NATIONAL AUDIT OFFICE
REPORTBY THE COMPTROLLERAND AUDITOR GENERAL
The 1991 Statementon Major DefenceProjects
ORDEREDBY THE HOUSEOFCOMMONS TO BE PRINTED 10 JULY1992
LONDON:HMSO 121 f7.95 NET THE 1991 STATEMENT ON MAlOR DEFENCE PROJECTS
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.
John Bourn National Audit Office Comptroller and Auditor General 25 June 1992
The Comptroller and Auditor General is the head of the National Audit Office employing some 900 staff. He, and the NAO, are totally independent of Government. He certifies the accounts of all Government departments and a wide rangeof otherpublic sectorbodies; and he hasstatutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources. THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS
Contents
Page Part 1: Introduction 1
Part 2: Analysis of the 1991 Statement 3
Part 3: Changes to the format of the Major Projects Statement 9
Part 4: Lessons from specific projects 12
Part 5: The Auxiliary Oiler Replenishment Vessel 20
Glossary 29
Appendices
1. Extracts from the 1991 Major Projects Statement 31
2. Project Summary Sheet 40 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS
Part 1: Introduction
Origin of the Statement Major Projects Statement itself is provided, in full, to the Committee by the Department. 1.1 The 1991 Major Projects Statement is the tenth to be produced by the Ministry of Defence (the Department). The Statement The form of the Statement was introduced at the request of the Committee of Public Accounts and stemmed 1.5 The Major Projects Statement comprises from their 9th Report, Session 198142, three tables with explanatory notes and an which criticised the absence of any annex with project descriptions. Key extracts requirement for the Department to inform from the Statement are reproduced in Parliament about the costs of major defence Appendix 1. Briefly, the tables include the projects. The Statement was intended to following information: provide improved visibility of the progress Table I-Projects for which the Treasury and costs of major defence equipment have authorised expenditure totalling f250 projects. million or more. Details are provided on the original and current estimates of both total 1.2 In previous years both the Major Projects project costs and timescale. Statement and the associated National Audit Office memorandum were provided to the Table II-Estimates, at present prices, of Committee of Public Accounts on a additional expenditure on those projects confidential basis. At a hearing, in November already shown in Table I which is planned 1991, to consider the 1990 Statement the and in clear prospect, but is not yet formally Committee expressed concern at the extent approved; for example, where some public to which the Statement and accompanying statement gives reasons to believe that National Audit Office memorandum were Ministers will or may wish to incur afforded relatively high security expenditure in due course. classifications. Table III-Projects in the early stages of development expected to qualify for 1.3 In the light of these developments and in inclusion in Table I and on which actual keeping with the current drive towards more expenditure has reached 00 million or more. open government the Department, in discussion with the National Audit Office, have sought to minimise the extent to which Examination by the National facts and figures in the 1991 Statement and associated report are given a security Audit Office classification. As a result, both the 1991 Statement and the National Audit Office 1.6 The Major Projects Statement is not an report on the Statement contain very little accountable document and the National information of a classified nature. For the Audit Office do not verify its completeness first time this has enabled the National Audit and accuracy in detail. Rather, they seek to Office to publish its findings, together with highlight aspects that arise from the key information from the Statement itself. statement.
1.4 Inevitably, a very small number of facts and 1.7 The main areas examined by the National figures are commercially sensitive and cannot Audit Office in relation to the 1991 Statement be included in this report since disclosure lVt?R?: could undermine the Department’s an analysis of the 1991 Statement negotiating stance and/or the contractor’s (al focusing on those projects appearing to commercial position. The National Audit show the greatest cost variances and in- Office have provided the Committee of Service date slippages (Part Two); Public Accounts with a separate memorandum covering these areas. The
1 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS
(b) consideration of the ways in which data Cd) an examination of the Auxiliary Oiler presentation could be improved to Replenishment (AOR) Vessel increase the usefulness of the Statement programme (Part Five). and how submission could be speeded Summaries of the main points arising from up (Part Three]: the National Audit Office examination are (c) the lessons that can be drawn from a contained within each individual section more detailed examination of three under the heading “Key Points”. projects: Multiple Launch Rocket System (MLRS) III, DROPS and Harpoon (Part Four):
2 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS
Part 2: Analysis of the 1991 Statement
Introduction In addition, the following factors can also distort comparisons: 2.1 The 1991 Major Projects Statement covers 31 with the reduced number of projects, a projects which vary widely in character. large cost variation on just one or two Table 1 of the Statement (see Appendix 1) projects can have a major and perhaps shows 24 projects, either in full development misleading impact on the overall picture; or production, with total estimated expenditure, at March 1991, of f15 billion moving to the lower force levels set out (1991 prices). Two projects entered Table 1 in “Britain’s Defence for the 90’s” has for the first time in 1991 (JTIDS and UNITER) involved large cuts in production whilst seven projects previously reported numbers. Currently, only estimated have been omitted on the grounds that outturn is adjusted to reflect changes in expenditure is largely complete. These are production quantities. Since Treasury the Single Role Minehunter, Type 2400 Approvals remain unchanged this affects Submarine, Sting Ray, Blowpipe/Javelin, E3- the validity of overall comparisons AEW, Harrier GRS-7 and ALARM. Possible between estimated and approved costs; further expenditure of El5 billion on five in a few cases year-on-year comparisons projects is detailed in Table 2. are made difficult by the corrections relating to prior year n&statements. For 2.2 Table 3 records details of seven projects example, the 1991 Statement records that which are expected to qualify for Table 1 Treasury Approvals were previously once they have received full Treasury overstated for the Sonar 2054 project. Approval (see Appendix I). Five projects previously included in Table 3 have been Consequently, the National Audit Office have omitted from the 1991 Statement. These are concentrated their examination of the 1991 SA80, CRARRV, NIS, Airbourne Anti- Major Projects Statement on those projects Armour Weapon and IUKADGE. In two cases where cost and in-Service date variances (NIS and the Airborne Anti-Armour Weapon) appear most marked. the future of the projects is under review, meaning that the likelihood of them Figure 1: Projects reported in MPS 1987-1991 subsequently qualifying for Table 1 is Year Number of Projects uncertain. In one case (CRARRV) expenditure is now estimated at f227 million 19881987 li (1991 prices) meaning that it does not reach the cut-off required for inclusion in Table 1. 19891990 2 In the case of SABO estimated total 1991 24 expenditure is f284 million but, because Source: Table /, Major Projects Statements 1987.1991 Treasury Approvals for development and Figure 1 shows that projects disclosed in Table 1 to MPS have production currently stand at f236 million, fallen from 40 in 1987 to 24 in 1991. the project has been omitted as it falls below the cut-off for Table I. IUKADGE has been omitted on the basis that expenditure is Variations in projected costs largely complete. 2.4 Treasury Approval for the Department’s 2.3 This report reflects the fact that the marked procurement expenditure is given as a fixed reduction in the number of projects in Table figure, usually with a 20 per cent tolerance. 1 (see Figure 1) to just 24 projects in 1991 and is not uprated for inflation. However, in means that drawing conclusions about the the Major Projects Statement and in this Department’s success in managing projects, Report project costs, at the time of Treasury especially given the variety of project types, Approval have been uprated to 1991 prices to runs the risk of painting a misleading picture. allow cost comparisons to be made in real
3 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS
terms. A comparison for Table 1 as a whole Office have identified three cases where between estimated and approved costs, shows certain costs have yet to be incurred but a 2.7 per cent increase of estimate over estimated cost overruns have been approval. The National Audit Office have exaggerated by including, in the total reviewed all projects in Table I where the estimated costs, items not yet covered by individual cost variances appear to be greater extant Treasury Approvals. than five per cent to establish the reasons for . DROPS-The 28.8 per cent cost variance this variance. From this analysis the National is wholly attributable to the inclusion, in Audit Office have identified two features total estimated costs but not in total which prevent proper comparisons being approved costs, of production quantities made: for which Treasury Approval has not yet l projects where items are included in total been sought. estimated costs but are not covered by . EHlUl- The difference between Treasury Approvals, serving to exaggerate estimated and approved costs has fallen cost overruns; from 32 per cent in the 1990 Statement to l projects where reductions in production 8.3 per cent in 1991. However, on this quantities are reflected in total estimated project, Treasury Approvals are given costs but not Treasury Approvals, separately for the various phases of creating an exaggerated cost underrun. development. Therefore, the total of approved costs given in Table 1 to the 2.5 Projects with these features and also those Statement has not historically represented where variances between estimated and the total development cost of the project. approved costs represent genuine variances Conversely, the Department’s estimate of [for reasons such as specification changes, total costs, also given in Table I, does cost escalations, etc) are considered in Figure represent the total development cost. The 2 together with a brief explanation of the marked decrease in cost variance reasons for the cost variance. between estimated and approved costs is explained by an additional Treasury Approval being granted during 1991. Items not covered by Treasury However, without an understanding of Approvals the basis on which the two figures are compiled the reader could wrongly conclude both that the project had been 2.6 When analysing the success of the heading for a substantial overspend and Department in managing projects to cost, it is that there had been a marked vital that figures quoted in relation to improvement in cost control between estimated costs relate only to items covered 1990 and 1991. by Treasury Approvals, The National Audit
Figure 2: Projects where apparent cost variance is greater than five per cent Project ApparentCost Variance(%) Main reasonsfor variance Warrior (21.6) Reductionin productionquantities LAW 80 (11.5) Reductionin productionquantities MLRS I (5.3) Reductionin productionquantities DROPS 28.8 Inclusionof costs not covered by TreasuryApprovals Tornado Mid-Life Update 33.7 Cost escalations(12.5%) and specification changes(13.1%) plus inclusion of costs not covered by TreasuryApprovals (8.1%) EHlOl a.3 Inclusionof costs not covered by TreasuryApprovals Harpoon (16.4) Specificationchanges (para 2.10) AOR 14.3 Specificationchanges (para 2.10) Type 23 Frigate 24.7 Difficultiesin development(para 2.11) GWSSea Wolf 15.5 Difficultiesin development(para 2.12) Tristar Batch 1 17.1 Difficultiesin development(para 2.13) Tristar Batch 2 12.6 Difficultiesin development(para 2.13) Source: Table 1, Major Projects Stafemenf 1991 Elate: Cost decreasesshown in parentheses Seven of the 12 projects shown in Figure2 representgenuine cost variances.
