NATIONAL AUDIT OFFICE REPORTBY THE COMPTROLLERAND AUDITORGENERAL Ministry of Defence:The Award of the Contractfor the Landing Platform for Helicopters ORDEREDBY THE HOUSEOF COMMONS TO BE PRINTED 29 JULY 1993 LONDON:HMSO f8.25 NET 864 MINISTRY OF DEFENCE: THE AWARD OF THE CONTRACT FOR THE LANDING PLATFORM FOR HELICOPTERS 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. JohnBourn National Audit Office Comptroller and Auditor General 27 July 1993 The Comptroller and Auditor General is the head of the National Audit Office employing some 800 staff. He, and the NAO, are totally independent of Government.Hecertifies the accounts of all Governmentdepartments 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. MINISTRY OF DEFENCE: THE AWARD OF THE CONTRACT FOR THE LANDING PLATFORM FOR HELICOPTERS Contents Pap Summary and conclusions 1 Part 1: Introduction 5 Part 2: Arriving at the LPH specification 7 Part 3: The LPH competition - initial offers 14 Part 4: The LPH competition - clarification, Best and Final Offers and 22 contract award Appendices 1: Chronology of events 35 2: Comments made by Members of Parliament 37 MINISTRY OF DEFENCE: THE AWARD OF THE CONTRACT FOR THE LANDING PLATFORM FOR HELICOPTERS Summary and conclusions Introduction 1 On 11 May 1993 the Minister for Defence Procurement announced that a contract was to be placed with Vickers Shipbuilding and Engineering Limited (VSEL) for the design and build of a vessel known as the Landing Platform for Helicopters (LPH). Figure 1 is an artist’s impression of the vessel which VSEL have contracted to build. VSEL had been competing with Swan Hunter Shipbuilders Limited (Swan Hunter) for the contract and the Ministerial statement referred to the fact that VSEL had won “by a very substantial margin of over E.50 million”. Following the announcement there has been considerable speculation, both in the House of Commons and in the media, about the circumstances surrounding the order, particularly the price difference between the bids. 2 The Department originally invited tenders for the LPH in February 1992 with the intention of placing a contract in November 1993. Two tenders were received in October 1992 at which point the gap between the two bids, before adjustments for non-compliances, was E9 million with VSEL submitting the lower tender. These were evaluated by the Department over the next three months but, because of uncertainty over the future of the programme, discussion of the bids with the tenderers did not commence until March 1993. Subsequently Ministers confirmed the place of the LPH in the programme and, in order to give Swan Hunter a chance to secure the future of the company, the Department invited Best and Final offers on 26 March 1993. These were received on 22 April 1993 and the decision on contract award made shortly after. At this stage, the price offered by Swan Hunter had increased whilst that offered by VSEL had decreased leading to a gap of +~71 million between the two bids. Although the outcome of the competition was not due to be announced so quickly, the Department considered that any undue delay in the award of the contract could result in Swan Hunter going into receivership and that, in consequence, the benefits of competition would be lost. 3 The National Audit Office, assisted by technical consultants, who were overseen by an advisory panel of experts nominated by VSEL and Swan Hunter, have examined the procurement of the LPH beginning with the way in which the specification was arrived at (Part 2 of the Report) and then following this through to the initial offers (Part 3 of the Report) and ultimately to the Best and Final Offers and contract award (Part 4). In so doing, the National Audit Office have had regard to the views expressed in Parliament. Main findings 4 The Department, in reaching their decision, treated both tenderers in a fair and even-handed manner and undertook a competent assessment of the technical and commercial merits of the two bids (paragraphs 4.30 and 4.35) 5 In undertaking their examination the National Audit Office have had regard to other concerns surrounding the contract award and have the following observations to make. 1 MINISTRY OF DEFEN(IE: THE AWARD OF THE CONTRACT FOR THE LANDING PLATFORM FOR HELICOPTERS (a) There have been some suggestions that the tenderers were not invited to bid against the same requirement. This is not the case. Both tenderers were clearly invited to bid against the same requirement (paragraphs 2.24,2.36(i), 4.22(i), and 4.4). (b) Contrary to allegations that have been made, the National Audit Office have seen no evidence to suggest that the Department had already made a decision on the award of the LPH contract by the end of 1992. The Department provided the National