Improving the performance of defence contracts

We are deeply concerned about departmental witnesses’ inability or unwillingness to answer basic questions and give a frank assessment of the state of its major programmes. The Department is not sufficiently open about programme progress and risks. A few weeks before our evidence session it considered initial operating capability on the Ajax programme achievable by the end of June 2021. That did not happen and now it has no timescale for when these armoured vehicles will be ready for service. While witnesses told us that investigations into noise and vibration issues are continuing, they could not explain the likely causes or remedial action necessary. So far, the Department plans to offer 310 service personnel hearing tests, but the potential long-term health implications of this failure remain unknown. In addition, the Department’s refusal to explain the magnitude of its financial exposure in the event of a contract termination demonstrates a disregard for Parliament and taxpayers. We were struck by witnesses’ reluctance to attribute problems with the Crowsnest and Ajax programmes to providers’ poor performance or project management, even though in both cases it is a matter of public record. In this situation it is essential to monitor robustly whether value for money is still 6 Improving the performance of major defence equipment contracts being achieved. But the Department admits that it does not routinely monitor value for money of programmes, nor have its Accounting Officer Assessments rendered sufficiently clear accounts of value for money. Recommendation: The committee expects the Department to develop a more transparent approach to assessing value for money. In particular, the Accounting Officer Assessments letters—which come to this committee when significant changes occur on major programmes—should include a more detailed and frank assessment of how the changes impact on the value for money case as defined at the start of the programme.

The Department does not make enough demands of its suppliers to share the financial risks as well as the rewards of contracting for major equipment capabilities. The Department is dependent on a limited supplier base to deliver its major equipment programmes. Of the 20 programmes examined by the NAO, 14 are being wholly or partly procured non-competitively, mainly through choice, rather than reasons of national security. Suppliers understand that poor performance on one contract will not stop them winning the next. We are concerned that the Department pours money into the developmental stages of programmes while suppliers are reluctant to accept more risk. Suppliers should contribute their fair share of development funding to equipment programmes so they are sufficiently incentivised to deliver. The Department told us that it has a range of contractual levers to encourage suppliers to deliver and that, for example, it was applying these in the case of the Ajax programme. Despite this, they are clearly not having the required effect. The Department has prioritised pursuing bespoke, ‘gold plated’ platforms—which are a source of considerable delay in the equipment portfolio— which then prove difficult and expensive to upgrade. It could reduce its exposure to risk and encourage more constructive attitudes from suppliers if it was more willing to buy proven equipment ‘off the shelf’, where the pain of development has already been borne by others. Recommendation: The Department should write to the Committee within six months with a clear plan on how it will ensure suppliers take on their fair share of the financial risk in contracts, and how it will take past performance into account when letting new contracts.

The Department continually fails to learn from its mistakes. The Department has been delivering equipment programmes for decades and has overseen many expensive failures. There have been at least 13 formal reviews of defence procurement policy over the last 35 years which have provided the Department with opportunities to take stock and learn from experience. We were therefore shocked to learn that the Department had only established a central register of learning from experience (LFE) in December 2020. Experience shows that there is a need for reflection and openness earlier in the process to avoid further catastrophes like Ajax. This does not convince us that the Department aspires to achieve a radical step-change in performance. We are encouraged by the Department’s Strategic Partnering Programme (SPP) initiative launched in 2018 to transform its relationships with industry. We recognise its strategic intent, but are disappointed with its lack of ambition in forecasting only £160 million in savings over the next ten years—less than 0.1% of its forecast Equipment Plan spend. The Department told us that it Improving the performance of major defence equipment contracts 7 expects efficiencies to amount to hundreds of millions of pounds as the programme matures, but until it develops scalable plans and can clearly attribute improvements to its interventions, it is cautious about the scale of potential success. Recommendation: The Department should provide the committee with a clear plan on how it will draw on LFE and how its SPP and associated initiatives will generate the level of savings that would be expected from work that is intended to transform the procurement of hundreds of billions of pounds of equipment.