4 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS
l Tornado Mid-Life Update-the overrun costs on these projects is hampered. The on this project is 33 per cent. As Figure 2 impact of these changes is illustrated in shows, 25 per cent is attributable to a Figure 3. This serves to demonstrate the way clearer definition of the development in which non-adjustment of Treasury specifications and revisions to indicative Approvals following quantity cuts can cost estimates provided by industry. The present a misleading picture. remaining eight per cent relates to the costs of an upgrade required to modify, because of attrition, a number of Other significant cost variances additional aircraft prior to their being subject to mid-life update. These costs are 2.9 Paragraphs 2.6 to 2.8 covered six of the 12 not included in current Treasury projects detailed in Figure 2, demonstrating Approvals but are included in the total in each case that the cost variances either estimated cost of the project. totally, or partially, arose from deficiencies in the way in which data is presented in Table 2.7 From the above analysis it is clear that, in 1 to the Statement. In the remaining six cases the “worst” instance of apparent overrun the data is more directly comparable. Two (Tornado Mid-Life Update] the position, factors emerge to explain the variances on although far from satisfactory, is not as bad these remaining six projects: as might first appear. In the second “worst” case (DROPS] the overrun is artificial. changes in specifications which either enhance or degrade equipment performance; Changes in production quantities unforeseen technical difficulties during development. 2.8 In its report on the 1987 Major Projects Statement (Committee of Public Accounts 2.10 Two sea systems projects illustrate the 47th Report, Session 1987438) the Committee impact of specification changes on project asked for information on the impact of costs. For the Auxiliary Oiler Replenishment reduced production quantities to be provided Vessel, the decision to introduce a new in future. The Department agreed to do so. In command system has led to a 9.3 per cent the 1991 Statement three projects are overrun out of a total cost variance of 14.3 identified as having been subject to per cent. Conversely, for the Harpoon project, reductions in production quantities. In all the decision was made to dispense with the three cases the projects currently display “over the horizon” targeting facility because substantial underruns. The Department have its potential effectiveness would have been not attempted to quantify the impact of these reduced as a result of deletions to the Lynx quantity changes in the notes. The Treasury upgrade programme. This represents 7.7 per Approval figure does not currently reflect the cent of the current 16.4 per cent underrun. reduced requirement--revised approvals will be sought in due course--although the 2.11 On the Type 23 Frigate, the biggest single Department’s estimate of total expenditure contributor to the cost overrun, currently has in large measure been adjusted to reflect 24.7 per cent (1990 23.9 per cent], was the the smaller quantities. Thus, direct decision to replace the original command comparison between approved and estimated system (CACS 4) with a new “to type” variant following development difficulties. Figure 3: Impact of CtuantityReductions 2.12 For the Vertical Launch Sea Wolf project, Quantity Existing cost reduction variance(l) which is linked to the Type 23 programme, Project (W (see also Figure2) the cost overrun is currently 15.5 per cent Warrior 24.9% 21.6% underrun (1990 15.6 per cent). The overrun is mainly LAWSO 20.3% 11.5% underrun attributable to difficulties experienced during MLRS I 9.9% 5.3% underrun software development and integration up to Source:Major Projects Statement 1991and Ministry of Defence 1985. There have been no further real cost analysis increases on the project since 1986. Mote:(I) Variancecalculated before impact of quantdy rerlr,,Yinn.s Figure3 shows that percentagecost underrunsare more than offset by percentagereductions in productionquantities.
5 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS
2.13 Both Tristar batches have suffered from the in-Service date is generally dependant significant cost overruns. The first batch upon delivery of a predetermined number of displays a cost overrun of 17 per cent (1990 equipments. This number can vary. For 12.2 per cent), mainly arising from the example. the Warrior and MLRS I projects necessity to develop a unique work package require delivery of equipment sufficient for a for each individual aircraft. The second batch single Infantry Battalion and Artillery shows a cost overrun of 12.6 per cent (1990 Regiment respectively. For DROPS the 12.7 per cent) arising from the difficulties definition relates to equipment for a division. encountered in developing the wing pod. The A more extreme example is provided by the Department have reconsidered the future of Rapier project where equipment is being these projects and concluded in February purchased for use both by the Army and the 1992 that the Batch 2 Tristar aircraft should Air Force. Here, the Army definition requires now continue to be used in the passenger 12 fire units to be operational while the Air carrying role rather than being converted for Force requires only one fire unit to achieve use as tankers. this status. The latter has been used for the purposes of the Major Projects Statement. Overall, the National Audit Office are Interpretation of in-Service dates concerned that the in-Service date gives in some instances, a misleading impression that 2.14 The in-Service date of a project is understood equipment is universally in use by front-line in basic terms to be the date by which forces and performing fully to specification. equipment is forecast to enter service. Significantly, for a piece of equipment to be 2.17 The Department recognise that some action considered as “in-Service” it does not may be required to: necessarily have to meet in full the rationalise the definitions of in-Service operational requirement. Figure 4 provides dates on individual projects to enhance three illustrations of this. comparability;
2.15 A further complication when making consider the need for some form of comparisons between estimated and explicit recognition in the Statement of actual/forecast in-Service dates concerns the the different in-Service dates for inter- different definitions employed, both between related equipments. projects and, in sume cases, within projects, They are currently reviewing the position. as to the effective in-Service date.
2.16 For warships the date generally relates to Review of in-Service dates in the acceptance of the First of Class vessel. 1991 Statement However, where a project involves delivery of multiple units of production the Statement does not always show at what stage the 2.18 As with cost overruns, the reduced number equipment is deemed to have entered of projects contained in the 1991 Statement service. For aircraft it is usually the date on means that the useof averagesover sucha which the first aircraft is received by the Air small population can present a distorted Force. In contrast, for Land Systems projects, picture, especially if just one or two projects
Figure 4: Platforms entering service without some of their associated equipment Project Actual/ForecastIS0 Componentsnot fully effective at IS0 Type 23 Frigate 1989 (Actual) (i) ReplacementCommand System not fitted. Expectedto be available 1996. AOR 1992 (Forecast) (i) ReplacementCommand System not fitted. To be fitted at refit. (ii) Sea Wolf missiles to provide air-defencecapability not fitted. DROPS 1990 (Actual) (i) Only six of the nine related equipmentshad met in-Servicequantity criteria by 1990. Onevariant (comprising22 per cent of total vehicle quantities)has not yet entered production. Source:Major ProjecfsStatement 1991 Figure4 shows that not all proiects are fully operationalwhen their in-Servicedates are achieved.
6 THE 1991 STATEMENT ON MA,OR DEFENCE PRO,ECTS
have suffered from large slippages. The negotiations with the Italian government on National Audit Office have therefore equipment selection and, latterly, the concentrated their examination on the six appointment of a prime contractor for the projects in Table 1 of the Statement which United Kingdom portion of the programme. appear to be running five years or more Similarly, renegotiation of the incentivised behind schedule. Whilst accepting that it is contract on the BATES project led to the difficult to attribute elements of slippage project timetable being adjusted to allow time precisely to any one reason, Figure 5 for the negotiations. Looking beyond the categorises the reasons for the delays on projects in Figure 5, the recently announced these projects under five broad headings. The ASRAAM contract had been deferred for classification is based both upon the several years by the Department’s desire to supporting notes to Table 1 and on discussion achieve competition in line with its objective with the Department. of obtaining better value for money in equipment procurement coupled with the 2.19 From Figure 5 it is apparent that unforeseen policy to transfer maximum risk to the technical difficulties (affecting the contractor. The Department recognise that a Department and/or the contractor) coupled careful balance needs to be struck between with changes in designs or specification are the operational penalties imposed on the important contributors to delay. The two may armed forces of delays in equipment be linked since technical problems arising availability and the need to secure better during the course of development (eg BATES] value for money. may result in the project being re-defined. Looking beyond the six projects analysed in 2.21 The other main factor identified as giving rise Figure 5, a similar theme can be identified on to delays is the reallocation of available other projects. For instance, on the Type 23 funds as major projects are given different Frigate, notwithstanding the fact that the priorities within the constraints of the overall project is classified as in-Service, delays in defence budget. This had a marked impact on the provision of a suitable command system the ITIDS project and, to a lesser extent, on (see Figure 4) are largely attributable to EHlOl. This factor is likely to have an unforeseen technical difficulties followed by increasing effect on the Department during a re-definition of the requirement. the ongoing rationalisation of the Armed Forces which, coupled with pressure on the 2.20 Another factor contributing to delays is the Defence budget, will require difficult and impact of renegotiating or redefining the careful judgements as to the identification of procurement route. This is particularly those projects which can be delayed as a cost evident from collaborative ventures such as saving measure with least impact on EHlOl where delays arose from protracted operational effectiveness.
Figure 5: Main causes of in-Service date slippage (figuresexpressed in years) Tristar 2 BATES Spearfish LAW 80 EHlOl JTIDS Total (i) Unforeseentechnical difficulties 3 3 5 2 13 (ii) Changesto design or specifications 2 1 5 (iii) Re-negotiationIRe-definitionof procurementmute 4 2 2 i (iv) Suspensionof work pending review 1 (v) Re-allocationof available funds 1 5 i Total 10 6 5 5 5 5 36 Source:Ministrv of DefenceAmhis Figure5 analyses delays in terms of the number of years slippage and shows that the main cause appearsto be unforeseentechnical difficulties.
7 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS
Key Points 2.22 In view of the National Audit Office the following points can be drawn out from the foregoing analysis: (i) The current presentation of the Majo Projects Statement hinders meaningful analysis of cost overruns and time slippages due to weaknesses in the format of the Statement and the amount of detail disclosed (paragraphs 2.4 and X14-2.17). Ways of overcoming these deficiencies are considered in Part 3. (ii) For projects where cost variances exceed five per cent, the main reasons for “genuine” variances are changes in specifications [either degradation or enhancement) and unforeseen technical difficulties (paragraphs 2.9-2.13). The former is likely to become more important in the future as the defence programme adjusts to reductions in defence expenditure. This will require the Department to make difficult judgements when considering the impact on operational effectiveness of equipment degradation. [iii) Current definitions for in-Service dates do not necessarily require the equipment to be fully operational (fo! example, Type 23 Frigate, AOR and DROPS). The Department have recognised these anomalies and are currently considering alternative solutions (paragraphs 2.14-2.17). (iv] For projects where the in-Service date has slipped by more than five years, two of the main reasons for slippage are unforeseen technical difficulties and changes in specifications (paragraph 2.19). The other reasons for slippage identified-w-negotiation of the procurement route and re-allocation of available funds (paragraphs 2.20-2.21)-both require the Department to weigh carefully the financial benefits accruing from the delay against their impact on operational effectiveness.
