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Ministry of Defence: Design and Procurement of Warships

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Ministry of Defence: Design and Procurement of Warships NATIONAL AUDIT OFFICE Report by the Comptroller and Auditor General Ministry of Defence: Design and Procurement of Warships Ordered by the House of Commons to be printed 5 June 1985 LONDON HER MAJESTY’S STATIONERY OFFICE E3.30 net 423 This report is presented to the House of Commons in accordance with Section 9 of the National Audit Act, 1983. Gordon Downey Comljtroller and Auditor General National Audit Office 4 June 1985 Contents Ministry of Defence: Design and Procurement of Warships Pages Summary and conclusions l-5 Report Part 1: Background 6 Part 2: Division of Responsibilities for Warshipbuilding 7-8 Part 3: Effectiveness of MOD’s Design and Development Arrangements 9-12 Part 4: Performance of Warshipbuilders 13-15 Part 5: Negotiation of Warship Contracts 16-17 Glossary of abbreviations 18 Appendix Mr Levene’s recommendations on warship procurement 19 Ministry of Defence: Design and Procurement of Warships Summary and conclusions 1. This Report records the results of an examination by the National Audit Office (NAO) of the Ministry of Defence (MOD)‘s arrangements for design and procurement of warships. It covers the progress made in increasing warshipbuil- ders’ involvement in and responsibility for design; the difficulties encountered in design and development of new ships; and MOD’s influence on the performance and productivity of the warshipbuilders and the effect of the latter on the achieve- ment of value for money. These matters have all been the subject of earlier Reports by the Public Accounts Committee (PAC). I intend to provide PAC with further details to supplement this Report, on a confidential basis. 2. The NAO examination showed that MOD are progressively increasing warshipsbuilders’ responsibilities; as a consequence the direct effort employed by the Ministry is reducing, partly due to staff cuts. This will reduce the level of oversight but MOD informed me that it will be relying on the terms and condi- tions laid down in its contracts to protect its interests. Although in general warshipbuilders’ performance~on quality and delivery appears to have improved in recent years, there are problem areas which require further attention by MOD, in particular the coordination of development of ships and their weapons. A cautious approach to further transfer of responsibilities seems necessary and there is a need to assess, as far as is practicable, the cost-effectiveness of such transfers and of proposals to contract out work arising from staff cuts. On pricing the evidence on warshipbuilders’ productivity and the outturn on MOD contracts suggest that MOD may not always have received value for money in terms of the cost of warships, but that improvements are likely as a result of action taken in recent years. As the warshipbuilders’ major customer, MOD should be able to influence improvements in performance and productivity by continuing to place emphasis on competition, by maintaining the efforts made recently to negotiate tougher non-competitive contracts with prices linked to improvements in productivity, and by maintaining a dialogue with the warship- builders to facilitate shipbuilders’ forward planning and to ensure that ah poten- tial means of improving value for money are properly appraised and fully taken into account in determining policy and in individual decisions. Background 3. The construction of a modern warship involves the fitting of increasingly complex and sophisticated weapons and equipment, based on the latest technol- ogy. The development and production of weapons, particularly for major warships, is usually subject to separate contracts placed by MOD with the specialist manufacturers. Contracts with shipbuilders for major warships normally provide for the fabrication of the huh, the procurement of most ship equipments and the fitting of weapons and equipment. In June 1984,21 major 1 warships were on order for the Royal Navy (RN). Annual expenditure on pro- curement of ships and submarines, excluding separate weapons and equipment contracts, exceedsf500 million; the total value of contracts placed with the UK shipbuilding industry, including the capital cost of weapons and equipment, is about f2,700 million. Of this some f2,OOOmillion is spent by the shipbuilder either directly (about 30 per cent), or indirectly through sub-contracts for equipment and materials. Intra-mural costs, including staff supporting the running fleet, are about f30 million per annum; the number of staff involved has fallen by a quarter since 1971 and further reductions are planned. 