NATIONAL AUDIT OFFICE REPORTBYTHE COMPTROLLERAND AUDITORGENERAL Ministry of Defence: Major ProjectsReport 1994 ORDEREDBY THEHOUSEOFCOMMONS TOBEPRINTED 22 MAY1995 LONDON:HMSO HC 436 Session 1994-95 Published 24 May 1995 f13.25 NET MINISTRY OF DEFENCE: MAJOR PROJECTS REPORT 1994 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 16 May 1995 The Comptroller and Auditor General is the head of the National Audit Office employing some 750 staff. He, and the NAO, are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies: and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources. IvRMSTRYOFDEFENCE: MAJORPROJECTSREPORT1994 Contents Page Part 1: Introduction 1 Part 2: Analysis of the 1994 Major Projects Report 3 Part 3: Examination of three missile projects 20 Appendix Major Projects Report 1994 39 MINISTRY OF DEFENCE: MAJOR PROJECTS REPORT 1994 Part 1: Introduction Origin of the report 1.1 The 1994 Major Projects Report is the twelfth to be produced by the Ministry of Defence (the Department). The Report was introduced at the request of the Committee of Public Accounts and stemmed from their 9th Report, Session 1981-82, which noted the absence of any requirement for the Department to inform Parliament about the costs of its major defence projects. The Report is intended to advise Parliament of the progress and costs of major defence equipment projects. Examination by the National Audit Office 1.2 The Major Projects Report is not an accountable document and the National Audit Office do not verify that it is complete and accurate in every respect. In the main, they seek to highlight aspects that arise from the Report. In their examination of the Report, the National Audit Office carried out a validation of data within a sample of 12 of the 25 draft project summary sheets forwarded to them in late June 1994. The National Audit Office also confirmed from the Department’s records that the 25 projects reported are, indeed, the 25 projects which are currently projected to have the largest expenditure over the next 10 years. After themselves validating the 13 summary sheets not validated by the National Audit Office, the Department submitted the Major Projects Report to the Committee of Public Accounts at the end of July 1994. 1.3 The Major Projects Report is reproduced at the Appendix. Inaccuracies which have been identified since the Report was submitted have been corrected in the Appendix. Facts and figures which are commercially sensitive or coniidential and cannot be disclosed have been starred in the Appendix and omitted from the National Audit Office report. Disclosure of these facts and figures could undermine the Department’s negotiating stance or give a positive intelligence advantage to potential enemies. The National Audit Office have provided the Committee with a separate memorandum covering these areas of the report. 1.4 The main areas examined by the National Audit Office in relation to the 1994 Major Projects Report were: al an analysis of the Report including consideration of those projects appearing to show the greatest additional cost variances and in-Service date slippages since the 1993 Major Projects Report (Part 2): b) the lessons that can be drawn from a more detailed examination of three missile projects: Vertical Launch Seawolf (VLSWJ, High Velocity Missile 1 MINISTRY OF DEFENCE: WOR PROJECTS REPORT 1994 HVM) and the Advanced Medium-Range Air-to-Air missile system LmmAAM) (Part 3). S-ties of the main points arising from the National Audit Office examination are contained within each individual section under the headings “Key Points” and “Lessons to be Learned”. MlNlSTRY OF DEFENCE: MAJOR PROJECTS REPORT 1994 Part 2: Analysis of the 1994 Major Projects Report Introduction 2.1 This part of the report: a) summarises the overall position on the cost of the 25 projects in the Major Projects Report and analyses the main reasons for any cost underruns and overruns; b) summarises the position as regards in-Service dates and analyses the reasons for any variation from original plans; c) examines recent trends in the time and cost position of projects by comparing the 1994 position with the 1993 position: d) analyses cost variance by stage of project: and e) compares performance on competitive and non-competitive contracts and on collaborative and non-collaborative projects. cost 2.2 The 25 projects in the Major Projects Report are expected to cost a total of around g30 billion by completion at 1994-95 prices. Broadly they will account for about 30 per cent of the annual procurement budget although expenditure can fluctuate considerably horn year to year. 2.3 Overall, the 25 projects are likely to cost El.680 million (or 5.3 per cent) less than origlnrdly forecast. This figure includes a forecast reduction of g3,455 mIllion