8 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS
Part 3: Changes to the format of the Major Projects Statement
Introduction The information currently provided in the Major Projects 3.1 The National Audit Office have reviewed the Statement continuing utility of the Major Projects Statement in its current form and have 3.2 The analysis in Part 2 highlighted a number considered how it might be enhanced. They of difficulties when comparing the data also considered how its production could be provided in the Statement on both a project- speeded up. They did so because: by-project and year-on-year basis: l As Part 2 shows, the Statement in its lack of comparability between estimated current format makes it difficult to assess and approved costs owing to inclusion of whether projects have been delivered to items in estimated costs not covered by time and cost. Treasury Approvals. . The Statement was first produced 10 lack of comparability between estimated years ago. Whilst recognising the and approved costs owing to quantity important changes to the Statement made reductions being included in the former by the Department at the request of the but not the latter. Committee of Public Accounts, it has remained substantially the same. lack of consistency in the definition of in- However, wer this period there have Service dates hindering assessment of been significant changes in the defence project slippage. environment in terms of the impact of the lower force levels set out in “Britain’s 3.3 In addition, the National Audit Office Defence for the 90’s” resulting from the consider that there are a number of diminished threat from the former Soviet limitations imposed by the quality of the Union. There have also been changes in existing information and consequently the the basis upon which the Department conclusions which may be drawn from it: seek to place major defence equipment The current format of the Statement does projects through the use of competition not facilitate a clear overview of progress and the negotiation of taut contracts. on a project. For example, there may be l The Statement has not, in the past, been up to five entries for an individual submitted to the Committee of Public project. In addition to a project Accounts or available to the National description there may be entries in both Audit Office for examination until at least Tables I and II each with associated notes. nine months after the date to which it This means that for projects such as Type relates (The 1991 Statement was not 23 and EFA it is difficult for the reader to submitted to the Committee until obtain a clear overall picture. February 1992 -a delay of 10 months]. Explanations as to cost variances and in- As a result the Statement cannot be Service date slippages are not always considered by the Committee until at sufficiently informative. In particular, least 15 months after the date to which it where several factors contribute to cost relates. variances the impact of each one is not generally separately costed whilst, for in- Service date slippage, reasons for delay are not separately quantified. The inclusion of historic cost data, expenditure to date, and precise details of Treasury Approvals does not contribute
9 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS
greatly to an understanding of the 3.5 To illustrate this new approach the National Department’s success in controlling Audit Office, in conjunction with the projects to time and cost. Department, have produced a summary sheet based on one of the projects contained in the l At present the Statement contains no 1991 Statement-Harpoon (see Appendix 2). information in relation to the various Much of the information contained therein is initiatives undertaken by the Department already available from the existing in recent years, for example, whether Statement. but from several sources. competition was used and the basis of the contract price (Fixed Price, Firm Price, 3.6 One of the most significant additions relates cost Plus, etc). to the categorisation and quantification of . Two separate statements are currently cost variances, an analysis of which should produced, one for nuclear projects and already be available from the Department’s one for all other major projects. The Project Offices. A similar approach is already information on all major projects is used in the production of the Defence New therefore not available in one place. Works Statement. Provision of this type of information would serve to prevent any confusion in the area of cost control, such as A possible revised format for the that arising this year on the six projects Major Projects Statement described in paragraphs 2.6-2.6. 3.7 The other important additions are the 3.4 The National Audit Office consider that, in provision of definitions for in-Service dates the light of the significant developments, in and the classification and quantification of the defence environment generally and in the the reasons for slippage. The former, which is approach to equipment procurement, readily available, will prevent confusion such fundamental changes are required to the as that described in paragraphs 2.14-2.17 and scope and content of the Major Projects assist in a clearer understanding as to what is Statement. These changes are needed to meant by “in-Service”. improve the quality of the information available and help the Committee of Public Accounts to examine the Department’s Projects to be included success in managing projects to time and cost. The National Audit Office therefore propose changes to the Statement which have 3.6 The current cut-off level for projects to be three key features: included in Table 1 of the Statement has not altered since 1966. Against this, as described a Dispensing with Tables l-3 and instead in paragraph 2.3, the number of projects providing separate summaries (including included in the Table has declined sharply in nuclear projects), to a standard format, on recent years. One solution, which would each project. Current prices would be obviate the need for regular revisions to the used. A cover sheet listing projects in cut-off level, and prevent protracted order of total estimated expenditure and discussion as to which projects qualify for giving expected in-Service dates would inclusion, wotlld be for the Department to accompany the project summaries. This restrict the Statement, every year, to say the would provide a clear focus on individual 25 largest including nuclear projects. Size projects and replace the current would be a function of total estimated project fragmented approach. costs over the following 10 years, provided at . Provision of additional information, least El0 million had already been spent and which should be readily available, Treasury Approval received. This would also: covering areas of interest such as the use cover projects in the early stages of of competition, the nature of the contract development of the type currently and the quantities to be purchased. included in Table III; l Focusing the information on the factors cwercome the problem of projects, such as affecting the Department’s achievement of SA60, where estimated expenditure is its original time and cost targets and significantly greater than Treasury quantifying the reasons for variances. Approvals (paragraph 2.2);
10 THE 1991 STATEMENT ON MA,OR DEFENCEPRO,ECTS
l bring all projects, including nuclear, together in one report, eliminating the 11 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS Part 4: Lessons from specific projects Introduction l Harpoon-The Department are purchasing the surface launched version 4.1 During the 1980s the Department revised its of the Harpoon anti-ship missile. It approach to equipment procurement with the entered service in 1968 and is fitted to the objective of translating its dealings with its Type 22 Batch 3 and Type 23 frigates. The suppliers into a commercial relationship such contract for ships systems and missiles is as that enjoyed by any other major customer placed directly with the McDonnell of industry. A key element of this policy is Douglas Corporation, a United States the transfer of much of the financial risk manufacturer. There is a separate from the Department to its suppliers. contract for Interface Translation Units equipment placed with a United Kingdom 4.2 Against this background the National Audit company, Data Sciences Limited (formerly Office have examined three projects included Software Science Ltd]. At 31 March 1991 in the 1991 Major Projects Statement to f162.3 million had been spent on the identify whether any lessons could be drawn project with further expenditure of E53.5 out to assist the Department in managing million in prospect. The Department future programmes. The three projects are: consider Harpoon to be a low-risk project which provides a good example of the benefits of “off-the-shelf” procurement. The missile is illustrated in Figure 6. Figure 6: Harpoon 12 THE ,991 STATEMENT ON MAJOR DEFENCE PROJECTS Figure 7: DemountableRack Off-loading and Pick-up System (DROPS) l Demountable Rack Off-loading and Pick- United States withdrawing at the end of up Systems [DROPS)-DROPS is the current phase and the United intended to facilitate the rapid offloading Kingdom and Germany reconsidering and pick-up of ammunition. Two their continuing involvement. Table III of variants, together with various ancillary the 1991 Statement shows that a total of equipments are being procured, both f81 million had been spent on MLRS III developed from utilising concepts already by 31 March 1991. Currently, the project used in the private sector. The first, with is running five months behind schedule. a medium mobility capability is already The system is illustrated in Figure 8. in service and performed well in the recent Gulf conflict. The second, for use 4.3 The following paragraphs draw out lessons over rough terrain, has not yet entered from these projects covering three broad full production due to technical areas: difficulties in development. The 1991 l arrangements for the transfer of financial Statement shows that expenditure of risk and managerial responsibility to a f80.8 million (present prices] has been single contractor; incurred on the project against an estimated total spend of f387.7 million. l linking payment to demonstrated The system is illustrated in Figure 7. performance: . Multiple Launch Rocket System Phase 3 l passing the risk of exchange rate (MLRS III]-MLRS III is the third phase fluctuations to suppliers. of the MLRS project and involves the development of a Terminal Guidance 4.4 The National Audit Office have also taken Warhead. It is being developed in the opportunity to consider whether the Department can learn any lessons from its collaboration with the United States, France and Germany. The future of the experience on the MLRS III project which project is currently uncertain with the could be applied to future collaborative arrangements. 13 THE 1991 STATEMENT ON MAJOR DEFENCE PROIECTS tl. Thm Rnckd Sartam IMI RS\ Transfer of financial risk and Kingdom) practice. Responsibility for managerial responsibility transporting missiles to the United Kingdom therefore rests with the Department. This exposes the Department to the risk of 4.5 The Department have adopted different damages claims if they are not able to arrangements on each of the three projects to transport the missiles on time. The facilitate the transfer of financial risk and Department have, on occasion, been unable managerial responsibility to its contractors. to provide sufficient transportation containers. To date, although the Department were in breach of their responsibilities, 4.6 For Harpoon no prime contractor was McDonnell Douglas have not pursued the appointed with responsibility for the matter. integration of the entire project. Rather, under the fixed price contract agreed by the 4.8 Industrial management of the MLRS III Department, McDonnell Douglas are required programme is by the MDTT Joint Venture to provide and set to work functioning who were awarded a contract for systems missiles and ship launching systems, but are development in 1984 following a competition. not responsible for guaranteeing the The Joint Venture comprises four national satisfactory integration and operation of the contractors and MDTT Inc. who are wholly entire systems once installed on board ship. Data Sciences are responsible for the owned by the four national partners and act performance of the Interface Translation as managing partners for the development. Units, whilst the DirectorGeneral of Marine This arrangement initially proved ineffective Engineering is responsible for the adequacy and may have contributed to schedule of the various pieces of equipment (eg control slippage of 23 months (45 per cent) during panels] supplied by them. The Department the early stages of the project. However, in consider that these arrangements are 1986, mainly as a result of United Kingdom adequate since most items are of proven pressure, the company was reorganised to design and have already been successfully give it greater direct programme and financial integrated by the United States Navy. control. Since this time industrial Furthermore, they consider that, under these management has been satisfactory. arrangements, any failure in the system can be attributed to one or other of the parties 4.9 The DROPS contract was put out to involved. competition with the original objective of appointing one main contractor although the Department recognised that, if necessary, the 4.7 The Harpoon contract specifies that “delivery” is deemed to have occurred once order could be split. In assessing the tenders the goods are available for collection at the the Department considered that there were contractor’s premises. This is in line with considerable advantages in splitting the contract between two contractors, Scammell accepted United States (but not United 14 THE 19% STATEMENT ON MAJOR DEFENCE PROJECTS (now Leyland DAF) and Paccar UK (Foden (ii) The deficiencies in the early Trucks Division]. The reasons for this were: performance of MDTT in managing l The Scammell Medium Mobility Load the MLRS III project demonstrate the Carrier bid was lower. problems which may arise from the appointment of Joint Venture prime l The Foden Improved Medium Load contractors (paragraph 4.8). MDTT’s Carrier was judged to be a lower risk as it more recent satisfactory performance was at a more advanced stage than the should serve to highlight the features other contenders. which the Department should ensure l The two companies represented the only are present in any future Joint United Kingdom sources of technically Venture prime contractor. suitable vehicles. Departmental policy at the time was to ensure that such an Linking payment to demonstrated indigenous procurement and support capacity was retained. performance Equipment was therefore selected from each 4.11 Through the agreement of taut contracts the company on the basis of what best met the Department seek to encourage contractors to user’s requirements and offered best value deliver equipments to time, cost and for money. This arrangement has worked performance. An important aspect of this well in practice with the Department able to practice is the setting of challenging take a significant degree of assurance from milestones and other incentives to improve the responsibilities placed on each contractor and enhance the contractor’s performance. for the delivery and performance of each The three projects examined each contain a variant. number of useful lessons on the application of these principles. Figure 9 summarises the main contractual incentives for each of these Key Points projects. 