The 1991 Statement on Major Defence Projects · 2018. 11. 15. · THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS (b) consideration of the ways in which data Cd) an examination of the

NATIONAL AUDIT OFFICE

REPORT BY THE

COMPTROLLER AND

AUDITOR GENERAL

The 1991 Statement on Major Defence Projects

ORDERED BY THE HOUSEOFCOMMONS TO BE PRINTED 10 JULY1992

LONDON:HMSO 121 f7.95 NET

THE 1991 STATEMENT ON MAlOR DEFENCE PROJECTS

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.

John Bourn Comptroller and Auditor General

National Audit Office 25 June 1992

The Comptroller and Auditor General is the head of the National Audit Office employing some 900 staff. He, and the NAO, are totally independent of Government. He certifies the accounts of all Government departments 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.

THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS

Contents

Part 1: Introduction

Part 2: Analysis of the 1991 Statement

Part 3: Changes to the format of the Major Projects Statement

Part 4: Lessons from specific projects

Part 5: The Auxiliary Oiler Replenishment Vessel

Glossary

Appendices

1. Extracts from the 1991 Major Projects Statement

2. Project Summary Sheet

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Part 1: Introduction

1.1

1.2

1.3

1.4

Origin of the Statement

The 1991 Major Projects Statement is the tenth to be produced by the Ministry of Defence (the Department). The Statement was introduced at the request of the Committee of Public Accounts and stemmed from their 9th Report, Session 198142, which criticised the absence of any requirement for the Department to inform Parliament about the costs of major defence projects. The Statement was intended to provide improved visibility of the progress and costs of major defence equipment projects.

In previous years both the Major Projects Statement and the associated National Audit Office memorandum were provided to the Committee of Public Accounts on a confidential basis. At a hearing, in November 1991, to consider the 1990 Statement the Committee expressed concern at the extent to which the Statement and accompanying National Audit Office memorandum were afforded relatively high security classifications.

In the light of these developments and in keeping with the current drive towards more open government the Department, in discussion with the National Audit Office, have sought to minimise the extent to which facts and figures in the 1991 Statement and associated report are given a security classification. As a result, both the 1991 Statement and the National Audit Office report on the Statement contain very little information of a classified nature. For the first time this has enabled the National Audit Office to publish its findings, together with key information from the Statement itself.

Inevitably, a very small number of facts and figures are commercially sensitive and cannot be included in this report since disclosure could undermine the Department’s negotiating stance and/or the contractor’s commercial position. The National Audit Office have provided the Committee of Public Accounts with a separate memorandum covering these areas. The

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1.6

1.7

Major Projects Statement itself is provided, in full, to the Committee by the Department.

The form of the Statement

The Major Projects Statement comprises three tables with explanatory notes and an annex with project descriptions. Key extracts from the Statement are reproduced in Appendix 1. Briefly, the tables include the following information:

Table I-Projects for which the Treasury have authorised expenditure totalling f250 million or more. Details are provided on the original and current estimates of both total project costs and timescale.

Table II-Estimates, at present prices, of additional expenditure on those projects already shown in Table I which is planned and in clear prospect, but is not yet formally approved; for example, where some public statement gives reasons to believe that Ministers will or may wish to incur expenditure in due course.

Table III-Projects in the early stages of development expected to qualify for inclusion in Table I and on which actual expenditure has reached 00 million or more.

Examination by the National Audit Office

The Major Projects Statement is not an accountable document and the National Audit Office do not verify its completeness and accuracy in detail. Rather, they seek to highlight aspects that arise from the statement.

The main areas examined by the National Audit Office in relation to the 1991 Statement lVt?R?:

(al an analysis of the 1991 Statement focusing on those projects appearing to show the greatest cost variances and in- Service date slippages (Part Two);

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(b) consideration of the ways in which data Cd) an examination of the Auxiliary Oiler presentation could be improved to Replenishment (AOR) Vessel increase the usefulness of the Statement programme (Part Five). and how submission could be speeded up (Part Three]:

Summaries of the main points arising from the National Audit Office examination are

(c) the lessons that can be drawn from a contained within each individual section more detailed examination of three under the heading “Key Points”. projects: Multiple Launch Rocket System (MLRS) III, DROPS and Harpoon (Part Four):

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2.1

2.2

2.3

Part 2: Analysis of the 1991 Statement

Introduction

The 1991 Major Projects Statement covers 31 projects which vary widely in character. Table 1 of the Statement (see Appendix 1) shows 24 projects, either in full development or production, with total estimated expenditure, at March 1991, of f15 billion (1991 prices). Two projects entered Table 1 for the first time in 1991 (JTIDS and UNITER) whilst seven projects previously reported have been omitted on the grounds that expenditure is largely complete. These are the Single Role Minehunter, Type 2400 Submarine, Sting Ray, Blowpipe/Javelin, E3- AEW, Harrier GRS-7 and ALARM. Possible further expenditure of El5 billion on five projects is detailed in Table 2.

Table 3 records details of seven projects which are expected to qualify for Table 1 once they have received full Treasury Approval (see Appendix I). Five projects previously included in Table 3 have been omitted from the 1991 Statement. These are SA80, CRARRV, NIS, Airbourne Anti- Armour Weapon and IUKADGE. In two cases (NIS and the Airborne Anti-Armour Weapon) the future of the projects is under review, meaning that the likelihood of them subsequently qualifying for Table 1 is uncertain. In one case (CRARRV) expenditure is now estimated at f227 million (1991 prices) meaning that it does not reach the cut-off required for inclusion in Table 1. In the case of SABO estimated total expenditure is f284 million but, because Treasury Approvals for development and production currently stand at f236 million, the project has been omitted as it falls below the cut-off for Table I. IUKADGE has been omitted on the basis that expenditure is largely complete.

This report reflects the fact that the marked reduction in the number of projects in Table 1 (see Figure 1) to just 24 projects in 1991 means that drawing conclusions about the Department’s success in managing projects, especially given the variety of project types, runs the risk of painting a misleading picture.

In addition, the following factors can also distort comparisons:

with the reduced number of projects, a large cost variation on just one or two projects can have a major and perhaps misleading impact on the overall picture;

moving to the lower force levels set out in “Britain’s Defence for the 90’s” has involved large cuts in production numbers. Currently, only estimated outturn is adjusted to reflect changes in production quantities. Since Treasury Approvals remain unchanged this affects the validity of overall comparisons between estimated and approved costs;

in a few cases year-on-year comparisons are made difficult by the corrections relating to prior year n&statements. For example, the 1991 Statement records that Treasury Approvals were previously overstated for the Sonar 2054 project.