The Department will not secure a step change in performance until it can recruit and retain the highly skilled staff that it requires. The Department continues to suffer from skills shortages in key areas critical to effective contract and programme management. It relies on expensive temporary contractors to deliver many of its programmes. We note that the cost of staff is small in comparison to the cost of the programmes the Department delivers. It pointed to constraints on its ability to recruit the right people who would help to deliver programmes to time and budget, but acknowledges that the question of paying people appropriately for their skills is being considered across government. However, we were surprised that the Department was so relaxed about losing skilled people to the private sector. We are concerned about the deliberate policy of regularly changing SROs and other senior staff working in programme teams, with individuals in post for a fraction of the contract lifecycle. Retaining and developing talent over substantive programme phases would help to stabilise delivery, with promotion linked to performance. The Department is still not doing enough to make sure that the armed forces treat the role of SRO as seriously as operational deployments. Examples of ‘double touring’ SROs on major programmes are welcome, but the Department needs to do more to prioritise and incentivise programme delivery among this cadre of senior officers. Recommendation: The Department and HM Treasury should write to the committee within the next six months setting out how together they will address the gap in skills that it needs for effective contract and supplier management; making the Department competitive in specialist labour markets; and improving retention. In its letter, the Department should also set out what more it will do to get greater continuity in the SRO role, including where feasible a single SRO for the lifetime of a project, and to recognise the role’s funda

The Department continues to be unclear about what additional capability the taxpayer will get from the extra £16.5 billion in the 2020 Spending Review. We remain to be convinced that the government’s substantial uplift to the Department’s budget will not simply be used to plug financial holes across its programmes. We are struck in recent evidence sessions by how many departmental witnesses with differing responsibilities have pointed to the additional funding as a solution to their problems. We note that as well as addressing £7 billion affordability gap in the Department’s 2020–2030 Equipment Plan, the Department is spending £6.6 billion 8 Improving the performance of major defence equipment contracts on R&D, and additional funding for pension changes and enhancing childcare for service personnel. It had previously written to us to say that the money would be used for both new and existing capabilities. However, witnesses could not say whether truly additional capabilities will be delivered through the additional funding. In addition, the Permanent Secretary was unclear about the basis of the assumptions informing its calculations of funding over the next ten years, including what has and has not been approved. Recommendations: The Committee expects to see absolute clarity in the Equipment Plan 2021–2031 about what additional capability the Armed Forces is getting for the additional £16.5 billion and how it has secured the long-term affordability of the Plan. It should clearly distinguish between new capabilities and those already in development. Improving the performance of major defence equipment contracts 9 1 The system for delivering major equipment capabilities

On the basis of a report by the Comptroller and Auditor General, we took evidence from the Ministry of Defence (the Department) and Defence Equipment & Support on improving the performance of major equipment contracts.1

Cost increases or cuts to funding on the Department’s programmes can have a profound impact on the level of military capability that can be achieved. For example, it is procuring considerably fewer Ajax armoured vehicles and Challenger 3 tanks than it identified it needed in earlier assessments, as well as fewer P-8A maritime patrol aircraft and Type 26 frigates. In addition, delaying the entry into service of new capabilities can 7 C&AG’s report, para 3.7 and Figure 6 8 Committee of Public Accounts, Defence capability and Equipment Plan, Tenth Report of Session 2019–21, 1 July

We questioned the Department in detail on the Ajax programme to procure armoured reconnaissance vehicles for the Army. In 2014, the Department agreed a deal with General Dynamics United Kingdom (GDUK) to procure 589 vehicles - down from an initial requirement of 761 vehicles. The Department decided to overlap the ‘demonstration’ and ‘manufacture’ stages of the programme in pursuit of savings and a quicker timetable, but this led to a 15-month renegotiation. The resultant baselining of the contract in 2019 included some concessions on capability by the Department. In April 2021, a review by the Infrastructure and Projects Authority raised serious concerns about the Department’s ability to deliver the programme.20 A significant problem facing the programme has been the discovery of noise and vibration issues adversely affecting soldiers’ health during equipment trials. The Department told us that soldiers were first reporting sick with vibration-related symptoms in the middle of 2020, and that anecdotal reports of the issue go back as far as December 2019.21 The Minister for Defence Procurement has since told Parliament that in December 2018 the Army imposed restrictions on the use of the vehicles in relation to vibration and identified that a design upgrade was needed. Although the Department’s analysis is ongoing, it has decided to offer hearing tests to 310 service personnel, while its work to establish any other vibration-related health effects is ongoing.22 Despite the length of time the Department has known about this issue, there is still no definitive information on the source of the noise and vibration.