4.10 The National Audit Office consider that :he following points can be drawn out 4.12 Payment on the main Harpoon contract is irom the Department’s experience on these triggered by McDonnell Douglas achieving programmes: scheduled deliveries. The contractor is only entitled to price enhancements to cover (i) The negotiation of contracts with inflation up until the agreed date of delivery. overseas suppliers is made more Thereafter, no further index&ion is allowed. difficult by the fact that foreign To date all delivery milestones have been companies are not always familiar successfully met with the exception of with, or willing to accept, United missile exercise sections, where only 22 Kingdom procurement practice. For against a schedule of 30, were delivered by Harpoon, the Department successfully the milestone date of 31 December 1991. In negotiated a fixed price for the this case the contract gives the Department contract but had to take the the discretion to retain payments up to the responsibility for transporting the value of items not delivered. missiles to the United Kingdom (paragraphs 4.6-4.7). The increasing 4.13 The first phase of the MLRS III contract was intensity of competition for defence let. in keeping with United States practice, on contracts means that the Department a cost plus basis with no limit placed on the should now be in a stronger position funding to be made available by partner to impose its will on foreign nations. This contributed to United Kingdom contractors. Where this does not payments on this phase increasing by fZ8 prove to be possible the Department million more than forecast (49 per cent). As a should ensure that full account is result of intense United Kingdom pressure taken of the risks arising from the the contract for the next phase of the project, acceptance of practices not normally as illustrated in Figure 9, was negotiated on a adopted on national contracts. This is highly incentivised basis. As part of the particularly important given the negotiations, and based on an important likely growth in international off-the- lesson learned from the earlier inadequacy of shelf procurement. planning and reporting by MDTT, and the 15 THE 1991 STATEMENT ON MA,OR DEFENCE PRO,ECTS Figure 9: Contractualincentives to efficient contractor performance Project contractor contract Incentives HarpnOn McDonnellDouglas Fixed Price (i) ~n$$~~~de:~r~ achievement Data Sciences Fixed Price (ii) Liquidateddamages payable for late delivery. (iii) Paymentsinflation-linked to scheduleddelivery date. If deliveriesare late the cnntractor bears the cnst of extra inflation. MLRS III (a) Component MDTT Cost Plus Incentive Demonstration Fee with sharing of Sub-stage cost over/underruns (b) Revised MDTT Maximum Price Contract (i) If cnntractnrfails to meet payment System with target cnst and milestonescnst reimbursement Demonstration fee and cnst reducedprogressively up to 50 per Sub-stage over/underrunsharing cent until achievement. (ii) 5 per cent for retentionuntil successfulcompletion. (iii) 45 per cent of target fee linked to target schedulecompletion. DROPS PaccarUK Fixed Price (i) Productionpurchase dependent upon (Faden) successfulvalidation of equipments. Leyland DAF Fixed Price (ii) ~;wr~;;~lsl,“,“~en$t$x achievement (Scammell) (iii) Liquidateddamages payable for late rMiry (anmllaryequipment (iv) Paymentsinflation-linked to scheduleddelivery date. If deliveries are late the cnntractnr bears the cost of extra inflation. problems of monitoring progress faced by the 4.15 Each DROPS contract contains a detailed Project Management Office, a sophisticated delivery schedule against which payments Schedule and Risk analysis network was are made. Failure to achieve these schedules developed. This was used by the Project results in all payments to the contractor Management Office to ensure that milestones being retained until the specified deliveries for the second phase reflected achievement of are achieved. As with Harpoon, the items on the critical path. The network contractor is only entitled to price provides both the Project Office and MDTT enhancements to cover inflation up until the with analysis of the current status of the agreed date of delivery. A further incentive project and gives early warnings of problems. to timely delivery is provided by a clause specifyinga maximum total delivery period 4.14 The success of this system is shown by for the whole contract. If the contractor fails progress on Milestone 4, which was due on to deliver within this period he may become 31 July 1991. In February 1991 the network liable to pay liquidated damages to the highlighted a potential slippage of up to four Department. months on the milestone and pressure was placed on MDTT to take action. MDTT took 4.16 The DROPS contracts were initially let for corrective action and the milestone was validation equipment only with an option to approved before payment retention became purchase various production quantities necessary. Another point pressed very which could not be exercised until successful strongly by the United Kingdom was that, in completion of the validation phase within a pressuring MDTT, the Project Office should specified timeframe. The prospect of not accept any degradation of milestone production orders being lost clearly requirements. MDTT have tried to degrade stimulated contractors’ efforts to resolve any the technical requirement for some difficulties. For example, it has encouraged milestones but, to date, the Project Foden to try to resolve outstanding technical Management Office have refused to accept difficulties on the Improved Medium any such proposals. Mobility Load Carrying Variant. 16 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS Contracts involving foreign Key Points currency 4.17 The National Audit Office consider that the following points can be drawn out 4.16 For Harpoon, when the contract was from the Department’s experience on negotiated in 1964, there was no these programmes: Departmental guidance on the preferred (i) Irrespective of the mechanism used currency to be used in overseas contracts. to incentivise contracts it is Tenders were invited in Sterling but important that it should focus on McDonnell Douglas chose to tender in overall contract achievement. Dollars. A contract let solely on this basis Arrangements such as the linking of would have left the Department open to a an element of fee to schedule significant risk from adverse exchange rate performance on MLRS III (paragraphs movements. The contract was negotiated to 4.13-4.14) and making DROPS allow the first 7 Stage Payments (48 per cent production orders contingent on of the total price) to be made in Sterling. completion of validation trials within Invoices for these payments were still a specified timeframe (paragraph submitted in Dollars. 4.16) both achieved this aim and provided significant incentives to 4.19 For the first three stage payments invoices contractors to perform well. were converted using the current exchange rate. Thus, the Department was still exposed [ii) On DROPS and Harpoon (paragraphs to risk from exchange rate movements. 4.12 and 4.15) the Department have However, for Stage Payments 4 to 7 succeeded in both limiting their (representing 32 per cent of the total exposure to inflation, and payments) the Department negotiated for encouraging the contractor to payments to be made at fixed exchange rates complete work on time, by only agreed in consultation with the Treasury and indexing payments for inflation up the Bank of England. until the scheduled delivery date. [iii) Where milestones are employed, 4.20 These rates were stated in the contract. In both parties should adhere to them the event exchange rate movements meant or the incentive effect will be that, for Stage Payments 4 to 7, the reduced. This is borne out by MLRS Department made Sterling payments of f3 III where the Project Office have million over the level which would have resisted attempts by the contractor to been made using exchange rates prevailing at degrade milestone requirements and, the time of payment. Had rates moved in the as a result, the contractor was forced other direction the Department would have to take decisive action to prevent saved money. slippage as this would have resulted in loss of fee (paragraph 4.14). 4.21 When the Harpoon contract was signed in 1964 it contained a number of provisional Generally, it is easier to define [iv) prices. In February 1966 these prices were incentives on production contracts firmly agreed and the overall contract price such as Harpoon and DROPS where reduced accordingly by $876,000. By this performance can be clearly linked to time the Department had made four specified delivery targets (paragraphs payments to McDonnell Douglas using the 4.12 and 4.15). For projects in the original price and this, combined with the development phase the establishment payment of the fifth stage payment at the of a networking tool such as that original rather than the revised price, used on MLRS III (paragraph 4.13), is resulted in McDonnell Douglas receiving important, both to ensure that overpayments worth $270,000. There was no milestones actually reflect key stages clause in the contract covering repayments in development, and to assist in the given this eventuality. In this case monitoring of progress. McDonnell Douglas repaid by crediting the exact dollar amount of the overpayment to the Department when they submitted their next payment claim. However, payments are both claimed and made in dollars and in the 17 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS intervening periods adverse movements in Ley Points the exchange rate meant that the Department effectively received sane f36,000 less from 4.23 ‘he National Audit Office consider that McDonnell Douglas than they originally paid. he following points can be drawn out ram the Department’s experience on these 4.22 In 1988 the Department introduced a co- m3grammes: ordinated policy for contracts with foreign (i) By seeking to price overseas contracts suppliers with the objective of limiting their in sterling the Department minimises exposure to the risk of adverse exchange rate its exposure to adverse exchange rate movements. movements (paragraph 4.22). Sterling . In order of preference the Department denominated prices will cause seeks a Sterling firm price, or a price contractors to seek to include denominated in Sterling but with exchange premiums or contingencies exchange variation provisions. If it is in their prices to cover exchange unavoidable they will exceptionally fluctuations and their acceptability agree. with an werseas supplier, a will be judged by the Department in contract denominated in foreign currency. the context of overall value for money. One option the Department . Central co-ordination of Dollar and may wish to consider is to obtain Deutchmark requirements with tenders in both sterling and the currencies bought forward 18 months in contractors’ national currency in advance. This removed a major element order to assess the premium of uncertainty from the management of involved. Moreover, in the case of project expenditure. quotes in either Dollars or Deutschmarks, the Department may then compare the rates offered by the contractors with the rates it is able to obtain in its own forward buying. [ii] The increased international competition for defence work, coupled with the growing number of multi-national defence companies, should assist the Department in pushing for tenders in more than one currency. With the likely growth in international off-the-shelf procurement this will become increasingly important. iii) Future contracts placed in foreign currencies should clearly specify that the exchange rate to be used in cases of over or under payment should be the same as that used for the original payment, where a direct relationship’ can be shown. This would prevent situations such as that on Harpoon where the Department lost E36.000 owing to adverse exchange rate movements [paragraph 4.21). 18 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS Withdrawals from collaborative was not accompanied by the expected fall in projects the pound/dollar exchange rate and the value of payments to the United Kingdom contractor, when converted to 1984 economic 4.24 The United States announced its withdrawal conditions, was less than the target from future stages of MLRS III on 5 May minimum. This contributed to an imbalance 1992. The decision follows a Congressional in the prescribed cost-share at the end of the direction to select a single sub-munition to first phase. This has continued to grow meet its Deep Fire requirements. The United during the present phase with a current States Army announced, in March 1991, that estimated imbalance for the phase of f8.56 it had selected BAT, a previously secret million. “black” programme, ahead of MLRS III. The United States have indicated that they will 4.28 The withdrawal of the United States raises continue to participate until the end of the the question of how this imbalance should be current System Demonstration phase. France resolved. The Memorandum of remain firmly committed whilst both the Understanding has two provisions affecting United Kingdom and Germany are imbalances: one refers to the possibility of considering their options for future anti- foreign currency payments for armour weapons in the light of recent cost/workshare balancing and changes in the threat. Both countries are integration/support tasks; the other states expected to announce their decisions by that imbalances should be addressed during Autumn 1992. subsequent phases or: ultimately, via levies on third party sales. The Department are 4.25 The absence of an official declaration of currently considering how to resolve the withdrawal by the United States for 15 imbalance in the light of this ambiguity. months had the potential to threaten the next phase of the programme since detailed planning for a European only solution could Key Points not be concluded whilst the possibility of United States involvement remained. 