Source · Select Committees · Public Accounts Committee
Recommendation 3
3
The Department does not make enough demands of its suppliers to share the financial risks...
Conclusion
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.
Government Response
Acknowledged
HM Government
Acknowledged
agree with the Committee’s conclusion. The department recognises the importance of managing supplier performance including the apportionment of financial and programme risk. CAAS (Cost Assurance & Analysis Service) Approvals Team help define specific estimating and scheduling evidence requirements to underpin business cases in accordance with HMT Aqua Book Guidance2. This is delivered throughout the lifecycle of programmes continually developing and improving the accuracy of estimates as the project becomes more mature, and its risks fully identified. 3.3 The department accepts that supplier underperformance has been a factor on some programmes, but the use of Firm Price contracts, Liquidated Damages, Single Source regulation reform and other measures have been effective in limiting exposure to cost increases. These measures have resulted in the financial liability for cost over-runs being borne by suppliers. Industry has posted significant losses on contracts (for example the development and production contract for A400M aircraft) as a result of work delivered by MOD programme teams to best understand where financial risk and liabilities rightfully sits between the department and supplier. The practice of government funding the development costs of new capability is well-established across the world. Demanding that most of the upfront development costs are funded by industry before a commitment is made to buy equipment would reduce investment in cutting-edge capability, damage UK industry competitiveness, and runs counter to the policy set out in the DSIS. 3.4 In addition to delivering military capability to the Armed Forces, Equipment Plan investment brings economic benefit, supporting over 200 thousand UK jobs and generating intellectual property (IP) that can be exploited by UK industry in exports. The generation of HMT Accounting Officers Assessment Guidance (2021) page 8 cutting-edge IP naturally leads to technically challenging and higher risk programmes as the Department strives to maintain operational advantage, while industry also seeks to offer market-leading equipment both for domestic export use. 3.5 The Department will write to the Committee by the end of May 2022 setting out evidence of how it holds its suppliers to account and fairly and responsibly apportions risk and reward across its contracts.