on the Trident project and a forecast cost increase of 21,129 million on the Eurofighter 2000 project. If these exceptionally large by value projects are excluded, a net forecast increase of E645 mIllion (or 4.6 per cent) is shown for the remaining projects (Figure 1). Cost change as reported is the difference between the total of original cost estimates made at the i&t approval of each stage, and current cost estimate. Therefore, cost “increases” are changes In the estimated cost of a project throughout its life. Some changes are due to decisions taken by the Department and other changes are due to external factors. MINISTRYOFDEFENCE: MAJORPROJECTSREPORT1994 Forecastcost variance(f millions) -200 0 100 TornadoMLU Eurofighter2000 Actual variation (fm) Spearfish BR 90 Bowman SeaHarrier MLU MR TRIGAT VLSW AS 90 Howitier High Velocity Missile EH101 “Merlin” Challenger2 RapierFSC LPD (R) S&T Update IRCM SeaHarrier Att. Buy COBRA Skynet4 Stage2 JTIOS ASRAAM CNGF T23 CommandSystem Trident AMRAAM I -40 -20 0 20 40 60 Percentagevariance Source: NAOanalysis of Major ProjectsRepoti 1994data Figure1 shows percentageand actual cost variances. Actual variancesfor Trident (-f3,454million) and Eurofighter2000 (tf1,129 million) are omittedfor presentationalpurposes. 2.4 The cost variances reported for some projects do not correspond to those given in response to recent Parliamentary Questions (Hansard, 1 February 1995). This is because the Major Projects Report primarily reflects the approved equipmentprogramme and does not report forecast variances for expenditure which has not yet been approved. For example, a cost overrun of 22.2 billion was reported in an answer on Eurofighter 2000 which is double the Sl.l billion cost overrun reported in the Major Projects Report. The extra overrun has occurred on future phases of the programme which have not yet been approved. In the case of Bowman, the costs of an associated project were included in the answer to the Parliamentary Question. MINISTRY OF DEFENCE: MAJOR PROJECTS REPORT 1994 Causes of cost variations 2.5 As noted above, the current estimates of the cost of Trident and Eurofighter 2000 vary greatly from those made originally, demonstrating the inherent difficulty of accurate forecasting so far ahead for projects embodying a great deal of technology being developed for the Rrst time in the project. For Trident, the net forecast reduction of f3,455 million is a result of savings from the decision to process missiles in the United States (f1,138 million) and savings resulting from the “refinement of earlier cost estimates” (E2.317 million). The E2,317 million net saving arising from refinements to earlier cost estimates includes an increase of E830 million in the cost of shore construction and dockyard projects (the former was examined in the Comptroller and Auditor General’s Report on the Management of the Trident Works Programme, HC 621, July 1994) and an increase of E.241 million resulting from programme requirement changes. 2.6 On Eurofighter 2000, the Department attribute 5232 million of the forecast increase in expenditure of El,129 million to changes in accounting rules for intra-mural costs. These changes have not resulted in additional expenditure on the project. A further increase of E772 million is attributed to: . German withdrawal from certain equipments; . an under-estimate of development costs; . additional tasks and integration of new weapons not specified in the original contract; and . re-orientation. The remaining X125 million increase results from estimated costs on the project escalating at a faster rate than general inflation. The National Audit Office are currently examining the Eurofighter 2000 project as part of a separate study. 2.7 Figure 2 shows, in aggregate, the reasons given for cost overruns for the other 23 projects in the Major Projects Report. Over one quarter of the total cost variation by value is attributed by the Department to an overly optimistic initial estimate of cost. The Department have introduced three-point estimating for future project submissions which will contribute to a reduction in overly optimistic estimates by translating the identified risks into upper and lower costs (with confidence limits) about an expected figure. This tolerance band will provide an indication of the uncertainty present in the estimate of future costs. A further one fifth of cost variation is a result of inflation adjustment mechanisms, the purpose of which is to reflect cost pressures facing the industries undertaking the work, escalating at a faster rate than inflation in the economy as a whole. The Department closely monitors the progress of projects against agreed costs, and overruns beyond set limits are automatically the subject of resubmission for re-endorsement.