Consequently, the National Audit Office have concentrated their examination of the 1991 Major Projects Statement on those projects where cost and in-Service date variances appear most marked.

Figure 1: Projects reported in MPS 1987-1991 Year Number of Projects

1987 1988 li

1989 1990 2 1991 24

Source: Table /, Major Projects Statements 1987.1991

Figure 1 shows that projects disclosed in Table 1 to MPS have fallen from 40 in 1987 to 24 in 1991.

Variations in projected costs

2.4 Treasury Approval for the Department’s procurement expenditure is given as a fixed figure, usually with a 20 per cent tolerance. and is not uprated for inflation. However, in the Major Projects Statement and in this Report project costs, at the time of Treasury Approval have been uprated to 1991 prices to allow cost comparisons to be made in real

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2.5

2.6

terms. A comparison for Table 1 as a whole between estimated and approved costs, shows a 2.7 per cent increase of estimate over approval. The National Audit Office have reviewed all projects in Table I where the individual cost variances appear to be greater than five per cent to establish the reasons for this variance. From this analysis the National Audit Office have identified two features which prevent proper comparisons being made:

Office have identified three cases where certain costs have yet to be incurred but estimated cost overruns have been exaggerated by including, in the total estimated costs, items not yet covered by extant Treasury Approvals.

. DROPS-The 28.8 per cent cost variance is wholly attributable to the inclusion, in total estimated costs but not in total approved costs, of production quantities for which Treasury Approval has not yet been sought. l projects where items are included in total

estimated costs but are not covered by Treasury Approvals, serving to exaggerate

.

cost overruns;

l projects where reductions in production quantities are reflected in total estimated costs but not Treasury Approvals, creating an exaggerated cost underrun.

Projects with these features and also those where variances between estimated and approved costs represent genuine variances [for reasons such as specification changes, cost escalations, etc) are considered in Figure 2 together with a brief explanation of the reasons for the cost variance.

Items not covered by Treasury Approvals

When analysing the success of the Department in managing projects to cost, it is vital that figures quoted in relation to estimated costs relate only to items covered by Treasury Approvals, The National Audit

EHlUl- The difference between

estimated and approved costs has fallen from 32 per cent in the 1990 Statement to 8.3 per cent in 1991. However, on this project, Treasury Approvals are given separately for the various phases of development. Therefore, the total of approved costs given in Table 1 to the Statement has not historically represented the total development cost of the project. Conversely, the Department’s estimate of total costs, also given in Table I, does represent the total development cost. The marked decrease in cost variance between estimated and approved costs is explained by an additional Treasury Approval being granted during 1991. However, without an understanding of the basis on which the two figures are compiled the reader could wrongly conclude both that the project had been heading for a substantial overspend and that there had been a marked improvement in cost control between 1990 and 1991.

Figure 2: Projects where apparent cost variance is greater than five per cent Project Apparent Cost Variance (%)

Warrior (21.6) LAW 80 (11.5) MLRS I (5.3) DROPS 28.8 Tornado Mid-Life Update 33.7

Main reasons for variance

Reduction in production quantities Reduction in production quantities Reduction in production quantities Inclusion of costs not covered by Treasury Approvals Cost escalations (12.5%) and specification changes (13.1%) plus inclusion of costs not covered by Treasury Approvals (8.1%)

EHlOl Harpoon AOR Type 23 Frigate GWS Sea Wolf Tristar Batch 1 Tristar Batch 2

Source: Table 1, Major Projects Stafemenf 1991 Elate: Cost decreases shown in parentheses

a.3 Inclusion of costs not covered by Treasury Approvals (16.4) Specification changes (para 2.10) 14.3 Specification changes (para 2.10) 24.7 Difficulties in development (para 2.11) 15.5 Difficulties in development (para 2.12) 17.1 Difficulties in development (para 2.13) 12.6 Difficulties in development (para 2.13)

Seven of the 12 projects shown in Figure 2 represent genuine cost variances.

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2.7

2.8

l Tornado Mid-Life Update-the overrun on this project is 33 per cent. As Figure 2 shows, 25 per cent is attributable to a clearer definition of the development specifications and revisions to indicative cost estimates provided by industry. The remaining eight per cent relates to the costs of an upgrade required to modify, because of attrition, a number of additional aircraft prior to their being subject to mid-life update. These costs are not included in current Treasury Approvals but are included in the total estimated cost of the project.

From the above analysis it is clear that, in the “worst” instance of apparent overrun (Tornado Mid-Life Update] the position, although far from satisfactory, is not as bad as might first appear. In the second “worst” case (DROPS] the overrun is artificial.

Changes in production quantities

In its report on the 1987 Major Projects Statement (Committee of Public Accounts 47th Report, Session 1987438) the Committee asked for information on the impact of reduced production quantities to be provided in future. The Department agreed to do so. In the 1991 Statement three projects are identified as having been subject to reductions in production quantities. In all three cases the projects currently display substantial underruns. The Department have not attempted to quantify the impact of these quantity changes in the notes. The Treasury Approval figure does not currently reflect the reduced requirement--revised approvals will be sought in due course--although the Department’s estimate of total expenditure has in large measure been adjusted to reflect the smaller quantities. Thus, direct comparison between approved and estimated

Figure 3: Impact of Ctuantity Reductions Quantity Existing cost reduction variance(l)

Project (W (see also Figure 2)

Warrior 24.9% LAW SO 20.3% MLRS I 9.9%

21.6% underrun 11.5% underrun 5.3% underrun

Source: Major Projects Statement 1991 and Ministry of Defence analysis Mote: (I) Variance calculated before impact of quantdy rerlr,,Yinn.s

2.9

2.10

2.11

2.12

costs on these projects is hampered. The impact of these changes is illustrated in Figure 3. This serves to demonstrate the way in which non-adjustment of Treasury Approvals following quantity cuts can present a misleading picture.

Other significant cost variances

Paragraphs 2.6 to 2.8 covered six of the 12 projects detailed in Figure 2, demonstrating in each case that the cost variances either totally, or partially, arose from deficiencies in the way in which data is presented in Table 1 to the Statement. In the remaining six cases the data is more directly comparable. Two factors emerge to explain the variances on these remaining six projects:

changes in specifications which either enhance or degrade equipment performance;

unforeseen technical difficulties during development.