Audit Office with assurances that a decision was not taken until after the Best and Final offers had been received (paragraphs 3.43 and 3.44&j). (c) The revised specification, issued with the Best and Final Offer invitation to tender, reflected a number of design easements to ensure affordability and did not imply a higher technical requirement than originally envisaged. However, given that both tendarers were originally significantly non-compliant, additional costs were likely to be incurred by them in reaching full compliance (paragraphs 4.17,4.22(vi), 4.44, and 4.49). (d) In terms of the substantial difference between the bids it is important to recognise that the price which the tenderers proposed to charge the Department for the LPH and the costs they expected to incur in building the vessel are not necessarily the same. VSEL opted to take the risk of supporting their bid significantly from the company’s reserves. This, together with a sharpening in the Kvaerner Govan price, enabled them to reduce their price at the Best and Final Offer stage. Increases in the Swan Hunter overhead rates and the fact that they included additional costs to make their proposal compliant with the Department’s specification led to Swan Hunter increasing their prices at the Best and Final Offer stage. Taken together, the above factors largely explain the ~71 million gap between the two final offers (paragraphs 4.42 - 4.49 and 4.62(v)). (e) Contrary to suggestions that have been made, the Trident contracts are based upon a target cost incentive basis rather than being cost plus arrangements (paragraphs 4.50 and 4.62(vi)). (fl The allegation that Kvaerner Gown, the commercial shipyard with which VSEL have teamed to build the ship platform, did not appreciate the requirement to apply certain naval engineering standards was refuted by the company. The Department took steps to evaluate the capability of the sub-contractors proposed by both tenderers. This was limited by the lack of information provided in the tenders. However, the National Audit Office’s technical consultants agreed with the Department’s conclusion that Kvaerner Govan are an efficient shipyard with a good track record of delivering complex merchant vessels. But the Department believed that VSEL would need to input specialised warship knowledge into Kvaerner Govan (paragraphs 3.30 - 3.35). Lessons to be learned and risks outstanding 6 In examining the procurement process in detail, the National Audit Office have identified a number of areas where improvements could have been made and lessons learned for the future together with a number of potential risks outstanding 2 MINISTRY OF DEFENCE: THE AWARE OF THE CONTRACT FOR THE LANDING PLATFORM FOR HELICOPTERS on the programme. These are highlighted in the Key Points boxes throughout the main body of the Report. The more important points are summarised below. It should be stressed that, in virtually all cases, these would have applied equally to both tenderers and none would have affected the basis of the Department’s decision. (a) Given the decision to move quickly to Best and Final Offers the Department recognised that it had not been possible to explore all possible means of optimising the specification for the vessel. This gave rise to the risk that the most cost effective solution had not been identified. However, the Department believed that this risk was more than outweighed by the benefits of ensuring an effective competition [paragraphs 4.72 and 4.77(i)). f$) The Department were unable to undertake a full lifecycle cost assessment of the two bids because of the paucity of information and the very short clarification and Best and Final Offer timescales. This has led to the Department carrying the downstream financial risk that the vessel could be more expensive to operate than originally envisaged. This would have applied irrespective of the bid finally selected by the Department (paragraphs 4.36 and 4.41(i)). (c) The arrangements for the Classification of the vessel (eg to Lloyds Register of Shipping Standards) were not clearly spelt out in the Department’s initial contract documentation although the documentation was refined during the course of the competition. Whilst this refinement served to reduce the downstream risks, some risk must remain. More generally, if the Department are to continue procuring vessels which embody a mixture of commercial and military standards some consideration might be given to improving the expertise of the Department’s staff in connection with commercial standards (paragraphs 2.18 - 2.19 and 2.22(iii)). (d) The Department’s approach to availability, reliability and maintainability resulted in the risks of achieving the requirement resting with the Department rather than industry.