 million of contingency was allocated to accelerate production of the Scout armoured vehicle and to underwrite capitalisation of the Rotary Wing Military Flying Training System PFI scheme.

3.11 At paragraph 2.13 we explained that the Cost Assurance and Analysis Service estimates that forecast costs across the Equipment Plan as a whole may be underestimated by as much as £5 billion. This would exceed the current contingency provision by £0.74 billion if all risks were realised.

Achievability of strategic objectives

3.12 The Department’s ability to achieve its wider objectives will depend on its ability to make a success of its new operating model and make efficiency savings. It will also have to adjust to meet the new strategic objectives set out in the forthcoming Strategic Defence and Security Review.

3.13 We recently reported on the Department’s efforts to improve its strategic financial management, which will be crucial in maintaining the affordability of the Equipment Plan.6 We found that commands are taking greater ownership of Equipment Plan budgets but they are still building the capacity that will allow them to develop financial management skills and fully understand equipment costs.

3.14 Within the 2015 to 2025 Equipment Plan, there is unallocated procurement expenditure – ‘command headroom’ – of £7.3 billion, available from 2017 to 2023. Commands can use this money to fund extra projects beyond the current core programme according to their military priorities (and assuming they are affordable), so that they can reach the full equipment capability needed to meet their longer-term objectives. The amount remaining unallocated has fallen from £8.4 billion 2 years ago, as they have begun to fund additional capability.

3.15 Army Command is provisionally allocated more than 50% (£3.9 billion) of the command headroom. As was the case last year, it has allocated some of this to fund enhanced capability in its Scout and Warrior armoured vehicles. Navy Command are the only other command to have utilised some of the headroom allocated to it, although all commands have planned how their allocations are to be spent.

3.16 Part of the fall in command headroom is because, beyond 2023, ‘headroom’ is being held centrally. Central Departmental headroom has increased from £1.15 billion to £2.15 billion this year. This gives the Department the option of using this money for equipment or to meet other capability objectives. The Department has taken these steps for two reasons:

HM Treasury’s current agreement to increase Equipment Plan expenditure by 1% above inflation each year runs out in 2021.

The forthcoming Strategic Defence and Security Review and Spending Review, due to be published in November, may require rationalisation of the portfolio or the re-prioritisation of activities across the Department as a whole, or both.

3.17 The Department’s ability to spend the intended amounts on the Equipment Plan also depends on it achieving planned savings initiatives and disposing of expected levels of surplus land. As we reported in July, the Department asserts that it is on track to deliver most of the cost reductions and savings to which it has committed.7 In the 2010 Spending Review the Department was set a target of achieving £1.8 billion from land disposals over 10 years. At the time of publication, the Department had accrued £0.7 billion of savings towards this target.

6 Comptroller and Auditor General, Strategic financial management in the Ministry of Defence, Session 2015-16, HC 268, National Audit Office, July 2015.

7 See footnote 6.

Part Four

Disclosures within the Department’s affordability statement

4.1 The Ministry of Defence (the Department’s) annual Statement on the Affordability of the Equipment Plan (the Statement) should:

aid transparency;

show whether the Equipment Plan is affordable and achievable; and

give the defence industry more information for planning.

4.2 Using International Assurance Standards (see Appendix One), we examined whether the Statement contains adequate and sufficient disclosures for users of the Equipment Plan to fully understand the key assumptions that:

have been used to generate the Equipment Plan costs and the sensitivity of the costs to changes in those assumptions; and

the Department has made about the level of available future funding, and the sensitivity of affordability of the Equipment Plan to changes in those assumptions.

Disclosure regarding cost assumptions

4.3 The Statement for 2014-15 is similar in format and content to those of earlier years. It breaks down the Equipment Plan budget into its component parts. This enables the reader of the Statement to identify:

the costs related to procurement and support;

the unallocated budget; and

the contingency provision detailed on a year-by-year basis for the reported 10-year period.

4.4 There is sufficient discussion for the reader to understand the nature of and rationale for the different components of the Equipment Plan, including the contingency provision and unallocated budget.