Two sea systems projects illustrate the impact of specification changes on project costs. For the Auxiliary Oiler Replenishment Vessel, the decision to introduce a new command system has led to a 9.3 per cent overrun out of a total cost variance of 14.3 per cent. Conversely, for the Harpoon project, the decision was made to dispense with the “over the horizon” targeting facility because its potential effectiveness would have been reduced as a result of deletions to the Lynx upgrade programme. This represents 7.7 per cent of the current 16.4 per cent underrun.

On the Type 23 Frigate, the biggest single contributor to the cost overrun, currently 24.7 per cent (1990 23.9 per cent], was the decision to replace the original command system (CACS 4) with a new “to type” variant following development difficulties.

For the Vertical Launch Sea Wolf project, which is linked to the Type 23 programme, the cost overrun is currently 15.5 per cent (1990 15.6 per cent). The overrun is mainly attributable to difficulties experienced during software development and integration up to 1985. There have been no further real cost increases on the project since 1986.

Figure 3 shows that percentage cost underruns are more than offset by percentage reductions in production quantities.

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2.13

2.14

2.15

2.16

Both Tristar batches have suffered from significant cost overruns. The first batch displays a cost overrun of 17 per cent (1990 12.2 per cent), mainly arising from the necessity to develop a unique work package for each individual aircraft. The second batch shows a cost overrun of 12.6 per cent (1990 12.7 per cent) arising from the difficulties encountered in developing the wing pod. The Department have reconsidered the future of these projects and concluded in February 1992 that the Batch 2 Tristar aircraft should now continue to be used in the passenger carrying role rather than being converted for use as tankers.

Interpretation of in-Service dates

The in-Service date of a project is understood in basic terms to be the date by which equipment is forecast to enter service. Significantly, for a piece of equipment to be considered as “in-Service” it does not necessarily have to meet in full the operational requirement. Figure 4 provides three illustrations of this.

A further complication when making comparisons between estimated and actual/forecast in-Service dates concerns the different definitions employed, both between projects and, in sume cases, within projects, as to the effective in-Service date.

For warships the date generally relates to acceptance of the First of Class vessel. However, where a project involves delivery of multiple units of production the Statement does not always show at what stage the equipment is deemed to have entered service. For aircraft it is usually the date on which the first aircraft is received by the Air Force. In contrast, for Land Systems projects,

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2.18

the in-Service date is generally dependant upon delivery of a predetermined number of equipments. This number can vary. For example. the Warrior and MLRS I projects require delivery of equipment sufficient for a single Infantry Battalion and Artillery Regiment respectively. For DROPS the definition relates to equipment for a division. A more extreme example is provided by the Rapier project where equipment is being purchased for use both by the Army and the Air Force. Here, the Army definition requires 12 fire units to be operational while the Air Force requires only one fire unit to achieve this status. The latter has been used for the purposes of the Major Projects Statement. Overall, the National Audit Office are concerned that the in-Service date gives in some instances, a misleading impression that equipment is universally in use by front-line forces and performing fully to specification.

The Department recognise that some action may be required to:

rationalise the definitions of in-Service dates on individual projects to enhance comparability;

consider the need for some form of explicit recognition in the Statement of the different in-Service dates for inter- related equipments.

They are currently reviewing the position.

Review of in-Service dates in the 1991 Statement

As with cost overruns, the reduced number of projects contained in the 1991 Statement means that the use of averages over such a small population can present a distorted picture, especially if just one or two projects

Figure 4: Platforms entering service without some of their associated equipment Project Actual/Forecast IS0 Components not fully effective at IS0

Type 23 Frigate 1989 (Actual) (i) Replacement Command System not fitted. Expected to be available 1996. AOR 1992 (Forecast)

DROPS 1990 (Actual)

Source: Major Projecfs Statement 1991

(i) Replacement Command System not fitted. To be fitted at refit. (ii) Sea Wolf missiles to provide air-defence capability not fitted. (i) Only six of the nine related equipments had met in-Service quantity criteria by 1990.

One variant (comprising 22 per cent of total vehicle quantities) has not yet entered production.

Figure 4 shows that not all proiects are fully operational when their in-Service dates are achieved.

6

THE 1991 STATEMENT ON MA,OR DEFENCE PRO,ECTS

have suffered from large slippages. The National Audit Office have therefore concentrated their examination on the six projects in Table 1 of the Statement which appear to be running five years or more behind schedule. Whilst accepting that it is difficult to attribute elements of slippage precisely to any one reason, Figure 5 categorises the reasons for the delays on these projects under five broad headings. The classification is based both upon the supporting notes to Table 1 and on discussion with the Department.

2.19 From Figure 5 it is apparent that unforeseen technical difficulties (affecting the Department and/or the contractor) coupled with changes in designs or specification are important contributors to delay. The two may be linked since technical problems arising during the course of development (eg BATES] may result in the project being re-defined. Looking beyond the six projects analysed in Figure 5, a similar theme can be identified on other projects. For instance, on the Type 23 Frigate, notwithstanding the fact that the project is classified as in-Service, delays in the provision of a suitable command system (see Figure 4) are largely attributable to unforeseen technical difficulties followed by a re-definition of the requirement.

2.20 Another factor contributing to delays is the impact of renegotiating or redefining the procurement route. This is particularly evident from collaborative ventures such as EHlOl where delays arose from protracted

negotiations with the Italian government on equipment selection and, latterly, the appointment of a prime contractor for the United Kingdom portion of the programme. Similarly, renegotiation of the incentivised contract on the BATES project led to the project timetable being adjusted to allow time for the negotiations. Looking beyond the projects in Figure 5, the recently announced ASRAAM contract had been deferred for several years by the Department’s desire to achieve competition in line with its objective of obtaining better value for money in equipment procurement coupled with the policy to transfer maximum risk to the contractor. The Department recognise that a careful balance needs to be struck between the operational penalties imposed on the armed forces of delays in equipment availability and the need to secure better value for money.

2.21 The other main factor identified as giving rise to delays is the reallocation of available funds as major projects are given different priorities within the constraints of the overall defence budget. This had a marked impact on the ITIDS project and, to a lesser extent, on EHlOl. This factor is likely to have an increasing effect on the Department during the ongoing rationalisation of the Armed Forces which, coupled with pressure on the Defence budget, will require difficult and careful judgements as to the identification of those projects which can be delayed as a cost saving measure with least impact on operational effectiveness.

