Progress on costs but concerns over MoD's equipment plan 2013-23
13 May 2014
Public Accounts Committee publishes its report into the MoD equipment plan 2013-23 and major projects report 2013.
- Report: Ministry of Defence equipment plan 2013-23 and major projects 2013
- Report: Ministry of Defence equipment plan 2013-23 and major projects 2013 (PDF 3.02MB)
- Inquiry: Ministry of Defence equipment plan 2013-23 and major projects 2013
- Public Accounts Committee
The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:
"The Ministry of Defence has made some progress this year in controlling costs on its major projects and managing the way it procures equipment.
However, we still have concerns over whether the MoD’s Equipment Plan is affordable.
There are some big uncertainties. The Ministry underspent by a huge £1.2 billion on the Equipment Plan in 2012-13. Yet it has no idea whether this is because of genuine savings or whether costs are simply being stored up for later years because of delays on projects.
If the Department does not address this underspending it will be tempting for the Treasury, in seeking further public expenditure reductions, to take these underspends as savings at the expense of the defence equipment capabilities our armed services need.
The MoD also does not properly understand the costs of maintenance and technical support, despite the fact that such support costs, £87 billion over ten years, account for over half of the spend on the Equipment Plan budget.
It also does not know whether its contingency of £4.7 billion is a sufficient buffer against risks to the Plan, for example if planned savings fail to materialise.
The affordability of the Equipment Plan is heavily reliant on achieving significant savings in some of its major programmes. For example, the MoD has assumed savings of over £2 billion in two large programmes, the Complex Weapons and Submarine Enterprise Performance Programmes, but achieving these will be a challenge. Any changes to these two programmes could jeopardise the expected savings and so put affordability at risk.
We are concerned that, despite improvements, cost control of some individual projects remains poor. Project teams do not yet have enough staff with the right skills to employ proper cost and risk management techniques.
The MoD urgently needs to address the shortage of skills across its critical functions. It told us that it needed to be able to pay more to attract and retain people with specialist skills. At the moment it is spending £400 million a year on technical support from consultants.
Treasury and Cabinet Office should look across Government at skills shortages and go for solutions that do not require bureaucratic reorganisations as the only route to enabling Departments to recruit skilled people at market rates.
For its part, the Ministry needs to get a grip on understanding costs and risks across the piece."
Margaret Hodge was speaking as the Committee published its 57th Report of this Session which, on the basis of evidence from Jon Thompson, Permanent Secretary, David Williams, Finance Director, Bernard Gray, Chief of Defence Materiel and Air Marshal Sir Stephen Hillier, Deputy Chief of Defence Staff, Ministry of Defence, examined The Ministry of Defence Equipment Plan 2013–23 and Major Projects Report 2013.
Affordability of Equipment Plan uncertain
The Ministry of Defence (the Department) has made progress this year in improving its control over the costs of its largest projects and its financial management of major equipment procurement. But against a long history of escalating costs on its major projects, the affordability of the overall Equipment Plan is still uncertain.
The Department still has work to do to properly understand the support costs which account for over half of the annual spend on the Equipment Plan. It underspent on the Equipment Plan by £1.2 billion in 2012-13, but does not know the reasons for the underspend and so cannot be certain that it is not storing up costs for future years. Project and cost control of individual projects is still too often not well managed. Project teams do not yet have enough staff with the right skills to employ proper cost and risk management techniques, good practice in cost and risk modelling is not consistently applied.
The Department does not have the robust measures of outturn against forecasts it needs to fully understand the variations in spending against plan, but is moving forward in this area. Any further increases in costs on major projects, such as those which affected the Carriers project in 2012-13, could also put the overall affordability of the Equipment Plan at risk. The Department needs to do further work to develop its overall understanding of the risks to the Equipment Plan, and whether its contingency of £4.7 billion is set at the right amount. It is relying on achieving over £2 billion of savings in two of its major programmes, but achieving these savings will be a challenge. Its plans are based on the assumption of a 1% real terms increase in the Equipment Budget from 2015 until 2023. Given the state of the public finances The Department should plan how it would manage on a reduced budget. It also needs to resolve its skill shortages in areas of expertise that will be vital to managing its major projects and keeping its spending plans on track.
Conclusions and recommendations
In February 2014 the Department published its second annual statement on the affordability of the Defence Equipment Plan, which sets out its plans to deliver and support the equipment that the Armed Forces will need in the coming years. The Equipment Plan has a budget of £164 billion for the period 2013-2023, made up of £63 billion for equipment procurement, £87 billion for equipment support, £4.7 billion contingency and an unallocated budget of £8.4 billion. Each year, the Department also presents a Major Projects Report to Parliament, which provides data on the cost, time and performance of the largest defence projects.