4.29 The National Audit Office consider that the following points can be drawn out 4.26 The prospect of partners withdrawing has from the Department’s experience on this also highlighted some uncertainties about the programme: provisions of the MLRS III Memorandum of (il If the Department and its partners do Understanding. For example, the termination not take a timely decision on the provision provides for a 270.day notice of future of the programme this may withdrawal period although the funding have an adverse effect on the obligation of the withdrawing participant projected in-Service date of MLRS III continues for either 270 days or to the end of (paragraphs 4.24-4.25) the phase whichever is the shorter. Thus, withdrawal of a partner as late as the final (ii) The Department should ensure that day of the current phase (expected to be late the terms relating to the resolution of 1993) would break the MOU but no financial cost-share imbalances in future penalty would be incurred. Memoranda of Understanding contain no ambiguities (paragraphs 4.27-4.28). 4.27 Also, the MLRS Memorandum of Given the United States withdrawal Understanding states that cost-share from MLRS III the United Kingdom calculations should be based on constant should continue to resist making any 1984 prices and exchange rates with each cash payments to reduce the current country paying its own national contractor in imbalances if these are not in line its own currency. During the first phase of with its interpretation of the the project high United Kingdom inflation Memorandum of Understanding. 19 THE 1991 STATEMENT ON MAJOR DEFENCE PRO,ECTS Part 5: The Auxiliary Oiler Replenishment Vessel Introduction additional payments of between f8.6 million and f13 million to buy out claims by Swan 5.1 Without regular supplies of fuel, stores and Hunters for delay caused by late provision of ammunition, surface fleet forces cannot Lead Yard Services information from Harland conduct sustained deep water operations. and Wolff in respect of AOR 1 and to permit The Auxiliary Oiler Replenishment (AOR) the shipyard to complete the vessel to its Vessel is intended to meet this support own drawings. Constru~ction of this vessel is requirement. It will also provide a helicopter currently 4 months (8 per cent) behind maintenance facility. The vessel is illustrated schedule (see paragraph 5.30). in Figure 10. 5.6 For some time to come neither vessel will 5.2 The AOR was intended to be capable of have a significant self-defence capability defending itself outside the protective owing to delays in the development of the umbrella of the main naval force. The command system and difficulties in obtaining requirement, therefore, called for it to be parts for missile systems. The National Audit equipped with Vertical Launch Sea Wolf Office have examined progress on the AOR missiles and other military systems. programme to identify the reasons for these problems. 5.3 Two vessels are currently under construction, the first (AOR 1) being built by Harland and Wolff under a contract let in Procurement of the AOR April 1986 and the second (AOR 2) by Swan Hunter Shipbuilders the contract for which 5.7 Following a feasibility study by Swan was issued in December 1987. The Hunters invitations to tender were sent to six Department intend to place further orders for companies in October 1984 requesting bids support ships, but decisions have not yet both for AOR 1 on its own and for AORs 1 been taken on the size and timing of future and 2 if the contracts were to be awarded for orders. both vessels at the same time. The Department had decided that the first two 5.4 Construction of AOR 1 is currently forecast vessels should be procured through a prime as 6 years 8 months, a slippage of 32 months contractor and that the company selected (66 per cent). A fixed price contract (subject would have the responsibility not only for to inflation adjustments)valued at f127.2 designingand building the vessels,but also million (at 1985-86 prices) was placed with for the procurement, installation, setting to Harland and Wolff. This excludes payments work and integration of the weapons. This of f53 million payable as part of the approach is known as “Whole Ship privatisation of Harland and Wolff, made by Procurement”. Subsequently two tenders the Northern Ireland Department of were received by July 1985, one from Economic Development, to the new owners Harland and Wolff and the other from Swan in connection with the AOR 1 contract, of Hunters. Both bids were well above the which El9 million remains to be paid. These Department’s target price for the first ship of payments could not have been foreseen when f.122 million (at 1984-85 prices). the contract was awarded. 5.8 The companies were then asked to submit 5.5 For AOR 2 the Department estimate the total two revised bids. Harland and Wolff reduced outturn cost to be in line with the estimate their bid to the target price and offered to when the contract was awarded plus 20 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS 21 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS build AOR 2 for El06.5 million if the two this, stating that they needed greater detail of orders were placed with them. Swan Hunters the systems, equipment and facilities were unable to offer a bid close to the target required to enable them to provide accurate price. estimates. They informed the National Audit Office that they were unhappy with the 5.9 In April 1986 the Government announced technical guidance they had received when that contracts would be split, with AOR 1 preparing their tenders. The Department told going to Harland and Wolff and Swan the National Audit Office that providing the Hunters being given a preferential shipbuilder with more detail and greater opportunity to bid for AOR 2. This was on guidance would have been counter to the the basis that the second vessel would be to concept of a design and build contract which the same design as AOR 1 and that the terms sought to place responsibility for risk and and conditions, cost and programme would scope for innovation with the shipbuilder. be no less favourable to the Department than those offered by Harland and Wolff for a 5.13 The effect of not having discrete design and follow-on ship. build phases for a first of class vessel is akin to allowing the development and production phases of a project to overlap. Subsequently, Specification and pricing of the the House of Commons Defence Committee AOR have recognised this as a risk which should not be readily accepted (para 36, 10th Report, Session 1988-891. By way of contrast, the 5.10 The target price of El22 million used in the tendering exercise was based upon a series of Type 23 Frigate design and build programme case studies, covering a wide range of vessels contained a discrete design phase. In practice, of varying capabilities. Some scenarios progress on the construction of AOR 1 has envisaged conversion from a merchant hull been subject to some delay whilst difficulties whilst others required a complete new build. reconciling the various standards have been resolved. 5.11 Unlike previous fleet auxiliaries the AOR was intended to carry relatively complex weapons systems which led to design Contract awards difficulties in building various parts of the ship to either naval and/or civil (Department 5.14 In parallel with the Department’s tender of Transport and Lloyds] standards. This evaluation process the Northern Ireland necessitated, for example, using two different Department of Economic Development spray control systems to protect the same commissioned a separate report to establish area and the need for special cabin furniture. whether or not the Harland and Wolff bid For damage control purposes the Naval contained any assumptions as to future Engineering Standard requires metal cabin Government subsidies. This Report, which furniture. However. the Department’s metal was made available to the Department, furniture range does not comply with the concluded using a cost build-up based on a Department of Transport minimum size merchantvessel that the bid containedno standards. Consequently, in place of the subsidy and that the level of contingency. at normal fire-proofed timber furniture the 4.1 per cent including profit, was low. shipbuilders planned to fit, they are having to Conversely independent consultants design and provide specially made metal employed by the Department, who were not furniture. Specific problems were also informed of the bid prices for reasons of encountered concerning weapon system commercial confidentiality, concluded that requirements resulting in slippage of five tenderers may have included significant months. contingency sums for the incorporation of Naval Engineering Standards required by the 5.12 In their tender assessment report the Department. Department’s consultants commented that it would have been their normal commercial 5.15 In comparing the substantial price margin practice to offer more guidance to the between the two bids for AOR 1, the shipbuilders than had been included in the Department considered that the lower Department’s invitation to tender. Both Swan Harland and Wolff price arose from a very Hunters and H&and and Wolff supported challenging estimate of the man hours 22 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS required and a low profit margin, and could whether the second ship could be built for be achieved provided the contractor avoided f106.5 million. The Chief of Defence bad luck. The Harland and Wolff bid was Procurement did, however, advise Ministers also considered by the Department to reflect that, in his view, the prudent and economical the security of their position, at that time, as course was to go to another competition for a Government backed company. AOR 2 rather than accept the Swan Hunters price at that stage. He also commented that 5.16 Harland and Wolff offered the best price for there would be no significant operational AOR 1 together with a Contract Acceptance penalty from the consequent delay of about Date eight months earlier than their rival, six months. However, the Secretary of State and a Contract In Service Date 13 months for Defence directed the Chief of Defence earlier. The Department also considered that Procurement, as Accounting Officer for Class the Harland and Wolff design was a clear first 1, Vote 2, to place the contract for AOR 2 choice technically though they did not with Swan Hunters. include in their tender assessment a detailed analysis of the likelihood of the firm completing the project on time. On the basis Contractual arrangements of these conclusions the contract to build the first AOR was awarded to Harland and Wolff. 5.20 The main design and build contract for AOR 1 is similar to those used by the 5.17 It is the Department’s normal practice to Department with other shipbuilders. As is allow a lengthy gap between a “First of customary with First of Class contracts, Class” vessel and the placing of an order for Harland and Wolff were obliged to accept the next ship. This allows time to prepare certain other responsibilities such as the essential drawings, resolve building provision of design and production difficulties and to make essential refinements information to enable another shipbuilder to to the design. The AOR 2 contract was build a similar ship if necessary. awarded to Swan Hunters in December 1987, 20 months after AOR 1, and before essential 5.21 The main contracts for both AOR 1 and 2 are drawings had been prepared and building tightly drawn, being fixed price with the difficulties had been resolved. In contrast, for Department succeeding in transferring most the simpler follow-on vessels in the AOR financial risks to the contractors. Fixed prices programme the Department are planning for were subject to uplift by the application of a 3o-month gap between the first two vessels, variation of price clauses to allow for if the second is to be built in a different yard. inflation and the AOR 2 contract contained a clause to prevent abnormal profits being 5.18 In their tender for AOR 2 Swan Hunters taken. All payments are tied to the stated that their ability to cover the material achievement of specified milestones. requirements of the specifications had been Although there is no specific sanction for the seriously inhibited by the continuing design late achievement of individual milestones, development, the high incidence of the contracts also allow the Department to provisional prices and the lack of precise withhold payments, or parts of payments at technical specifications from the Department any time without detriment to the to ensure that the items to be supplied met contractor’s obligation to complete the the requirement. This added to their costs contract. Moreover, variation of price and in consequence Swan Hunters payments do not continue beyond the maintained that they were unable to match contractually agreed acceptance date after the price offered by Harland and Wolff for a which the contractor also becomes liable to follow-on ship. pay liquidated damages to the Department. 