Figure 5: Main causes of in-Service date slippage (figures expressed in years)

Tristar 2 BATES Spearfish LAW 80 EHlOl JTIDS Total

(i) Unforeseen technical difficulties 3 3 5 2 13 (ii) Changes to design or specifications 2 1 5

(iii) Re-negotiationIRe-definition of procurement mute 4 2 2 i (iv) Suspension of work pending review 1 (v) Re-allocation of available funds 1 5 i

Total 10 6 5 5 5 5 36 Source: Ministrv of Defence Amhis

Figure 5 analyses delays in terms of the number of years slippage and shows that the main cause appears to be unforeseen technical difficulties.

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2.22

Key Points

In view of the National Audit Office the following points can be drawn out from the foregoing analysis:

(i) The current presentation of the Majo Projects Statement hinders meaningful analysis of cost overruns and time slippages due to weaknesses in the format of the Statement and the amount of detail disclosed (paragraphs 2.4 and X14-2.17). Ways of overcoming these deficiencies are considered in Part 3.

(ii) For projects where cost variances exceed five per cent, the main reasons for “genuine” variances are changes in specifications [either degradation or enhancement) and unforeseen technical difficulties (paragraphs 2.9-2.13). The former is likely to become more important in the future as the defence programme adjusts to reductions in defence expenditure. This will require the Department to make difficult judgements when considering the impact on operational effectiveness of equipment degradation.

[iii) Current definitions for in-Service dates do not necessarily require the equipment to be fully operational (fo! example, Type 23 Frigate, AOR and DROPS). The Department have recognised these anomalies and are currently considering alternative solutions (paragraphs 2.14-2.17).

(iv] For projects where the in-Service date has slipped by more than five years, two of the main reasons for slippage are unforeseen technical difficulties and changes in specifications (paragraph 2.19). The other reasons for slippage identified-w-negotiation of the procurement route and re-allocation of available funds (paragraphs 2.20-2.21)-both require the Department to weigh carefully the financial benefits accruing from the delay against their impact on operational effectiveness.

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Part 3: Changes to the format of the Major Projects Statement

Introduction

3.1 The National Audit Office have reviewed the continuing utility of the Major Projects Statement in its current form and have considered how it might be enhanced. They also considered how its production could be speeded up. They did so because:

l As Part 2 shows, the Statement in its current format makes it difficult to assess whether projects have been delivered to time and cost.

. The Statement was first produced 10 years ago. Whilst recognising the important changes to the Statement made by the Department at the request of the Committee of Public Accounts, it has remained substantially the same. However, wer this period there have been significant changes in the defence environment in terms of the impact of the lower force levels set out in “Britain’s Defence for the 90’s” resulting from the diminished threat from the former Soviet Union. There have also been changes in the basis upon which the Department seek to place major defence equipment projects through the use of competition and the negotiation of taut contracts.

l The Statement has not, in the past, been submitted to the Committee of Public Accounts or available to the National Audit Office for examination until at least nine months after the date to which it relates (The 1991 Statement was not submitted to the Committee until February 1992 -a delay of 10 months]. As a result the Statement cannot be considered by the Committee until at least 15 months after the date to which it relates.

3.2

3.3

The information currently provided in the Major Projects Statement

The analysis in Part 2 highlighted a number of difficulties when comparing the data provided in the Statement on both a project- by-project and year-on-year basis:

lack of comparability between estimated and approved costs owing to inclusion of items in estimated costs not covered by Treasury Approvals.

lack of comparability between estimated and approved costs owing to quantity reductions being included in the former but not the latter.

lack of consistency in the definition of in- Service dates hindering assessment of project slippage.

In addition, the National Audit Office consider that there are a number of limitations imposed by the quality of the existing information and consequently the conclusions which may be drawn from it:

The current format of the Statement does not facilitate a clear overview of progress on a project. For example, there may be up to five entries for an individual project. In addition to a project description there may be entries in both Tables I and II each with associated notes. This means that for projects such as Type 23 and EFA it is difficult for the reader to obtain a clear overall picture.

Explanations as to cost variances and in- Service date slippages are not always sufficiently informative. In particular, where several factors contribute to cost variances the impact of each one is not generally separately costed whilst, for in- Service date slippage, reasons for delay are not separately quantified.

The inclusion of historic cost data, expenditure to date, and precise details of Treasury Approvals does not contribute

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3.4

greatly to an understanding of the Department’s success in controlling projects to time and cost.

l At present the Statement contains no information in relation to the various initiatives undertaken by the Department in recent years, for example, whether competition was used and the basis of the contract price (Fixed Price, Firm Price, cost Plus, etc).

. Two separate statements are currently produced, one for nuclear projects and one for all other major projects. The information on all major projects is therefore not available in one place.

A possible revised format for the Major Projects Statement

The National Audit Office consider that, in the light of the significant developments, in the defence environment generally and in the approach to equipment procurement, fundamental changes are required to the scope and content of the Major Projects Statement. These changes are needed to improve the quality of the information available and help the Committee of Public Accounts to examine the Department’s success in managing projects to time and cost. The National Audit Office therefore propose changes to the Statement which have three key features:

a Dispensing with Tables l-3 and instead providing separate summaries (including nuclear projects), to a standard format, on each project. Current prices would be used. A cover sheet listing projects in order of total estimated expenditure and giving expected in-Service dates would accompany the project summaries. This would provide a clear focus on individual projects and replace the current fragmented approach.

. Provision of additional information, which should be readily available, covering areas of interest such as the use of competition, the nature of the contract and the quantities to be purchased.

l Focusing the information on the factors affecting the Department’s achievement of its original time and cost targets and quantifying the reasons for variances.

3.5

3.6

3.7

3.6

To illustrate this new approach the National Audit Office, in conjunction with the Department, have produced a summary sheet based on one of the projects contained in the 1991 Statement-Harpoon (see Appendix 2). Much of the information contained therein is already available from the existing Statement. but from several sources.

One of the most significant additions relates to the categorisation and quantification of cost variances, an analysis of which should already be available from the Department’s Project Offices. A similar approach is already used in the production of the Defence New Works Statement. Provision of this type of information would serve to prevent any confusion in the area of cost control, such as that arising this year on the six projects described in paragraphs 2.6-2.6.

