Source · Select Committees · Public Accounts Committee
Recommendation 14
14
The Department spends significant sums on the developmental stages of programmes while suppliers may not...
Conclusion
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
Government Response
Not Addressed
HM Government
Not Addressed
The government agrees with the Committee’s recommendation. Target implementation date: Spring 2022 3.2 Although the department agrees with the Committee’s recommendation, it does not 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 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.