5.19 After a period of negotiation the final Swan 5.22 The milestones used on the AOR 1 contract Hunters offer for AOR 2 was still are based on the original specification which considerably higher than the existing forms part of the main contract. However, the Harland and Wolff quotation of f106.5 continual evolution of the design under a million for AOR 2 from the first competition. design and build contract means that, if the The Department considered that, in the light specification is not regularly up-dated, of the cost overrun by Harland and Wolff disputes can arise over the interpretation of (paragraph 5.4). there was a doubt over milestones. This can be costly for the 23 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS contractor in cash flow terms and lead to able to produce a realistic schedule for delays in project progress as it may be completion of the vessel. This plan was necessary to *e-schedule work to meet produced in May when payments resumed. changing expectations. Despite the revised timetable, which gave a completion date of December 1990, progress 5.23 Responsibility for assessing the achievement was still slow and, in May 1991, the of milestones rests jointly with the Department suspended all payments to the Department’s resident naval overseers, who contractor except for those on related AOR deal mainly with ship platform matters, and spares contracts where non-payment would the Department’s weapon acceptance staff. adversely affect sub-contractors. Even after The National Audit Office were told both by taking this action, progress remained slow. the Department and the shipbuilders that Completion is not now expected before the sometimes the weapons acceptance staff had end of 1992. been conducting their inspection against the latest design modification state of the weapon 5.27 None of the sanctions imposed by the equipment, even though it was not always Department appears to have had a significant part of the shipbuilders’ main contracts to impact on the rate of progress. The keep the equipment up to the latest Department informed the National Audit modification state. Office that, as each sanction was enforced, the contractor made good progress in the 5.24 The Department accept that there have been immediate aftermath but appeared to have milestone difficulties with contractors. been unable to sustain that improvement for However, in their view, difficulties mainly longer periods. arose where the contractor had fallen behind and was looking for a less stringent 5.28 Harland and Wolff acknowledge that they interpretation to allow payment to be made. have had problems maintaining production. The Department stressed that these were However, they consider that, when judging precisely the conditions under which they their performance, account needs to be taken had to hold a firm line to ensure the of the difficulties experienced in obtaining milestones achieve their purpose of equipments that met naval engineering producing measurable progress. standards. This produced a knock-on effect on design development and drawing production and, in turn, the shortage of Progress on construction of the drawings had delayed construction of the vessels vessel. The Department informed the National Audit Office that these difficulties were the responsibility of the shipbuilder AOR 1 within the contract. Harland and Wolff also 5.25 The contract for AOR 1 required the vessel point to the redundancies and major to he built in 4 years. Construction time is uncertainties about the future of the now forecast as 6 years 8 months, a slippage company arising during the 16 month run-up of 32 months (66 per cent] of which the to privatisation.This loweredmorale and, Department have accepted responsibility for more importantly, meant that the company 5 months. The Department estimate that also lost through resignation over ZOOof their their total payments to Harland and Wolff on more senior and experienced staff, including completion of the AOR 1 contract will be in more than 30 key staff involved on the AOR the region of El40 million whilst they believe 1 project. total Harland and Wolff costs to january 1992 had reached around f172 million. To April 1992 the Department had paid f124.7 million AOR 2 against this contract. 5.29 The decision to place the contract for AOR 2 so soon after the AOR 1 contract was let 5.26 As the AOR 1 contract progressed a regular (paragraph 5.17) has had implications for both dialogue took place between senior officials the costs and progress of AOR 2. Under a on both sides, becoming more frequent as the separate contract valued at fl million Department’s concerns about lack of progress Harland and Wolff were required to provide increased. Their concern was such that, in the necessary drawings and technical April 1990, all payments were suspended information for Swan Hunters to build AOR until such time as Harland and Wolff were 24 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS 2 (paragraph 5.20). In practice, for the reasons 5.32 The money was to be paid by the Northern outlined in paragraph 5.26, coupled with low Ireland Department of Economic morale and an overtime ban in the Harland Development in five instalments related to and Wolff drawing office, some of the the achievement of specified milestones. drawings required by Swan Hunters were These were agreed between the Northern delayed whilst others were of poor quality. Ireland Department of Economic Significantly, owing primarily to the value of Development, the Department and the the contract and partly to the immaturity of shipbuilder. The first two milestones were the design Harland and Wolff only accepted not intended to coincide with the liquidated damages clauses to a maximum of Department’s own milestone schedule and f20,OOO. payment of the first milestone (for flo.145 million) was straightforward being timed to 5.30 Because of its exposure to damages claims coincide with privatisation. The next two from Swan Hunters the Department agreed milestones were achieved one and six that, for a payment of between f8.6 and f13 months respectively behind schedule because million [dependent upon delay and progress on AOR 1 had slipped. Payment 4 dislocation actually experienced) and and part of 5 have yet to be earned but there acceptance of an I&week delay in contract was a contractual commitment by the acceptance date Swan Hunters would Northern Ireland Department of Economic complete AOR 2 to its own drawings. AOR 2 Development to pay Harland and Wolff f2.04 is therefore running four months behind the million of the 5th instalment not later than 1 original schedule. With the exception of the April 1991 irrespective of progress. This Machinery Control and Surveillance payment was made just before the indefinite System-completion of which is at the suspension of payments by the Department in Department’s own risk - (paragraphs May 1991. When in 1969 they were 5.40-5.41), Swan Hunters have had little consulted, before these commitments were other difficulty in keeping to schedule. entered into, the Department did not raise objections. Role of the Northern Ireland Department of Economic Gzy Points Development in the AOR 1 5.33 ,n the view of the National Audit Office Contract .he following points arise from the xocurement of the AORs and the progress 5.31 Historically, the Northern Ireland .o date on the contracts: Department of Economic Development as the (i) In undertaking tender assessments of only shareholder in the nationalised proposed designs, it would be company, had provided considerable helpful to include a full analysis of financial support to Harland and Wolff. In the likelihood of firms completing September 1969 the company was privatised. projects on time. This would not As part of the privatisation agreement the necessarily have changed the cwrse Northern Ireland Department of Economic of this competition, but it is a point Development had undertaken to make to bear in mind in future appraisals payments to H&and and Wolff totalling f53 (paragraph 5.16). million, tied to progress in completing AOR 1. By doing so the Northern Ireland (ii) The target price set (paragraphs Department of Economic Development 5.7-5.6) was a commendable attempt avoided responsibility for any losses on to drive down costs. However, the completion of the vessel. The composition of requirement to both design and these payments was examined by the build the vessel made it difficult for Committee of Public Accounts in its report tenderers to estimate build costs. on the Privatisation of H&and and Wolff The two companies involved, as well (7th Report of Session 1991-92). as an independent firm of consultants, have criticised the depth of information upon which bids were to be based. However, as the invitation to tender was for a Design and Build contract the 25 THE 1991 STATEMENT ON MAJOR DEFENCE PROIECTS companies were aware of the (vii) The Department successfully limited potential difficulties (paragraph 5.13) their own exposure to cost whilst the Department protected escalation on the contract to Harland itself against cost overruns by letting and Wolff (paragraph 5.21). A fixed price contracts (paragraph further f53 million is likely to be 5.21). paid by the Northern Ireland (iii) The use of a Design and Build Department of Economic contract without discrete breaks Development to Harland and Wolff between phases for a vessel as in connection with AOR 1 complex as the AOR, especially with (paragraphs 5.31-5.32). Harland and a shipbuilder with limited recent Wolff consider that increases in experience of warship building, may their own costs arose in part have been over-ambitious. The because they were unable to make a effect was akin to entering full realistic estimate due to production whilst development was shortcomings in information incomplete. These factors have provided by the Department at the contributed to the delays, tender stage. However, the particularly on AOR I, since the Department considered the risk design was continually evolving as stayed entirely with the contractor the project progressed and problems, (paragraph 5.12). such as the conflict between naval and civil standards, arose (paragraphs 5.11 and 5.13). Vertical Launch Sea Wolf (iv) One of the problems with a Design and Build contract of this nature is 5.34 Under the “Whole Ship Procurement” that, as the design evolves, approach both Harland and Wolff and Swan amendments are necessary to the Hunters were required to purchase and fit contract and associated specification the Vertical Launch Sea Wolf System. This documents. As milestones, under system is also to be used on other vessels which payments are made, are such as the Type 23 Frigate. However, at the derived from the specifications, it is time the contract was drawn up, no important, if lengthy disputes are to requirement was placed on Harland and be avoided, that both specifications Wolff either to purchase the setting to work and milestone definitions are kept spares. or provide the requisite setting to up to date (paragraphs 5.22~5.23]. work test equipment. For AOR 1 (v) The Department let the contract for responsibility for these items rested with the the second vessel within 20 months Department. As a result of this, and because of the contract for the first vessel. of the difficulty in obtaining some items at The shipbuilder for the first vessel short notice there was a 60-80 week delay in (Harland and Wolff] agreed to provide the supply of setting to work spares with the the drawings for the second vessel result that the Department was open to delay but was unableto do so in the Lime and dislocationclaim from Harlandand available. As a result the Wolff. Department is now having to make payments of between f8.6 million 5.35 Partly because of this and partly because and f13 million to the builder of the there was a delay in the availability of the second vessel (Swan Hunters). The Command System which could have problem might have been less severe involved incurring expenditure on care and if the gap between the two ship maintenance of Sea Wolf if fitted. The orders had been longer (paragraphs Department decided to remove those parts of 5.17, 5.29-5.30). the system already fitted to AOR 1 at a cost, (vi) Progress on AOR 1 has been very estimated by the Department, to be at least slow, due in part to the factors f300,000. outlined in (iii) above. The Department have made various 5.36 In part, therefore, the Department have had attempts to improve the position but to delay fitting this system to avoid have met with little success contractors competing with their own needs (paragraphs 5.25-5.28). elsewhere for the limited number of spares 26 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS available. For AOR 2, which is less advanced, originally envisaged. Nonetheless, they the Department agreed with Swan Hunters acknowledge that some form of self-defence that the ship should just be made ready to will still be required. receive the equipment. However, Swan Hunters had already ordered smne of the relevant spares and were expecting to take delivery of them on time. Once delivered, Machinery Control and the Department now plan to take over these Surveillance System setting to work spares for use on other ships using the system. This arrangement means 5.40 The original design for the AOR envisaged that the Department will incur Swan Hunters greatly reduced crew numbers compared to on-costs which would not have been those normally required on a vessel of this incurred had the parts been purchased complexity. The Machinery Control and directly for the Sea Wolf project. Overall Surveillance System involves complex these difficulties call into question the computer software, and is critical to the wisdom of incorporating complex and achievement of this objective. However, relatively immature weapons systems within when Harland and Wolff passed on the Whole Ship Procurement contracts. technical information relating to the system, via the Department, to Swan Hunters, the 5.37 The Department now intend to recover the latter identified a number of design and position for both ships at refit. On current specification errors. Responsibility for these plans the first refits are likely to take place in errors is the subject of a contractual dispute the mid 1990’s although the Department has between Harland and Wolff and their sub- yet to decide whether air defence features contractors, although Harland and Wolff are will be incorporated at this stage. This ultimately responsible for any additional decision means that both vessels will be costs arising on AOR 1. Because without a full air defence capability for some responsibility for the surveillance system was considerable time and that the refits, if Sea specifically excluded from the agreement Wolf is fitted, will take them out of service reached with Swan Hunters in 1969 for 47 weeks longer than had originally been (paragraph 5.30) the Department is liable to planned. meet the costs of any knock-on effects on AOR 2. The Command System 5.41 With a view to minimising its exposure to any claims from Swan Hunters, the 5.36 Owing to the complex military equipments to Department commissioned a separate risk be carried in the AOR, the vessel required a assessment. As a result of this they have command system to co-ordinate and control funded Swan Hunters (at a cost of f1.3 the various elements. It was originally million) to validate the specification to permit intended to utilise a variant of the CACS4 software corrections to be made before system, designed for use in the Type 23 installation in AOR 2. The Department are Frigate. However, owing to technical hoping to re-coup at least part of this expense difficulties this system has been cancelled by selling the results to Harland and Wolff. and a new system is under development for At present, it is not clear whether or not the the Type 23 which is also intended, after system will be fully operational by the time modifications, for use in the AOR. The either vessel is otherwise completed, but the forecast in-Service date for this system in the Department will not accept the ships without Type 23 is 1996. Thus, both AOR 1 and AOR an operational system. 2 will enter service without a command system. 