The other important additions are the provision of definitions for in-Service dates and the classification and quantification of the reasons for slippage. The former, which is readily available, will prevent confusion such as that described in paragraphs 2.14-2.17 and assist in a clearer understanding as to what is meant by “in-Service”.

Projects to be included

The current cut-off level for projects to be included in Table 1 of the Statement has not altered since 1966. Against this, as described in paragraph 2.3, the number of projects included in the Table has declined sharply in recent years. One solution, which would obviate the need for regular revisions to the cut-off level, and prevent protracted discussion as to which projects qualify for inclusion, wotlld be for the Department to restrict the Statement, every year, to say the 25 largest including nuclear projects. Size would be a function of total estimated project costs over the following 10 years, provided at least El0 million had already been spent and Treasury Approval received. This would also:

cover projects in the early stages of development of the type currently included in Table III;

cwercome the problem of projects, such as SA60, where estimated expenditure is significantly greater than Treasury Approvals (paragraph 2.2);

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l bring all projects, including nuclear, together in one report, eliminating the need for one statement on nuclear 3.10 projects and another covering all other major projects.

Timing

3.9 The introduction of a streamlined system for gathering the data required for the Statement will enable the Department to produce the Statement more speedily. For example, the Department consider that they should be able to produce a Major Projects Report, for the year ended 31 March 1993, by August 1993, a considerable improvement. The National Audit Office have agreed to liaise closely with the Department during the introduction of the revised format to ensure that implementation proceeds smoothly.

<ey Points

The format of the Major Projects jtatement could be enhanced and the xoduction speeded up in the following Nays:

(i] Discontinuation of the existing Tables l-3 and substituting in their place project summaries along the lines of that devised for Harpoon (paragraphs 3.4-3.7). These would form a “Major Projects Report”. Adoption of the new approach would provide more information and better visibility than is presently the case.

(ii] Summaries should be provided, annually, for the 25 largest projects, with projects selected on the basis of anticipated expenditure in the next 10 years (paragraph 3.8).

iii] The introduction of a more streamlined system for gathering the data should facilitate production of the new report on a more timely basis (paragraph 3.9).

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4.1

4.2

Part 4: Lessons from specific projects

Introduction

During the 1980s the Department revised its approach to equipment procurement with the objective of translating its dealings with its suppliers into a commercial relationship such as that enjoyed by any other major customer of industry. A key element of this policy is the transfer of much of the financial risk from the Department to its suppliers.

Against this background the National Audit Office have examined three projects included in the 1991 Major Projects Statement to identify whether any lessons could be drawn out to assist the Department in managing future programmes. The three projects are:

l Harpoon-The Department are purchasing the surface launched version of the Harpoon anti-ship missile. It entered service in 1968 and is fitted to the Type 22 Batch 3 and Type 23 frigates. The contract for ships systems and missiles is placed directly with the McDonnell Douglas Corporation, a United States manufacturer. There is a separate contract for Interface Translation Units equipment placed with a United Kingdom company, Data Sciences Limited (formerly Software Science Ltd]. At 31 March 1991 f162.3 million had been spent on the project with further expenditure of E53.5 million in prospect. The Department consider Harpoon to be a low-risk project which provides a good example of the benefits of “off-the-shelf” procurement. The missile is illustrated in Figure 6.

Figure 6: Harpoon

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THE ,991 STATEMENT ON MAJOR DEFENCE PROJECTS

Figure 7: Demountable Rack Off-loading and Pick-up System (DROPS)

.

l Demountable Rack Off-loading and Pick- up Systems [DROPS)-DROPS is intended to facilitate the rapid offloading and pick-up of ammunition. Two variants, together with various ancillary equipments are being procured, both developed from utilising concepts already used in the private sector. The first, with a medium mobility capability is already in service and performed well in the recent Gulf conflict. The second, for use over rough terrain, has not yet entered full production due to technical difficulties in development. The 1991 Statement shows that expenditure of f80.8 million (present prices] has been incurred on the project against an estimated total spend of f387.7 million. The system is illustrated in Figure 7.

Multiple Launch Rocket System Phase 3 (MLRS III]-MLRS III is the third phase of the MLRS project and involves the development of a Terminal Guidance Warhead. It is being developed in collaboration with the United States, France and Germany. The future of the project is currently uncertain with the

United States withdrawing at the end of the current phase and the United Kingdom and Germany reconsidering their continuing involvement. Table III of the 1991 Statement shows that a total of f81 million had been spent on MLRS III by 31 March 1991. Currently, the project is running five months behind schedule. The system is illustrated in Figure 8.

4.3 The following paragraphs draw out lessons from these projects covering three broad areas:

l arrangements for the transfer of financial risk and managerial responsibility to a single contractor;

l linking payment to demonstrated performance:

l passing the risk of exchange rate fluctuations to suppliers.

4.4 The National Audit Office have also taken the opportunity to consider whether the Department can learn any lessons from its experience on the MLRS III project which could be applied to future collaborative arrangements.

13

THE 1991 STATEMENT ON MAJOR DEFENCE PROIECTS

tl. Thm Rnckd Sartam IMI RS\

Transfer of financial risk and managerial responsibility

4.5 The Department have adopted different arrangements on each of the three projects to facilitate the transfer of financial risk and managerial responsibility to its contractors.

4.6 For Harpoon no prime contractor was appointed with responsibility for the integration of the entire project. Rather, under the fixed price contract agreed by the Department, McDonnell Douglas are required to provide and set to work functioning missiles and ship launching systems, but are not responsible for guaranteeing the satisfactory integration and operation of the entire systems once installed on board ship. Data Sciences are responsible for the performance of the Interface Translation Units, whilst the Director General of Marine Engineering is responsible for the adequacy of the various pieces of equipment (eg control panels] supplied by them. The Department consider that these arrangements are adequate since most items are of proven design and have already been successfully integrated by the United States Navy. Furthermore, they consider that, under these arrangements, any failure in the system can be attributed to one or other of the parties involved.

4.7 The Harpoon contract specifies that “delivery” is deemed to have occurred once the goods are available for collection at the contractor’s premises. This is in line with accepted United States (but not United

Kingdom) practice. Responsibility for transporting missiles to the United Kingdom therefore rests with the Department. This exposes the Department to the risk of damages claims if they are not able to transport the missiles on time. The Department have, on occasion, been unable to provide sufficient transportation containers. To date, although the Department were in breach of their responsibilities, McDonnell Douglas have not pursued the matter.