The NAO has reviewed the assumptions underlying the Department’s Equipment Plan and the data from the Major Projects Report. Together, the NAO’s reports on the Equipment Plan and Major Projects Report aim to provide an informed basis for Parliament to examine how the Department is managing the procurement and support of the UK’s defence capability.
The Department does not yet fully understand the reasons for the £1.2 billion underspend on its Equipment Plan in 2012-13. The Department has done some work to analyse the causes of its £1.2 billion underspend in 2012-13. But its information is not good enough to provide a clear view of the extent to which the underspend has resulted from slower than expected progress by suppliers, genuine cost savings through contract negotiations, or the effect of risks that were factored in to cost forecasts but did not materialise. It is therefore not clear whether this year’s underspend will lead to higher spending in future years. In May 2013 we recommended that the Department put in place performance metrics so that it can monitor project progress and hold industry to account. It told us it is improving its ability to monitor progress and budget on individual projects, but it has not yet implemented our recommendation fully. The Department recognises persistent underspending as a strategic weakness and that more work needs to be done. If the Department underspends it will be tempting for the Treasury in seeking further public expenditure reductions to take these underspends as savings at the expense of the defence equipment capabilities our armed services need.
Recommendation: The Department should establish processes to improve its data at project level, covering project progress and spending against forecast to understand the principal causes of any under or overspend on its Equipment Plan. We expect the Department to have this in place for its 2014-2024 affordability statement.
The Department does not yet fully understand its equipment support costs, which raises concerns that the Equipment Plan is affordable. When we examined the first Equipment Plan last year the Department assured us that, for this year’s review, it would be able to provide evidence to support the affordability of support costs. But the Department has still not completed its assessment and so was unable to provide the NAO with the data it needed for its report. The Department has work underway to provide an independent assessment and told us that it was less concerned about support costs as a large proportion of them were “on contract” and that they were therefore less volatile than procurement costs. However, support costs are a complex and highly variable set of cost lines that the Department understands less well than it does the procurement costs, and they account for £87 billion, more than half of the Equipment Plan budget.
Recommendation: The Department should complete its work on its support costs to provide accurate data to the NAO in time for it to report to Parliament on the whole of the Equipment Plan for 2014-2024.
The Department does not yet have a comprehensive understanding of the risks to the Plan and so has not set out clearly the extent of the risks that the contingency is intended to cover. The Equipment Plan includes a contingency of £4.7 billion, which is 3% of the total budget. The contingency is expected to cover any assumed financial savings that do not materialise, provide a buffer against over-optimism at project level, and allow for unknown risks within the support cost budget. Individual project teams have a track record of under-estimating their project costs and the forecasts produced by the Department’s semi-independent cost assurers are £4.4 billion higher than those of its project teams.
Recommendation: The Department should ensure all project teams are applying good practice in cost and risk modelling to help develop its understanding of aggregate risk across the Equipment Plan. It should set out clearly, and quantify, what the contingency is intended to cover.
The affordability of the Equipment Plan relies on achieving significant savings in some of its major programmes. For example, the Department has assumed savings of over £2 billion in its Complex Weapons and Submarine Enterprise Performance Programmes, and has already taken these savings into account in the Equipment Plan budget. However, it does not provide regular updates of its progress in securing these savings. The Department assured us that it is on track to achieve these savings but was not able to confirm what savings would be achieved as there is still a long way to go in negotiations with suppliers. Any changes to these two programmes could jeopardise the expected savings and so put affordability at risk.
Recommendation: In its annual statement to Parliament on the affordability of the Equipment Plan, the Department should report on its progress against its assumed efficiency savings in major programmes.
The Department still has a shortage of skills across its critical functions. Commercial, project management, and engineering skills are essential to keeping the Equipment Plan on track and on budget. The Department recognises its skills gaps and told us that it needed to be able to pay more to attract and retain people with specialist skills. The Department hopes to create a bespoke trading entity to manage its procurement that would sit within the Department but also have greater freedoms to vary civil service terms and conditions to attract the people it needs. The Department also told us it is developing in-house skills with the Major Projects Leadership Academy and is in discussions with the Treasury and the Cabinet Office to identify other options to access the skills needed. In the meantime the Department is spending £400 million a year on technical support from consultants.
Recommendation: The Department should pursue all options to enable it to meet its skills requirements at the best value for taxpayers, including engaging with and learning from other departments (such as Energy & Climate Change and Transport) that are experiencing similar gaps in critical areas. Treasury and Cabinet Office should look across Government at skills shortages and accept solutions that do not require bureaucratic reorganisations as the only route to enabling Departments to recruit skilled people at market rates.