6.39 The delay in the procurement of the Command System for the AOR will have a potentially adverse effect on the vessel’s ability to defend itself. However, with the changing threat, the Department is now considering whether the AOR will need such a complex self-defence capability as 27 THE 1991 STATEMENT ON MAJOR DEFENCE PRO,ECTS Ley Points 5.42 n the view of the National Audit Office he following points have emerged on the ntegration of specific equipments on the hOR programme: (i) On coming into service, both AOR 1 end AOR 2 will be without the self- defence capability required to fulfil the role originally envisaged for them. Incorporation of the various equipments necessary to provide this capability will have a significant impact upon the vessels’ operational availability owing to the time taken to fit them, even if a decision is taken to opt for a simpler system (paragraphs 5.36-5.39) ii) One of the main objectives of Whole Ship Procurement is to pass on the maximum risk to the contractor. The omission of certain Vertical Launch See Wolf spares from the AOR I contract has exposed the Department to a potential risk which, in this case, will cost at least en additional E~OO,OOO[paragraphs 5.34-5.35). Similarly, the inability of the Department to transfer risks associated with the Machinery Control and Surveillance System to Swan Hunters @aragraphs 5.40-5.41) could have financial repercussions. There is a particular lesson to be learned here in that the inclusion of complex end relatively immature weapons systems within the umbrella of Whole Ship Procurement can expose the Department to both programme and financial risks which needto be carefully managed. iii] Although the Machinery Control and Surveillance System problems have the potential to produce further delay, the National Audit Office recognise that the Department acted promptly and decisively to limit their exposure (paragraph 5.41). 28 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS Glossary ALARM: Air Launched Anti-Radar Missile. AOR: Auxiliary Oiler Replenishment Vessel. ASRAAM: Advanced Short Range Air to Air Missile. A3-AEW: Airborne Early Warning Aircraft. ASW: Anti-Submarine Warfare. BATES: Battlefield Artillery Target Engagement System. Blowpipe/Javelin: A man-portable surface-to-air guided missile. CDS: Component Demonstration Substage of MLRS III programme. Cost Plus contract: A contract priced by reference to the Government’s profit formula which reimburses a contractor for the costs he has actually incurred plus a percentage for profit. Collaboration: Joint procurement between two or more nations to meet a crxnm~n requirement. Costshare: The proportion of total collaborative project cost borne by each participating nation’s defence procurement agency. CRARRV: Challenger (battle tank] Armoured Repair and Recovery Vehicle. Defence New Works Provides annual information on the progress of major defence works. Statement: Design and Build Contract: A contract placed with a single contractor making them responsible for both the design and building of a first of class vessel. DROPS: Demountable Rack Off-loading and Pick-up System. EFA: European Fighter Aircraft. Firm Price Contract: The amount to be paid is specified in the contract and is not subject to adjustment for inflation. Fixed Price Contract: The amount to be paid is specified in the contract and subject to adjustment only for inflation. Full Development: An agreed programme of design engineering leading to the establishment of the final design of an equipment so that production may proceed. IMMLC: Improved Medium Mobility Load Carrier--a variant of DROPS. ISD: In-Service Date. IUKADGE: Improved UK Air Defence Ground Environment-a system enabling the creation of a recognisable air picture covering the whole UK Air Defence Region. 29 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS JTIDS: Joint Tactical Information Distribution System, Lynx: An attack helicopter. Maximum Price Contract containing terms placing an absolute limit on the customers’ liability. COIltl-Wt: MDTT: A joint venture comprising Martin Marietta Corporation (US), Diehl GMbH (Germany), Thomson-CSF (France), THORN EMI Electronics Ltd (UK] and MDTT Inc. (managing partner wholly owned by the four national partners). Memorandum of An international agreement which commits partners in a collaborative project to a Understanding: stage of its procurement process. and defines arrangements for that stage. Mid-Life Update: A programme of enhancements to an existing weapons platform to prolong its effective service life. Milestone: A mechanism which enables the Department to monitor adherence to an overall programme. MLRS: Multiple Launch Rocket System NIS: NATO Identification System allowing positive identification of friendly ships and aircraft. Off-the-shelf Purchase of equipment that is already fully developed and in “se PrOC”rL?“le”t: On Costs: Costs levied by a supplier, on to items purchased from a sub-contractor, to cover the suppliers’ own overheads and profits. Prime Contractor: A firm or consortium responsible for the co-ordination and integration of industrial work. RSDS: Revised System Demonstration Substage of the MLRS III project. SA 80: Small Arms for the SOS,comprising rifle, light support weapon and ancillary equipment. Setting-to-work Essential spares purchased to replace items consumed during the testing and tuning Spares: of new systems eg for missile systems such as Sea Wolf. Sting Ray: A ship/air-launched lightweight torpedo. Target Cost: The estimated cost of work on a contract where the risks are too great to agree a fixed price. Supported by incentives for contractors to contain costs within the target. UNITER: A secure. survivable integrated ground communications system for the RAF throughout the UK. Variation of Price: Adjustment made to a fixed price contract to provide for the effects of inflation. Whole Ship Shipbuilder is made responsible for both the build of a vessel and the integration of PlXX”rel”e”t: the various associated equipment. Workshare: The proportion of a collaborative project’s work that is carried out by each partner nation’s industry. Information is either confidential or commercial-in-confidence. 30 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS Appendix 1 Extracts from the 1991 Major Projects statement Table I: Approved work Sea systems Estimatedtotal expenditure(Em) Expenditure(Em) Project In-Servicedate to 31.3.91 At approval of work At present DevelopmentD Forecast Actual/ Title at first present OUtbNll Present present Present ProductionP approval forecast prices prices Historic prices prices prices (a (4 (CJ (d) (N (f) (91 (h) (il Surface Ships 1. Type 23 Frigate1 D I 72.0 94.1 76.3 (80. 83) 135.4 240.8 88 69 167.6 229.7 139.6 (81. 64) 250.0 239.7 2. Auxiliary Oiler DlPI 90 92 131.3 156.9 128.7 (84. 85) 192.2 Replenishment VBS# SUrfaCeWeaQOnS 3. GWS26 MOD 1 0 I 123.9 171.1 79.4 (82) 136.9 Vertical Launch 90 91 Sea Wolf Missile P 156.2 190.8 165.0 (62) 322.4 and Ship System’ 4. HarpoonSurface D 1 10.2 12.0 15.2 (64) 22.3 16.3 LaunchedMissile a7 a0 and Ship System1 P 134.1 150.3 192.7 (84. 90) 235.6 197.5 UnderwaterWeapons 5. Spearfish D&P I a7 92 604.6 836.2 399.7 (60) 903.7 897.7 Torpedo’ 6. Sonar,2054 D 1 167.9 230.5 164.9 (83,64.65. 250.5 250.5 Sonar Suite for 9415 9415 86.87,88,89,90) Trident P 90.3 110.3 120.2 (tn64.65, 179.5 160.6 86.87.88.89.901 Notes: 8See explanatory note below. Presentprices are average 1991/92 outturn prices. Table I-Project descriptions and explanatory notes General Projects in full development or production with Treasury Approvals in excess of f’250 million by 31 March 1991. Compared with MPS 90, the entries for the Single Role Minehunter, the Type 2400 “Upholder” Class submarine, the Stingray torpedo, the Blowpipe/Javelin missile, the E-3 AEW aircraft, the ALARM missile, Harrier GR5/7 and IUKADGE projects have been omitted as all were in service on 31 March 1991 and nme had significant remaining expenditure. As a separate project, TRIGAT MR does not qualify for inclusion in Table I and has been reattributed to Table III. UNITER stages 1 and 2 and JTIDS (which have been transferred from Table III] are the only new entries in Table I. Paragraph numbers refer to the serial number of the project in Table I. 31 THE 1991 STATEMENT ON MAJOR DEFENCE PROrECTS In its original form Table I is supported by two separate sets of notes, the first giving project descriptions and the second giving explanations of cost variances and/or in- Service date delays. To ease understanding, the National Audit Office have amalgamated these notes so that, for each project, all relevant information is contained in a single note. Sea systems Surface Ships and Submarines-General (a] ISDs in the case of warships correspond to the acceptance dates. (b) Columns (e) and (f) exclude expenditure on production of weapons except where these are procured under the ship build contract. (c) Production expenditure includes First of Class costs. Sarfare shin. ------I-- 1. TYPE 23 FRIGATE: Anti-Submarine Warfare frigate. Principal features include towed array sonar, Harpoon surface to surface missiles, Vertical Launched Sea Wolf point defence missile system to meet the air threat, and the EHlOl ASW helicopter capable of carrying Stingray torpedoes and sonobuoys. The increase in development cost between Columns (h) and (i) is attributable to the costs of the special-to-type replacement command system which were not included in the original Treasury Approval. Associated projects are GWS 26 MOD 1 Vertical Launch Sea Wolf missile system, Harpoon surface launched missile system and EHlOl anti-submarine helicopter. all of which have separate entries. and the Type 23 Frigate Command System. 2. AOR: Auxiliary Oiler Replenishment vessel. A new concept of Royal Fleet Auxiliary capable of supplying fuel, ammunition and other solid stores from the same hull-the “one-stop-replenishment” principle. The approved development costs of the special-to-type replacement Command System are included in Column (i). ISD slippage has been caused by shipbuilder delays. Associated projects are Vertical Launch Sea Wolf (described separately] and the AOR variant of the Type 23 Frigate command system. Surface Weapon systems 3. GWS 26 MOD 1: Vertically Launched version of Sea Wolf missile system, to be fitted to the Type 23 Frigates and AORs. The increase in development costs (Columns (h) and [i)) was largely due to problems with software and system integration, which resulted in the contract being renegotiated. Reapproval for the contract was given by Defence Ministers and the Treasury in 1966. 4. HARPOON: Surface to Surface anti-ship guided missile fitted to the Batch 3 Type 22 Frigates and which is to be fitted to Type 23 Frigates. Purchased from the USA. The increased production cost estimate reflects Treasury Approval received for an additional eight systems previously shown in Table II. Underwater Weapon Systems 5. SPEARFISH: Submarine-launched heavyweight torpedo with both anti- submarine and anti-surface ship capabilities. The further slippage in ISD since MPS 90 is due to the need to demonstrate that the required level of reliability has been achieved. A Reliability Assurance Programme is now underway within the original contract and the resultant modifications will be incorporated into the initial batch: further production will be to the modified design. 32 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS 6. SONAR 2054: An integrated sonar suite being developed for the Vanguard class submarine. Includes both hull-mounted and towed arrays with advanced on-board electronics for signal processing and display. The figure at Column (g) is lower than that in MPS 90. The figure in MPS 90 was erroneous in including a significant element of double counting: the revised figure has been confirmed as accurate. There has been a further Treasury Approval since MPS 90. The associated project is the Vanguard class nuclear-powered SSBN. These costs are also included in the Trident entry in the Nuclear MPS. Land Systems Estimatedtotal expenditure(fm) Expenditure(fm) Project In-Servicedate to X.3.91 At approval of work At present DevelopmentD Forecast Actual/ Title at first present OUthXll Present Present Present ProductionP app,OKl forecast prices prices Historic prices prices prices (d t’) 63 Cd) c-3 (0 (9) 03 0) Fighting Vehicles 1. Warrior’ 01 129.1 218.2 125.0 (79) 278.4 221.2 86 88 PI 458.2 530.2 764.6 (84) 1061.6 845.4 Weapon Systems 2. Rapier Field DBP 89 93 628.1 841.1 1235.5 (81, 83, 1805.3 1805.3 StandardCl 84, 85) 3. High Velocity D&P 91 93 119.5 147.2 242.0 (84, 86) 348.0 355.7 Missile’ 4. AS90 D‘ 5.2 5.5 18.6 (89) 22.7 25.6 92 92 P, 22.2 23.7 317.7 (89) 383.8 427.3 5. MLRS II D 19.0 24.1 14.6 (80) 27.1 24.1 90 90 P, 238.2 271.8 433.1 (82, 85) 605.9 575.5 6. LAW 80’ D 65.1 105.2 86.3 (84) 123.5 105.2 83 88 P, 148.2 172.9 237.9 (84) 340.4 305.4 7. TRIGATLong D 98 98 85.2 95.6 244.9 (61, 87) Range’ Electronic Systems 8. GATES’ D&P 85 91 176.3 249.1 190.0 (85. 88) 279.3 277.4 ~pg~~ispehicles D&P 89 90 77.74 80.8 250.1 (88, 89 301.1 387.7 90) Notes: * * New item in Table I this year. 1see expk3flatmynote. Presentprices are average 1991/92 outturn prices. Land Systems Fighting Vehicles 1. WARRIOR (MCV 60): Tracked Combat Vehicle for mechanised infantry battalions. The ISD slippage resulted from technical problems and delays in finalising vehicle numbers and variants. The post-Options reduction in the quantity of vehicles required is reflected in the lower production figure in Column (i). Weapon systems 2. RAPIER FIELD STANDARD C (FSC): Completely new low level air defence system currently under development which will have a full day/night and poor weather capability. Will incorporate new surveillance radar, improved tracking and missile guidance system, eight-rail launcher, electronic counter measures against anti-radiation missiles, new Rapier tracker, and new missile (Mk II). The achievement of Reliability and Maintainability (R&M) of the overall system has been accorded second highest design priority after resistance to ECM. 33 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS The slippage in the ISD occurred before the incentivised contract was placed in 1986 and was the result of technical difficulties [now overcome), to a degree compounded by a restricted funding profile in the early years. There has been no further slippage in the ISD since the contract was incentivised in 1986. 3. -: Designed to enhance the Army’s close air defence capability by providing a highly mobile armoured platform for a new generation of short time-of-flight missiles. The system consists primarily of a self-propelled (SP) launcher vehicle [Stormer) which carries a lightweight multiple launcher and a shoulder launch aiming unit for deployment away from the SP vehicle. The reported slippage to the in-Service date was caused by difficulties during development. Considerable progress has been made and it is felt that this aspect of HVM development is no longer likely to pose a major threat to the successful completion of the HVM programme. However. there is a good deal of development work still to be completed. 