The Department had told the NAO that it considered initial operating capability achievable by the end of June 2021, but in our public evidence session, witnesses could not tell us when some sort of capability will be secured, even in broad terms.23 The Department told us it has commissioned an external review of the Department’s route to full operating capability in 2025 and committed to write to us once it had a clearer understanding on timescales.24 The Minister for Defence Procurement told Parliament that, as at September 2021, it was not possible to set a realistic timescale for the vehicles’ entry into operational service.25

The Department has spent nearly £4 billion of its budget by March 2021—including payments to GDUK of £3.1 billion—out of budgeted whole-life costs of £5.5 billion.26 It has so far received 14 vehicles, 2% of its contractual fleet requirement.27 Witnesses told us they were not prepared to outline the magnitude of potential losses to taxpayers in the event of contract termination, but told us that there are strong provisions in the contract and that it has imposed liquidated damages on GDUK for its failures.28 19 C&AG’s report, para 2.8 20 C&AG’s report, Figure 6 21 Qq 29–30 22 Minister for Defence Procurement, Statement on the Armoured Cavalry Programme (Ajax) Programme, 6 September 2021, HCWS260 23 Qq 37–47 24 Qq 37, 47 25 Minister for Defence Procurement, Statement on the Armoured Cavalry Programme (Ajax) Programme, 6 September 2021, HCWS260. 26 Qq 57–58 27 Q 5 28 Qq 56–57 12 Improving the performance of major defence equipment contracts Monitoring value for money

HM Treasury directs that Accounting Officers should confirm to Parliament that procurements remain value for money (VFM) where there are significant changes to costs and schedules. The Accounting Officer had assessed eight of the projects examined by the NAO for this reason, yet did not find that VFM had been undermined in any case. For example, in upgrading the Warrior armoured vehicle, the Department never reached a view on whether its proposed approach constituted value for money, despite spending over £580 million on it by the time of its cancellation in 2021.29

We asked witnesses about the process for determining value for money and whether it monitors whether programmes remain so. The Department told us that there are routine ‘touchpoints’ through a capability’s life, but acknowledged that it does not routinely take a step back and evaluate whether VFM has been achieved. It believes more regular evaluation of VFM is ‘worth thinking through’.30 29 C&AG’s report para 5.9 and Figure 8 30 Q 87 Improving the performance of major defence equipment contracts 13 2 Managing suppliers and learning from mistakes

Across the 20 projects and programmes examined by the NAO, 14 are being procured partly or wholly non-competitively, despite the fact that ‘competition by default’ has been departmental policy for nearly a decade. In only four of these cases was this due to ‘sovereignty capability’ requirements, whereby the government must source capabilities from specific suppliers due to the need to protect the UK’s national security interests or operational advantage.31 In the absence of competition, there is a risk that the Department will continue to award further contracts to poorly performing suppliers. The Cabinet Office’s recent green paper on public procurement proposes that it should be easier to take into account past supplier performance when awarding future contracts.32 Sharing risks with suppliers

The Department spends significant sums on the developmental stages of programmes while suppliers may not be paying their fair share. The Department argued that it is standard practice to pay for work against agreed milestones across areas such as development, demonstration, training and manufacture.33 However, given the number of programmes that have encountered problems, better incentivisation of suppliers could be sought through securing more substantial private investment up-front. For example, on Ajax, the Department has paid out £3.1 billion to GDUK, while GDUK has told the Defence Committee that it has invested £40 million on manufacturing facilities and jobs: a ratio of 99:1.34 The Department has reduced its exposure to risk in some cases by buying proven equipment ‘off the shelf’, such as the Boxer armoured vehicle, Poseidon P8-A maritime patrol aircraft and Protector unmanned aerial vehicle.35 The Department told us that this approach is typically suitable for lower-value programmes but that from experience, off the shelf acquisitions with UK-specific modifications may be better than a full development programme, such as the Crowsnest radar system.36