4.5 The Statement’s disclosures have not, however, noticeably built on the improvements we noted last year in a way that would help readers to fully understand the fundamental assumptions that underpin the Equipment Plan, and the risks and sensitivities in implementing it within budget. Specifically, there is still scope to explain:

the range of possible amounts that the total Equipment Plan could cost. In line with good practice most of our sample of projects now present a range of possible costs for the project to reflect, for example, greater levels of uncertainty at an early stage of development, and the Plan does not reflect this, nor does it give an indication of which projects present the greatest threat to the Plan’s overall affordability as a result;

associated with this, the total value of ‘risks outside costing’ (see paragraph 2.17) and the impact on affordability should these risks materialise;

the drivers for the increase in the budget this year;

the approach to inflation and foreign exchange assumptions and the sensitivity to these assumptions; and

further information on the milestones against which savings targets are being measured (paragraph 3.7).

Disclosure regarding funding assumptions

4.6 The Statement adequately discloses that funding available to the Equipment Plan is underpinned by an agreement with HM Treasury that provides for a minimum level of funding based on a 1% increase above inflation until 2020-21. It is also clear about the method and rationale for allocating funding to a core programme while retaining an unallocated budget (headroom). However, for the user to fully understand the effect that changes in the funding assumptions could have on affordability, the Statement should also contain information on how the Department’s assumed funding level for the Equipment Plan budget relates to its assumptions for departmental funding as a whole. It should also explain the sensitivity of the Plan’s affordability should these change, for example through failure to meet cost reduction targets in non-equipment areas of the Department’s budget.

Appendix One

Our audit approach

1 For the second year running we have combined what were previously two separate outputs, the Major Projects Report and our review of the affordability of the Equipment Plan. This reflects the close relationship between the two pieces of work:

The sample of projects for our Major Projects Report is also used for our review of the Equipment Plan.

The Major Projects Report looks at the impact of changes to cost, time or performance measures. It provides some evidence of the stability of the programme on which the forward assumptions in the Equipment Plan are based. Our review of the Equipment Plan provides further detail on the accuracy and risks to the project cost and time forecasts in the Major Projects Report.

2 Our work is based on a sample of major military equipment projects. These include 17 of the Ministry of Defence’s (the Department’s) largest procurement projects. We also looked at 4 of the largest equipment support projects for our Equipment Plan work.

Affordability of the Equipment Plan

3 As in our previous reports, we built a model to test the Department’s assertions within its assessment of the cost of the Equipment Plan and the funding available. The model breaks these assertions down into a set of hypotheses, as set out in Figure 12. Appendix Two sets out the evidence we used to test these hypotheses.

4 The procedures we performed have been selected by drawing on the principles set out in the professional standard ‘ISAE 3000: Assurance Engagements Other Than Audits or Reviews of Historical Financial Information’.

Project cost, time and performance

5 This is the thirty-second year in which we have examined the in-year changes to the cost, time and technical performance of the Department’s largest equipment projects.

6 We have published the Department’s data for the 17 projects in this sample, covering cost, time and performance against what was originally planned at the main investment decision. We validate but do not audit these data. We perform analysis to report on overall trends and in-year performance. We also validate and publish more limited data on the projects where the main investment decision is yet to be taken.

Assessing whether Affordability Statement disclosures are adequate

7 To assess whether the disclosures in the Department’s Affordability Statement are adequate and sufficient, we used as a framework the ’International Standard on Assurance Engagements 3400: The Examination of Prospective Financial Information’ (the Standard). The relevant elements extracted from the Standard that are applicable to this engagement are as follows:

The presentation of prospective financial information is informative and not misleading.

The assumptions are adequately disclosed in the notes to the prospective financial information. It should be clear whether assumptions represent management’s best estimates or are hypothetical. Where assumptions are made in areas that are material and subject to a high degree of uncertainty, this uncertainty and the resulting sensitivity of results need to be adequately disclosed.

The date as of when the prospective financial information was prepared is disclosed. Management needs to confirm that the assumptions are appropriate as of this date, even though the underpinning information may have been accumulated over a period of time.

The basis of establishing points in a range is clearly indicated and the range is not selected in a biased or misleading manner when results shown in the prospective financial information are expressed in terms of a range.

Appendix Two

Our evidence base

1 We reached our conclusions based on our analysis of evidence collected during fieldwork between June and August 2015.

Affordability of the Equipment Plan

2 We built a model to test the Ministry of Defence’s (the Department’s) assertions within its assessment of the cost of the Equipment Plan and the funding available. The model breaks these assertions down into a set of hypotheses. Our audit approach is set out in Appendix One. We referred to the following sources of evidence to test these hypotheses:

We reviewed alternative cost estimates generated by the Department’s internal Cost Assurance and Analysis Service. Where there were significant differences between the Service’s and the project teams’ estimates we evaluated the risk to the affordability assertion.