4.8 Industrial management of the MLRS III programme is by the MDTT Joint Venture who were awarded a contract for systems development in 1984 following a competition. The Joint Venture comprises four national contractors and MDTT Inc. who are wholly owned by the four national partners and act as managing partners for the development. This arrangement initially proved ineffective and may have contributed to schedule slippage of 23 months (45 per cent) during the early stages of the project. However, in 1986, mainly as a result of United Kingdom pressure, the company was reorganised to give it greater direct programme and financial control. Since this time industrial management has been satisfactory.

4.9 The DROPS contract was put out to competition with the original objective of appointing one main contractor although the Department recognised that, if necessary, the order could be split. In assessing the tenders the Department considered that there were considerable advantages in splitting the contract between two contractors, Scammell

14

THE 19% STATEMENT ON MAJOR DEFENCE PROJECTS

4.10

(now Leyland DAF) and Paccar UK (Foden Trucks Division]. The reasons for this were:

l The Scammell Medium Mobility Load Carrier bid was lower.

l The Foden Improved Medium Load Carrier was judged to be a lower risk as it was at a more advanced stage than the other contenders.

l The two companies represented the only United Kingdom sources of technically suitable vehicles. Departmental policy at the time was to ensure that such an indigenous procurement and support capacity was retained.

Equipment was therefore selected from each company on the basis of what best met the user’s requirements and offered best value for money. This arrangement has worked well in practice with the Department able to take a significant degree of assurance from the responsibilities placed on each contractor for the delivery and performance of each variant.

Key Points

The National Audit Office consider that :he following points can be drawn out irom the Department’s experience on these programmes:

(i) The negotiation of contracts with overseas suppliers is made more difficult by the fact that foreign companies are not always familiar with, or willing to accept, United Kingdom procurement practice. For Harpoon, the Department successfully negotiated a fixed price for the contract but had to take the responsibility for transporting the missiles to the United Kingdom (paragraphs 4.6-4.7). The increasing intensity of competition for defence contracts means that the Department should now be in a stronger position to impose its will on foreign contractors. Where this does not prove to be possible the Department should ensure that full account is taken of the risks arising from the acceptance of practices not normally adopted on national contracts. This is particularly important given the likely growth in international off-the- shelf procurement.

(ii) The deficiencies in the early performance of MDTT in managing the MLRS III project demonstrate the problems which may arise from the appointment of Joint Venture prime contractors (paragraph 4.8). MDTT’s more recent satisfactory performance should serve to highlight the features which the Department should ensure are present in any future Joint Venture prime contractor.

Linking payment to demonstrated performance

4.11 Through the agreement of taut contracts the Department seek to encourage contractors to deliver equipments to time, cost and performance. An important aspect of this practice is the setting of challenging milestones and other incentives to improve and enhance the contractor’s performance. The three projects examined each contain a number of useful lessons on the application of these principles. Figure 9 summarises the main contractual incentives for each of these projects.

4.12 Payment on the main Harpoon contract is triggered by McDonnell Douglas achieving scheduled deliveries. The contractor is only entitled to price enhancements to cover inflation up until the agreed date of delivery. Thereafter, no further index&ion is allowed. To date all delivery milestones have been successfully met with the exception of missile exercise sections, where only 22 against a schedule of 30, were delivered by the milestone date of 31 December 1991. In this case the contract gives the Department the discretion to retain payments up to the value of items not delivered.

4.13 The first phase of the MLRS III contract was let. in keeping with United States practice, on a cost plus basis with no limit placed on the funding to be made available by partner nations. This contributed to United Kingdom payments on this phase increasing by fZ8 million more than forecast (49 per cent). As a result of intense United Kingdom pressure the contract for the next phase of the project, as illustrated in Figure 9, was negotiated on a highly incentivised basis. As part of the negotiations, and based on an important lesson learned from the earlier inadequacy of planning and reporting by MDTT, and the

15


Figure 9: Contractual incentives to efficient contractor performance Project contractor contract Incentives

HarpnOn McDonnell Douglas Fixed Price Data Sciences Fixed Price

(i) ~n$$~~~de:~r~ achievement

(ii) Liquidated damages payable for late delivery.

(iii) Payments inflation-linked to scheduled delivery date. If deliveries are late the cnntractor bears the cnst of extra inflation.

MLRS III (a) Component

Demonstration Sub-stage

(b) Revised System Demonstration Sub-stage

DROPS

MDTT

MDTT

Paccar UK (Faden) Leyland DAF (Scammell)

Cost Plus Incentive Fee with sharing of cost over/underruns Maximum Price Contract with target cnst and fee and cnst over/underrun sharing

Fixed Price

Fixed Price

(i) If cnntractnr fails to meet payment milestones cnst reimbursement reduced progressively up to 50 per cent until achievement.

(ii) 5 per cent for retention until successful completion.

(iii) 45 per cent of target fee linked to target schedule completion.

(i) Production purchase dependent upon successful validation of equipments.

(ii) ~;wr~;;~lsl,“,“~en$t$x achievement

(iii) Liquidated damages payable for late rMiry (anmllary equipment

(iv) Payments inflation-linked to scheduled delivery date. If deliveries are late the cnntractnr bears the cost of extra inflation.

problems of monitoring progress faced by the Project Management Office, a sophisticated Schedule and Risk analysis network was developed. This was used by the Project Management Office to ensure that milestones for the second phase reflected achievement of items on the critical path. The network provides both the Project Office and MDTT with analysis of the current status of the project and gives early warnings of problems.

4.14 The success of this system is shown by progress on Milestone 4, which was due on 31 July 1991. In February 1991 the network highlighted a potential slippage of up to four months on the milestone and pressure was placed on MDTT to take action. MDTT took corrective action and the milestone was approved before payment retention became necessary. Another point pressed very strongly by the United Kingdom was that, in pressuring MDTT, the Project Office should not accept any degradation of milestone requirements. MDTT have tried to degrade the technical requirement for some milestones but, to date, the Project Management Office have refused to accept any such proposals.

4.15 Each DROPS contract contains a detailed delivery schedule against which payments are made. Failure to achieve these schedules results in all payments to the contractor being retained until the specified deliveries are achieved. As with Harpoon, the contractor is only entitled to price enhancements to cover inflation up until the agreed date of delivery. A further incentive to timely delivery is provided by a clause specifying a maximum total delivery period for the whole contract. If the contractor fails to deliver within this period he may become liable to pay liquidated damages to the Department.