4. ASSO: New 155mm Self-Propelled Howitzer to replace the obsolete 105mm Abbot and all 155mm M109s. Will be capable of firing all natures of 155mm ammunition. 5. Multiple Launch Rocket System (MLRS) I: Depth fire artillery system. Basic system comprises a Self-Propelled Launcher Loader (SPLL) carrying two rocket/pod containers each containing six rockets. Phase I rockets have bomblet warheads. There has been a volume reduction in SPLLs and rockets since the initial Treasury Approval. This accounts for the reduction in the production costs in Column (i). Associated project is MLRS III. This consists of the M26 rocket body, used for MLRS I, with a terminally guided warhead, containing three terminally guided submunitions which, ““ce ejected from the warhead, use radar to locate and destroy enemy armoured vehicles. 6. LAW 80: A disposable short-range lightweight anti-tank guided weapon (ATGW) carried by one ma” and discarded after use. For use by all arms but principally by infantry. It replaces the 84mm Carl Gustav and 66mm M72 anti-tank guided weapons. The ISD slippage was caused by the need for improved performance to meet changes in the threat. Technical problems were encountered in the subsequent development and production and a solution has had to be produced to counter potential premature detonations induced by static electricity. As a result of “Options for Change”,the quantity of missile launcherswas reducedfrom the original quantity approved by the Treasury and this is reflected in Column (il. The costs include those of LAW 80 training aids, and indoor and outdoor trainers. 7. TRIGAT LONG RANGE: A Long Range anti-tank guided missile of the “fire and forget” type using an infra-red seeker head. At 31 March 1991, the UK was still a full participant in the Long Range TRIGAT project and this is reflected in the Table I and II entries. Formal notice of the UK’s intention to withdraw from the Long Range project was given to our French and German partners in September 1991. Continued UK participation is dependent upon negotiation with “UT partners of a revised programme with a significantly lower cost to the UK. 34 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS Electronic Systems 8. BATTLEFIELD ARTILLERY TARGET ENGAGEMENT SYSTEM (BATES): An automated artillery communications, command, control and information system. Consists of automatic data processing equipment located at battery, regimental, divisional and corps level, and artillery command posts, together with appropriate data entry devices and display units at remote cells (eg guns, MLRS fire units, observation posts). Data will be transferred via Ptarmigan secure digital links and Clansman radios. Funding difficulties and inadequacies in the prime contractor’s management resulted in the project being submitted for re-approval in 1985. Since that date, further slippage has occurred due to problems in software development and inconsistencies in the specification. Logistic Vehicles 9. DROPS: Ammunition resupply system incorporating wheeled Demountable Rack Offload and Pickup System. A transport vehicle with its own integral crane designed to carry pallet&d loads. The difference between the cost shown in Columns (h) and (i) is explained by the incorporation of various equipments not previously incorporated in the original Treasury Approvals of 1988, 1989 and the most recent of 1990. Air systems Estimatedtotal expenditure(fm) Expenditure(Em) Project In-Servicedate to 31.3.91 At approval of work At present DevelopmentD Forecast Actual/ Title at first pment outturn present Present Present ProductionP approval forecast prices prices Historic prices prices prices (a) 01 CC) (d) @I (f) (91 PI 0) Aircraft 1. EuropeanFighter D 482 561 1841.0 (63. 85. 2609.0 2723.0 Aircraft (EFA) 861 2. TornadoGRl Mid D&P 93 96 70.1 78.4 376.7 (87) 491.7 657.3 Life Update’ 3. HarrierTlO’ O&P 94 94 13.8 14.7 264.6 (89) 301.9 297.7 4. Sea Harrier Mid D&P 94 94 234.0 265.0 330.3 (84. 88) * Life Update’ 5. Tristar 1st D&P a4 86 187.0 279.1 183.6 (82, 87) 303.9 355.7 Batchl 6. Tristar 2nd D I 15.0 18.8 11.3 (87) 14.8 27.5 Batch> 87 97 P 82.5 122.7 120.0 (87) 153.6 162.1 Helicopters 7. EHlOl ASW’ D 93 98 618.5 927.8 699.4 (62, 90) 1252.7 1356.0 Electronics 8. JTIDS”l D&P 88 z: 122.0 185.0 285.0 (89) 314.0 314.0 9. UNITERSTAGE D&P 90 124.3 144.9 367.6 (89) 389.7 408.5 1 & 2”’ Notes: **New item this year. 1see exptanatorynote. Presentprices are average 1991/92 outturn prices. Air Systems Aircraft 1. EUROPEAN FIGHTER AIRCRAFT--FA: Agile fighter aircraft with offensive support capability. Collaborative programme with Germany, Italy and Spain. 2. TORNADO GRl MID-LIFE UPDATE: A package of work to improve the GRl’s avionics and update its armament to meet the threat into the next century. 35 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS The ISD has slipped three years because of problems in development, primarily with software, and the need to reduce the overlap between the development and production phases in order to avoid cost escalations or risk. The increased Column (i] figure is due to: (al clearer definition of the development specification which has, in turn, led to increased costs of the development and production phases: (b) the revision of initial indicative cost estimates from industry which were significantly understated; and (c) the additional costs associated with making provision in the MLU programme for the possible modification of 19 batch 1 aircraft to the GRl standard. The previous Tornado MLU entry in MPS 90 Table II has now been deleted. 3. HARRIER TlD: Two-seater trainer version of the Harrier GR7 utilising the TAVB-B airframe, which can be used in both training and operational roles. The decision to purchase the aircraft was taken in February 1990. Funding for the purchase of the TlO was offset by the cancellation of an expected attrition buy of Harrier GR5/7. 4. SEA HARRIER MID-LIFE UPDATE: Uprating the Sea Harrier to meet the threat through the 1990s. It is planned to be equipped with an advanced Blue Vixen radar (the costs of which are included here) and other avionic equipments. and to be capable of carrying Advanced Medium Range Air-to-Air Missiles (AMRAAM). Taken together, the programme will endow the aircraft with an all weather. beyond visual range, look-down, shoot-down capability. Blue Vixen radar is a multi-mode, pulse doppler radar being developed to replace the Blue Fox radar currently installed in the Sea Harrier FRSI. AMRAAM, intended for FRSZ, is being developed in the USA. The UK has the option to procure the system. 5. TRISTAR Batch 1: The conversion of six w-British Airways Tristar aircraft for RAF service in tanker/passenger or tanker/freighter roles. This programme has encountered a number of unforeseen technical problems, which caused the ISD to slip by two years. These include carrying out smaller packages of work than originally planned at any one time in order to preserve aircraft geometry. Differences between the individual aircraft prevented the production of six identical aircraft modification sets and the production methods for dealing with large reinforcing areas were inadequate. All aircraft have been completed with the last delivery taking place in December 1990. 6. TRISTAR Batch 2: The conversion of three w-Pan Am Tristar aircraft for use by the RAF in the tanker/passenger role. The ISD has slipped by a total of 10 years as a result of savings measures; the revision of the requirement from a three-point to a two-point configuration, the decision to put the production element of the programme to competition and slippage in the development work on the wing pods. The development cost has increased significantly. This arose from an underestimation of the amount of work remaining following deletion of the centreline refuelling point. It was not foreseen that it would be necessary to conduct a major revalidation of the design analysis carried out for the first batch. On being stripped down, the development aircraft was also found to require more extensive recovery. rectification, modification and servicing than originally envisaged. Ministers are to decide on the future of the project in early 1992. 36 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS Helicopters 7. z: A medium sized helicopter developed collaboratively by the UK and Italy for a range of different applications, both civil and military. The version reported here is the Merlin ASW variant. The forecast ISD has now slipped by an additional year over that reported in MPS 90. This followed our annual review of the forward equipment programme. An additional Treasury Approval was given in 1990. The associated project is the EHlOl Utility variant. Electronics 8. JOINT TACTICAL INFORMATION DISTRIBUTION SYSTEM (JTIDS): ECM- resistant secure data and voice communications link developed in USA. Entry covers the fitting of JTIDS to Tornado ADV and IUKADGE for Air defence data exchange. (There is a separate, similar Navy programme for fitting JTIDS to the Fleet and to Naval Aircraft). JTIDS also forms part of the E-3 system. There have been four separate budgetary savings measures which have deferred the LSD initially by two years and then by a further year on each subsequent occasion. Approvals to date cover the Project Definition and Development stages and the first production buy for the Tornado. Associated project is IUKADGE. 9. UNITER l&Z: A secure, survivable integrated ground communications system for the RAF throughout the UK. Associated project is JTIDS. The initial two and a half years slippage was caused primarily by delays in the provision of accommodation arising out of RAF/PSA works services. A further year’s slippage arose from the resubmission and renegotiation of the contractual arrangements when the remaining works services element was brought under PE management through a “turnkey” hybrid arrangement with the equipment prime contractor. UNITER has only qualified for inclusion in Table I following Treasury sanction of the programme which, for the first time, also includes the works element. Associated project is IUKADGE. 37 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS Table III: Expenditure on the early stages of projects -ElOm or over Forecast ISD and total expenditure are shown for projects which had entered Full Development at 31 March 1991. FOreCaSt Expenditureto toti cost 31 March 1991 ForecastIS0 at 31 March (Em at present at 31 March 1991 (fm at Projecttide prices) 1991 present prices) Sea Systems Submarines 1. SSNZO 44 2. Swiftsure8 14 TrafalgarClass Sonar Update Eleclronic systems 3. Type 23 Frigate 48 1996 CommandSystem Land Systems Fighting Vehicles 4. Challenger2 108 DemonstrationPhase WeaponSystems 5. TRIGATMedium 42 1996 125 6. MLRS PhaseIII 61 Air Systems Air Weapons 7. ASf?AAM 77 Presentprices are average 1991/92 outturn prices. Annex to Table III: Project descriptions Sea systems Submarines 1. e: Feasibility studies into a follow-on class of Fleet nuclear-powered submarines. Since 31 March 1991, the decision has been taken to begin studies on a new class of SSN based on the Trafalgar class design rather than continue with the SSNZO concept. 2. SWIFTSURE & TRAFALGAR Class Sonar Suite Update: To match the predicted submarine threat into the next century and to extend the cost-effective lifespan. Although the first two stages of the project are underway, including both development and production spend, the largest and the most technically complex stages are only in the early stages of Project Definition. It is not yet possible to give firm cost and timescale estimates for these. Electronic Systems 3. TYPE 23 FRIGATE COMMAND SYSTEM: An automated computer-based command system, which will process data from a ship’s own sensors and other sources for the purpose of information management, command planning and the co- ordination of weapon direction. The forecast cost of the programme has been reduced in line with the lower force levels envisaged in “Britain’s defence for the 1990'S". Land Systems Fighting Vehicles 4. CHALLENGER 2: The new Main Battle Tank to succeed Chieftain, to be equipped with the CHARM gun in addition to other improvements including better mnhility, protection and fire control. 38 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS Weapon systems 5. TRIGAT MEDIUM RANGE: Planned as replacement for MILAN ATGW System. The Operational Concept of MRT is to develop and produce a crew-portable ATGW which is capable of defeating improved enemy armour using a tandem warhead missile (twin charge]. Fitted with a thermal imager to give an all weather, day/night capability. 6. MLRS III: Depth fire artillery system. Phase III is a terminally guided submunition warhead rocket under collaborative development by the UK, US, France and Germany. Air Weapons 7. ASRAAM: Advanced Short-Range Air-to-Air Missile for Harrier GR5/7, EFA and originally (before the decision not to proceed with the upgrade) the Tornado ADV. 39 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS Appendix 2 Project Summary Sheet General information Project Title: Harpoon Controllerate Responsible: Sea systems Title ISD Associated Projects: Type 23 Frigate 1969 Purchase arrangements Contractor Contract Type Procurement Route McDonnell Douglas Fixed Price International Competition Data Sciences Fixed Price UK Competition Quantities Required Ship Systems: Missiles: 20 * Project description, Harpoon is a surface-to-surface anti-ship guided missile fitted to the Batch 3 Type 22 progress to date and Frigates and which is to be fitted to the Type 23 Frigates. The missile is an off-the- key future events shelf purchase from the USA with a separate contract for system integration let with a UK company. The Department has already taken delivery of 15 ship systems and the original contract with McDonnell Douglas is substantially complete. An order for a further eight ship systems was placed in 1991. This is reflected in the increase in both approved and total estimated costs when compared to 1990. Project costs Prod. DW. Totals (at current prices) WI (Em) Ml MOD Approval 235.8 22.3 258.1 Current Estimate of Outturn 197.5 18.3 215.8 Difference 38.3 4.0 42.3 Estimated Expenditure to date: f162.3 million. Explanation of significant differences Factor WI Specification Changes -19.79 Quantity/VolumeVariations -6.63 Price Variations -1.99 Other Factors (Unused Contingency, etc) -11.96 Total -42.36 Further expenditure in clear prospect None foreseen In Service dates ISD definition ISD is defined as the date by which the first complete missile system is fitted and operationally effective on a warship. 40 THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS Achievement of ISD Original ISD Current Forecast/Actual ED Slippage Explanation of slippage Factor Unforeseen technical difficulties Need for project redefinition Procurement delays Budgetary constraints Delays in associated projects 1 - Other - Total - 1 41