4. NAO examination did not cover contracts for weapons but the Report deals with the effects of weapon development problems on warshipbuilding. Although the NAO did not visit British Shipbuilders (BS), their comments obtained through the Department of Trade and Industry (DTI) on extracts from the draft report have been incorporated in the relevant paragraphs. The NAO has also recently seen the report on warship procurement made in July 1984 by Mr Peter Levene in his capacity as Personal Adviser to the Secretary of State for Defence (Secretary of State). His recommendations on areas covered by his report and my own are broadly consistent with the NAO findings and are referred to in appro- priate paragraphs of Parts 2 to 5 and the Appendix. Conclusions Division of responsibilities 5. MOD are seeking to increase shipbuilders’ responsibility and liability for design and other warshipbuilding tasks. I note that maximum devolution to industry is seen by MOD as bringing advantages such as easier incorporation of “buildability” into design and greater opportunity to consider export potential and that BS believe improved efficiency would result. Disadvantages include some loss of flexibility arising from dispersal of design resources to the three lead shipyards and the progressive increase in delegation of responsibilities to the warshipbuilders is accompanied by reduced MOD control and oversight, result- ing partly from staff cuts. MOD have not to date been able to assessthe overall cost-effectiveness of the changes taking place, although they intend to undertake studies in later years. There is thus some risk that the changes will not result in better value for money. 6. The following specific comments relevant to the division of responsibilities take account of the examination of current projects referred to in Part 3 of the Report: (a) MOD intend to maintain a core of intra-mural expertise to enable them to act as an informed customer and to explore the prospects of appointing a prime contractor with responsibility for the whole ship, including weapons and equipment. I consider it desirable that MOD should follow up the Penny Report’s proposal that they should pursue cost-effectiveness studies and, as far as practicable, quantify the advantages and disadvantages of the overall division of responsibilities and specific proposals for contracting out. As policy develops the balance of advantage in cost-effectiveness should be carefully monitored (paragraphs 2.5-2.9). (b) Although MOD are generally satisfied with warshipbuilders’ quality assurance, standards at contractors are not always satisfactory: MOD are considering the value of obtaining extended guarantees with shipbuilders taking more responsibility for achieving acceptable standards (paragraph 3.17). 2 (c) The degree of MOD involvement in design may, as in the case of the Seabed Operations Vessel (SOV), affect their ability to pursue claims in respect of defects and therefore lead to extra costs. The SOV case illustrates the importance of responsibilities for design and liabilities for defects being clearly identifiable and dispersal of responsibilities should be avoided (paragraph 3.18). (d) There are problems in weapons development and their coordination with ship development; these are obstacles to the appointment of whole ship prime contractors. They are being reviewed by MOD’s new warship plann- ing unit and MOD have told me there are encouraging signs that the prob- lems are being solved for future projects (paragraphs 3.19-3.21). Effectiveness of MOD’s design and development arrangements 7. MOD’s objective is to procure warships to be delivered on time, of good quality, at a reasonable price and capable of fulfilling the operational require- ments for which they were designed. Action is being taken by MOD or is under consideration to remedy deficiencies in some earlier ships to enable them to fulfil their full operational role as currently defined and MOD are seeking to remedy in new and, where practicable, existing ships some deficiencies identified following the Falklands experience. On individual warship projects, in general, MOD have learned the lessons of the problems which arose on earlier ships and taken the necessary action. The current position on delivery and quality of ships received from the warshipbuilders is generally satisfactory and appears to have improved since PAC considered problems in development of new warships in the mid 1970s. However NAO examination showed that some difficulties are still being encountered in design and development. 8. The following specific comments arise from NAO examination of current projects: (a) There is some risk of delay with ships currently under development, in particular in bringing some new ships to full operational effectiveness because of the problems in weapons and equipment development and their coordination with the ship construction programme (paragraphs 6(d) and 3.19-3.21). Delays and cost increases have occurred mainly
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