4.16 The DROPS contracts were initially let for validation equipment only with an option to purchase various production quantities which could not be exercised until successful completion of the validation phase within a specified timeframe. The prospect of production orders being lost clearly stimulated contractors’ efforts to resolve any difficulties. For example, it has encouraged Foden to try to resolve outstanding technical difficulties on the Improved Medium Mobility Load Carrying Variant.

16


4.17

Key Points

The National Audit Office consider that the following points can be drawn out from the Department’s experience on these programmes:

(i) Irrespective of the mechanism used to incentivise contracts it is important that it should focus on overall contract achievement. Arrangements such as the linking of an element of fee to schedule performance on MLRS III (paragraphs 4.13-4.14) and making DROPS production orders contingent on completion of validation trials within a specified timeframe (paragraph 4.16) both achieved this aim and provided significant incentives to contractors to perform well.

[ii) On DROPS and Harpoon (paragraphs 4.12 and 4.15) the Department have succeeded in both limiting their exposure to inflation, and encouraging the contractor to complete work on time, by only indexing payments for inflation up until the scheduled delivery date.

[iii) Where milestones are employed, both parties should adhere to them or the incentive effect will be reduced. This is borne out by MLRS III where the Project Office have resisted attempts by the contractor to degrade milestone requirements and, as a result, the contractor was forced to take decisive action to prevent slippage as this would have resulted in loss of fee (paragraph 4.14).

[iv) Generally, it is easier to define incentives on production contracts such as Harpoon and DROPS where performance can be clearly linked to specified delivery targets (paragraphs 4.12 and 4.15). For projects in the development phase the establishment of a networking tool such as that used on MLRS III (paragraph 4.13), is important, both to ensure that milestones actually reflect key stages in development, and to assist in the monitoring of progress.

Contracts involving foreign currency

4.16 For Harpoon, when the contract was negotiated in 1964, there was no Departmental guidance on the preferred currency to be used in overseas contracts. Tenders were invited in Sterling but McDonnell Douglas chose to tender in Dollars. A contract let solely on this basis would have left the Department open to a significant risk from adverse exchange rate movements. The contract was negotiated to allow the first 7 Stage Payments (48 per cent of the total price) to be made in Sterling. Invoices for these payments were still submitted in Dollars.

4.19 For the first three stage payments invoices were converted using the current exchange rate. Thus, the Department was still exposed to risk from exchange rate movements. However, for Stage Payments 4 to 7 (representing 32 per cent of the total payments) the Department negotiated for payments to be made at fixed exchange rates agreed in consultation with the Treasury and the Bank of England.

4.20 These rates were stated in the contract. In the event exchange rate movements meant that, for Stage Payments 4 to 7, the Department made Sterling payments of f3 million over the level which would have been made using exchange rates prevailing at the time of payment. Had rates moved in the other direction the Department would have saved money.

4.21 When the Harpoon contract was signed in 1964 it contained a number of provisional prices. In February 1966 these prices were firmly agreed and the overall contract price reduced accordingly by $876,000. By this time the Department had made four payments to McDonnell Douglas using the original price and this, combined with the payment of the fifth stage payment at the original rather than the revised price, resulted in McDonnell Douglas receiving overpayments worth $270,000. There was no clause in the contract covering repayments given this eventuality. In this case McDonnell Douglas repaid by crediting the exact dollar amount of the overpayment to the Department when they submitted their next payment claim. However, payments are both claimed and made in dollars and in the

17


intervening periods adverse movements in the exchange rate meant that the Department effectively received sane f36,000 less from McDonnell Douglas than they originally paid.

4.23

4.22 In 1988 the Department introduced a co- ordinated policy for contracts with foreign suppliers with the objective of limiting their exposure to the risk of adverse exchange rate movements.

. In order of preference the Department seeks a Sterling firm price, or a price denominated in Sterling but with exchange variation provisions. If it is unavoidable they will exceptionally agree. with an werseas supplier, a contract denominated in foreign currency.

. Central co-ordination of Dollar and Deutchmark requirements with currencies bought forward 18 months in advance. This removed a major element of uncertainty from the management of project expenditure.

Ley Points

‘he National Audit Office consider that he following points can be drawn out ram the Department’s experience on these m3grammes:

(i) By seeking to price overseas contracts in sterling the Department minimises its exposure to adverse exchange rate movements (paragraph 4.22). Sterling denominated prices will cause contractors to seek to include exchange premiums or contingencies in their prices to cover exchange fluctuations and their acceptability will be judged by the Department in the context of overall value for money. One option the Department may wish to consider is to obtain tenders in both sterling and the contractors’ national currency in order to assess the premium involved. Moreover, in the case of quotes in either Dollars or Deutschmarks, the Department may then compare the rates offered by the contractors with the rates it is able to obtain in its own forward buying.

[ii] The increased international competition for defence work, coupled with the growing number of multi-national defence companies, should assist the Department in pushing for tenders in more than one currency. With the likely growth in international off-the-shelf procurement this will become increasingly important.

iii) Future contracts placed in foreign currencies should clearly specify that the exchange rate to be used in cases of over or under payment should be the same as that used for the original payment, where a direct relationship’ can be shown. This would prevent situations such as that on Harpoon where the Department lost E36.000 owing to adverse exchange rate movements [paragraph 4.21).

18


Withdrawals from collaborative projects

4.24 The United States announced its withdrawal from future stages of MLRS III on 5 May 1992. The decision follows a Congressional direction to select a single sub-munition to meet its Deep Fire requirements. The United States Army announced, in March 1991, that it had selected BAT, a previously secret “black” programme, ahead of MLRS III. The United States have indicated that they will continue to participate until the end of the current System Demonstration phase. France remain firmly committed whilst both the United Kingdom and Germany are considering their options for future anti- armour weapons in the light of recent changes in the threat. Both countries are expected to announce their decisions by Autumn 1992.

4.25 The absence of an official declaration of withdrawal by the United States for 15 months had the potential to threaten the next phase of the programme since detailed planning for a European only solution could not be concluded whilst the possibility of United States involvement remained.