We reviewed the cost models and cost-estimating techniques used in generating cost forecasts; risk management; and how uncertainty and risk are built into costings. We also matched actual spend to contracted amounts.

We reviewed the application of central government guidance on how to treat inflation and foreign exchange.

We reviewed historical data on actual costs against planned spending. This enabled us to assess the Department’s ability to forecast costs accurately.

Project cost, time and performance

3 We report to Parliament on in-year changes to the cost, time and technical performance of major projects. We publish the Department’s data for the 17 projects; these data cover cost, time and performance against the original plans when the decision to proceed to the demonstration and manufacture phase was made. Our audit approach is detailed in Appendix One.

4 For the time, cost and performance of major projects we measured the largest projects’ forecasts against original approvals:

The project teams in Defence Equipment and Support and Information Systems and Services put together the project summary sheets that are published in Volume II of this report.

We validated the data back to supporting evidence such as planning documents, contracts, project plans, contractor reports and assessments of performance by the Director of Capability and Front-Line Commands.

We collected qualitative and quantitative data to consider whether the Department is anticipating that the project will meet the budget, time and performance expected when the main investment decision was made.

The sample of projects

5 The 13 procurement projects in our sample which have progressed to the point where the Department has approved expenditure on the main Demonstration and Manufacture phases are detailed in Figure 14. Our sample also includes 4 projects that are still in the assessment phase;

the Apache attack helicopter capability sustainment programme;

the Crowsnest radar system for the Merlin helicopter;

the Morpheus tactical communications programme; and

the Successor platform and propulsion unit to maintain the Continuous At-Sea Deterrent.

6 For our validation of the assumptions within the Equipment Plan we also examined 4 large projects within the support budget of the Plan:

in-service support to the Typhoon fighter aircraft;

in-service support to the Lightning II fighter aircraft;

in-service support to the Type 45 destroyer; and

the Defence Core Network Services programme to upgrade the Department’s communications infrastructure.

Appendix Three

Major projects: cost, time and performance in 2014-15

Scope of the review

1 Each year the Ministry of Defence (the Department) presents to Parliament a Major Projects Report that provides data on the cost, time and performance of the largest defence projects where the decision to proceed to the Demonstration and Manufacture stage has been taken (13 of the projects in our procurement sample).8 Full details of the projects are shown in Figure 14. The Department’s report also contains less detailed information on the largest projects where the main investment decision has not yet been taken. We validate, but do not fully audit, the data. This report presents our analysis and key conclusions. Short summaries of each project can be found at Appendix Four and the full project summary sheets are contained in Volume II of this report. As explained in paragraph 4 of our Summary, we have used the same samples in this review as our work on the Equipment Plan. An explanation of our approach is in Appendix One.

Cost

2 We examined the cost movements for the elements of the 12 projects in our sample where the Department has decided to proceed to the main Demonstration and Manufacture stages of the project (see paragraphs 3 and 4 below). We also examined the cost movements of the entire sample.

3 Across the projects we found that, as for last year, there has been relative stability in the cost forecasts during 2014-15 at the aggregate level. Overall, we found a net cost reduction of £247 million during 2014-15 (0.4% of the current forecast cost to completion of £65.8 billion).9

4 Within the sample, there are cost fluctuations within individual projects. The major reductions are on the fighter aircraft projects, most notably a net reduction of £202 million in the Typhoon project, due to an accounting adjustment following an examination of project costs by consultants. Within the overall reduction there was a net increase of £147 million across the Astute submarines, made up of a large number of individual variations with a range of causes.

5 During 2014-15 the Aircraft Carrier Alliance has reported a potential increase in forecast costs as a result of the need to recover time slippage in the construction of HMS Queen Elizabeth. However, the Department has to date not accepted the validity of this forecast. The Senior Responsible Owner and project team will update the Department’s Investment Approvals Committee on developments in the autumn, in order that it can formalise the Department’s position on whether to acknowledge a change to the forecast cost of the project.