Problems with supplier performance include their inability to undertake complex design work within agreed timetables, difficulties in satisfying safety regulators’ requirements, and their inability to project management effectively due to under- resourcing.37 However, the Department has also contributed to problems, in particular it has managed the integration of different elements of programmes and the work of different contractors poorly. In equipment procurement, a particular challenge for the Department is its inability to deliver ‘Government Furnished Assets’ (GFA), such as equipment, information or resources, to suppliers in line with contractual obligations. On the Type 31e frigate programme, the Department had not finalised its schedule of GFA 18 31 C&AG’s report, para 3.2 32 C&AG’s report, para 3.10 33 Q 12 34 House of Commons Defence Committee, Oral Evidence: Ajax: recent developments, HC 550, 20 July 2021, Q 80. 35 C&AG’s report, para 3.2 and Figure 6 36 Q 93 37 C&AG’s report, para 3.8 14 Improving the performance of major defence equipment contracts months after awarding the contract.38 The Department also makes suppliers’ achievement of contract milestones more challenging by often changing its mind about what it wants during the contract, as in the case of the Warrior armoured vehicle upgrade.39

The Department has ambitions to improve delivery performance through use of ‘agile’ procurement—delivery methods where the requirement and solutions are developed collaboratively in discrete steps with flexibility around requirements, cost and schedule. However, delivery teams found that agile approaches were incompatible with the Department’s emphasis on certainty of output and cost. Two of the Department’s digital programmes teams—New Style of IT (Deployed) and Morpheus—identified a range of shortcomings in their early adoption of agile approaches. These included learning by trial and error, a lack of shared understanding of what will be delivered, customers’ reluctance to accept trade-offs in capability to improve the speed of delivery, suppliers’ lack of experience with the approach, and difficulties when agile programmes need to join up with programmes being delivered traditionally.40 Learning from experience

The Department’s willingness and ability to systematically record its learning from existing programmes is critical to securing improvements in the future. There have been at least 13 formal reviews of defence procurement policy over the last 35 years, which have provided the Department with opportunities to take stock and learn from experience.41 While existing guidance in the Department is clear on the importance and benefits of recording and sharing learning from experience (LFE), the Department has not systematically gathered and distributed LFE from programmes.42 While most programmes have identified lessons, some have done so more systematically than others. For example, the Warrior armoured vehicle upgrade programme identified that they would have benefited from better collaboration within the programme team, and between themselves and the Ajax armoured vehicle team.

The same lessons have been identified again and again across programmes, including underestimation of programme complexity at the design stage, users being unclear about their requirements, the need to have sufficient resources and skills in place, and shortcomings in delivering GFA.43 The Department only established a central register of LFE for the first time in December 2020. The Department told us that it recognises LFE as an area for improvement and pointed to the complexity of the landscape, which spans four Commands, three delivery agents and several operating centres.44 Initiatives to improve delivery

In 2018, the Department established a Strategic Partnering Programme (SPP) to maximise commercial leverage with its 19 most important suppliers by improving contract performance and managing strategic risks.45 The Department told us that the 38 C&AG’s report, para 3.16 39 C&AG’s report, para 3.8 40 C&AG’s report, paras 3.4–3.5 41 Q 3 42 C&AG’s report para 5.12 43 C&AG’s report para 5.13 44 Q 3 45 C&AG’s report, paras 3.17–3.18 Improving the performance of major defence equipment contracts 15 programme is now embedded across 14 suppliers and emphasised its vision to achieve a single view of suppliers’ contracts with the Department and suppliers’ performance under contracts. Witnesses cited ongoing detailed work looking at dockside support for ships and submarines as an example of how its ‘workstreams’ will improve efficiency.46 Its current savings target for the programme is £160 million—less than 0.1% of its forecast Equipment Plan spend of £163 billion, though its intention is to scale up its savings targets by ‘hundreds of millions’ of pounds.47 The Department told us that attributing savings to the programme’s interventions is challenging and it was worried about double counting of savings because of overlaps with DE&S’s ongoing efficiency programme work.48

The Department has relatively more ambitious savings targets of £628 million over the next 10 years for its ‘category management’ programme. Category management involves grouping together related products and services into market ‘segments’ to generate efficiencies. The Department’s earlier attempt at introducing the practice in 2004 achieved significant efficiencies, but ultimately failed because the processes required to embed the programme were not established by the time start-up funding was withdrawn. 46 Q 73 47 Q 77 48 Qq 77–78 16 Improving the performance of major defence equipment contracts 3 Securing skilled staff and additional funding The Department’s reliance on temporary contractors