Time

6 The total net additional delay in 2014-15 to the operational delivery of 12 projects in our sample with in-service dates was 60 months. The additional delays were:

52 months for the Core Production Capability project. The unforeseen need to produce an additional reactor core as a consequence of the refuelling of HMS Vanguard and to retain the capability to produce a core for HMS Victorious, if required, means that the final phase of regeneration of the production facility has been deferred. This is to maintain the capability for the production of existing cores, while minimising the risk to the capability for producing cores for Successor;

6 months for the A400M transport aircraft, due to slippage in the aircraft delivery schedule;

6 months for the Brimstone 2 missile, due to technical issues with the missile; and

2 months for the Queen Elizabeth Carriers as a consequence of the first recalculation of the ‘budgeted for’ in-service date following the re-baselining of the project in October 2013.

These increases are partly offset by the earlier forecast in-service date for the Scout Specialist Vehicle by 6 months compared to the approved date. This was because the contractor submitted an accelerated production schedule.

Performance

7 When the Department takes the main investment decision it approves a number of key performance measures for each project. These provide an indicator of whether the equipment is expected to provide the intended military capability. Within our sample the Department has set 208 key performance measures across 12 projects. It expects to achieve all but 1 of these, although it has identified risks to achieving 10 others.

8 Each project also reports against 8 defence lines of development. These measure the other elements of capability, such as trained personnel and logistical support, which the Department needs to develop and deliver at the right time to ensure that it can best use the equipment. It expects to deliver all of the defence lines of development on time, with risks attached to 20% of the lines.

Overall view of risks

9 The Defence Equipment and Support organisation uses a project assessment tool called Sentinel, which tracks project health over time. In addition to cost and time forecasting metrics, Sentinel includes a wider range of assessment criteria such as earned value management scores,10 external dependencies and reviews, project staffing levels and judgements about progress by senior staff within the organisation. Figure 13 gives an overview of the Sentinel scores for the projects in our sample as at March 2015. The larger the value of the project, the greater the impact on the affordability of the Equipment Plan if it encounters delays and cost overruns.

10 Two projects were rated ‘red’ in March:

In the approach to the Main Gate investment decision, the Type 26 Global Combat Ship project is working to determine a robust proposition in terms of schedule, costs and risks. This work, involving Defence Equipment and Support, the prime contractor and third party independent support, has been running since July 2014 and will establish the baseline for seeking approval to move forward to the manufacturing stage, against which subsequent variances can be measured and managed.

Astute submarines boats 4-7 face risks to significant milestones and have received low earned value management scores.

The Sentinel scores also draw on the Cost Assurance and Analysis Service’s cost estimating work (paragraph 2.14). At the end of 2014-15 the estimates of most likely 10-year outturn cost for the 2 red-rated projects were £0.75 billion higher than the project teams’ 50th percentile estimates. The Service’s forecast underestimate for the constituent elements of the Successor project was £0.8 billion.11

8 Includes the Type 26 warship, where some expenditure on the Demonstration and Manufacture stages has been approved in advance of submission of the business case for full approval. We count the Complex Weapons portfolio as a single project for these purposes.

9 In almost all cases this is the 50th percentile cost, derived from cost modelling, which gives a profile of possible costs for a project. The 50th percentile is the mid-point of the range of costs. Each project is as likely to cost less than this estimate as it is to cost more. It is used by the Department for equipment planning purposes.

10 Earned Value Management is a project management tool for measuring progress and is mandated within Defence Equipment and Support for projects at the manufacturing stage.

11 Within our sample, the Successor project is made up of 2 elements: the platform and the Nuclear Reactor and Steam Propulsion System.

Appendix Four

Executive project summary sheets

Post-Main-Gate projects 45

A400M 45

Astute Class Submarines 47

Complex Weapons Pipeline 50

Core Production Capability 53

Lightning II 55

Marshall 57

Military Afloat Reach and Sustainability 58

Queen Elizabeth Class Aircraft Carriers 59

Scout Specialist Vehicles 61

Type 26 Global Combat Ship 63

Typhoon 64

Voyager 66

Warrior Capability Sustainment Programme 68

Assessment phase projects 70

Apache Attack Helicopter Capability Sustainment Programme 70

Crowsnest 71

Morpheus 72

Successor 73

Projects with approval to spend on demonstration and manufacture stages

Assessment phase projects

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DP Ref: 10814-001