Having the right people in place to manage suppliers is essential to ensure programme progress and to hold suppliers to account. However, many of the Department’s programmes were reliant on temporary contractors to fill these roles, especially in the Department’s digital projects and programmes. In two of these—New Style of IT (Deployed) and Morpheus—temporary contractors made up 79% and 58% of posts respectively.49 Under the Department’s previous information strategy, it took on more responsibility for the direct management of contractors, but for the three digital programmes the NAO examined, the Department has failed to recruit people with the right skills and experience to do this effectively.50 The Department told us that ensuring the right skills available to programmes is a challenge shared across government as well as among suppliers. The Department envisages recruiting around 200 additional digital specialists to boost its capability in these areas.51

The Department is also reliant on contractors on some of its maritime programmes, where between one sixth and one third of staff working on the Spearfish, Type 31e frigate and Fleet Solid Support programme teams are contractors. The Department puts this down to the burden of several major programmes being launched concurrently. It explained that it can draw on framework contracts for specialist skills where needed and that it is committed to reducing spend on temporary contractors.52 We asked the Department whether civil service pay rates are a limiting factor in keeping people in role. It told us that pay for specialist roles is a live issue across government, including in the project delivery, digital and commercial professions. It explained that while the Department has flexibility in setting pay in the market for fixed-term appointments, there is less flexibility for civil servants progressing into senior roles.53 Senior Responsible Owners

Senior responsible owners (SROs) have responsibility for ensuring a programme meets its objectives. SROs oversee governance of programmes and steer them through key decision points, assisted by a delivery team. The NAO’s analysis showed that the median time in post for an SRO was 22 months, against median programme length of 77 months, reflecting the career path requirements of the senior officers who fill most SRO roles. A recent departmental survey found that many SROs did not feel empowered to carry out their roles, while some felt least competent in areas important to the effective management of suppliers.54 We asked the Department what it is doing to ensure that the role of SRO becomes an important part of the CV for military officers. The Department claims it has a good record of putting SROs through Major Projects Leadership Academy 49 C&AG’s report, para 17 and Figure 7 50 C&AG’s report, paras 4.6–4.7 51 Qq 83–84 52 Qq 85–86 53 Q 103 54 C&AG’s report, para 4.11 Improving the performance of major defence equipment contracts 17 training,55 but some of its own survey respondents reported difficulty in accessing it.56 The Department was non-committal on the actions it plans to take, but said that it is looking at personnel policy to ensure project and programme delivery are recognised as military trades in their own right. It also aspires to ensure that SROs spend at least 50% of their time on programmes and said it has experience of some personnel staying on programmes for longer than a traditional military appointment (‘double touring’).57 We also asked whether, for military SROs, the Department had thought about moving towards a model whereby the SRO stays in post throughout the term of a particular contract, and promotion is dependent on the successful delivery of that contract. The Department said it had experience of “double-touring” people to get longer terms in office, and that there were examples where it would be happy to see military SROs promoted ‘in

The Department secured an additional £16.5 billion in funding over the next four years in the 2020 Spending Review. Given the Department’s track record of short-term financial management, and schedule delays and cost growth across its programmes, we asked the Department whether it is certain that the additional money will not just be used to plug existing financial holes and fund existing projects.59 It has already acknowledged in previous evidence sessions that part of the additional money will be used to plug its estimated £7 billion Equipment Plan shortfall.60 The Department could not provide a clear account of the extent to which the money will secure genuinely new equipment and capabilities. It had previously written to us to say that the money would be used to fund both new and existing capabilities. However, in our oral evidence session, the Department could not clearly explain the basis of its longer-term projections or point to what has and what has not been approved.61 The Department’s letter to us also set out other spending commitments using the new money, such as spending £6.6 billion on R&D, and additional funding for pension changes and enhancing childcare for service personnel.62 55 Q 86 56 C&AG’s report, para 4.11 57 Q 86 58 Q107 59 Q 96 60 Committee of Public Accounts, Oral Evidence: Defence Equipment Plan 2020–2030, HC 693, 4 February 2021, Q 24 61 Qq 94–99 62 Correspondence from David Williams, CB to Dame Meg Hillier, MP, Follow up to 4 February PAC oral evidence session: Defence Equipment Plan 2020–2030, 22 June 2021. 18 Improving the performance of major defence equipment contracts