4.26 The prospect of partners withdrawing has also highlighted some uncertainties about the provisions of the MLRS III Memorandum of Understanding. For example, the termination provision provides for a 270.day notice of withdrawal period although the funding obligation of the withdrawing participant continues for either 270 days or to the end of the phase whichever is the shorter. Thus, withdrawal of a partner as late as the final day of the current phase (expected to be late 1993) would break the MOU but no financial penalty would be incurred.

4.27 Also, the MLRS Memorandum of Understanding states that cost-share calculations should be based on constant 1984 prices and exchange rates with each country paying its own national contractor in its own currency. During the first phase of the project high United Kingdom inflation

was not accompanied by the expected fall in the pound/dollar exchange rate and the value of payments to the United Kingdom contractor, when converted to 1984 economic conditions, was less than the target minimum. This contributed to an imbalance in the prescribed cost-share at the end of the first phase. This has continued to grow during the present phase with a current estimated imbalance for the phase of f8.56 million.

4.28 The withdrawal of the United States raises the question of how this imbalance should be resolved. The Memorandum of

4.29

Understanding has two provisions affecting imbalances: one refers to the possibility of foreign currency payments for cost/workshare balancing and integration/support tasks; the other states that imbalances should be addressed during subsequent phases or: ultimately, via levies on third party sales. The Department are currently considering how to resolve the imbalance in the light of this ambiguity.

Key Points

The National Audit Office consider that the following points can be drawn out from the Department’s experience on this programme:

(il If the Department and its partners do not take a timely decision on the future of the programme this may have an adverse effect on the projected in-Service date of MLRS III (paragraphs 4.24-4.25)

(ii) The Department should ensure that the terms relating to the resolution of cost-share imbalances in future Memoranda of Understanding contain no ambiguities (paragraphs 4.27-4.28). Given the United States withdrawal from MLRS III the United Kingdom should continue to resist making any cash payments to reduce the current imbalances if these are not in line with its interpretation of the Memorandum of Understanding.

19

THE 1991 STATEMENT ON MAJOR DEFENCE PRO,ECTS

Part 5: The Auxiliary Oiler Replenishment Vessel

5.1

5.2

5.3

5.4

5.5

Introduction

Without regular supplies of fuel, stores and ammunition, surface fleet forces cannot conduct sustained deep water operations. The Auxiliary Oiler Replenishment (AOR)

Vessel is intended to meet this support requirement. It will also provide a helicopter maintenance facility. The vessel is illustrated in Figure 10.

5.6

The AOR was intended to be capable of defending itself outside the protective umbrella of the main naval force. The requirement, therefore, called for it to be equipped with Vertical Launch Sea Wolf missiles and other military systems.

Two vessels are currently under construction, the first (AOR 1) being built by Harland and Wolff under a contract let in April 1986 and the second (AOR 2) by Swan Hunter Shipbuilders the contract for which was issued in December 1987. The Department intend to place further orders for support ships, but decisions have not yet been taken on the size and timing of future orders.

5.7

Construction of AOR 1 is currently forecast as 6 years 8 months, a slippage of 32 months (66 per cent). A fixed price contract (subject to inflation adjustments) valued at f127.2 million (at 1985-86 prices) was placed with Harland and Wolff. This excludes payments of f53 million payable as part of the privatisation of Harland and Wolff, made by the Northern Ireland Department of Economic Development, to the new owners in connection with the AOR 1 contract, of which El9 million remains to be paid. These payments could not have been foreseen when the contract was awarded.

5.8

For AOR 2 the Department estimate the total outturn cost to be in line with the estimate when the contract was awarded plus

additional payments of between f8.6 million and f13 million to buy out claims by Swan Hunters for delay caused by late provision of Lead Yard Services information from Harland and Wolff in respect of AOR 1 and to permit the shipyard to complete the vessel to its own drawings. Constru~ction of this vessel is currently 4 months (8 per cent) behind schedule (see paragraph 5.30).

For some time to come neither vessel will have a significant self-defence capability owing to delays in the development of the command system and difficulties in obtaining parts for missile systems. The National Audit Office have examined progress on the AOR programme to identify the reasons for these problems.

Procurement of the AOR

Following a feasibility study by Swan Hunters invitations to tender were sent to six companies in October 1984 requesting bids both for AOR 1 on its own and for AORs 1 and 2 if the contracts were to be awarded for both vessels at the same time. The Department had decided that the first two vessels should be procured through a prime contractor and that the company selected would have the responsibility not only for designing and building the vessels, but also for the procurement, installation, setting to work and integration of the weapons. This approach is known as “Whole Ship Procurement”. Subsequently two tenders were received by July 1985, one from Harland and Wolff and the other from Swan Hunters. Both bids were well above the Department’s target price for the first ship of f.122 million (at 1984-85 prices).

The companies were then asked to submit two revised bids. Harland and Wolff reduced their bid to the target price and offered to

20


21


5.9

5.10

5.11

5.12

build AOR 2 for El06.5 million if the two orders were placed with them. Swan Hunters were unable to offer a bid close to the target price.

In April 1986 the Government announced that contracts would be split, with AOR 1 going to Harland and Wolff and Swan Hunters being given a preferential opportunity to bid for AOR 2. This was on the basis that the second vessel would be to the same design as AOR 1 and that the terms and conditions, cost and programme would be no less favourable to the Department than those offered by Harland and Wolff for a follow-on ship.

Specification and pricing of the AOR

The target price of El22 million used in the tendering exercise was based upon a series of case studies, covering a wide range of vessels of varying capabilities. Some scenarios envisaged conversion from a merchant hull whilst others required a complete new build.

Unlike previous fleet auxiliaries the AOR was intended to carry relatively complex weapons systems which led to design difficulties in building various parts of the ship to either naval and/or civil (Department of Transport and Lloyds] standards. This necessitated, for example, using two different spray control systems to protect the same area and the need for special cabin furniture. For damage control purposes the Naval Engineering Standard requires metal cabin furniture. However. the Department’s metal furniture range does not comply with the Department of Transport minimum size standards. Consequently, in place of the normal fire-proofed timber furniture the shipbuilders planned to fit, they are having to design and provide specially made metal furniture. Specific problems were also encountered concerning weapon system requirements resulting in slippage of five months.

In their tender assessment report the Department’s consultants commented that it would have been their normal commercial practice to offer more guidance to the shipbuilders than had been included in the Department’s invitation to tender. Both Swan Hunters and H&and and Wolff supported

5.13

5.14

5.15

this, stating that they needed greater detail of the systems, equipment and facilities required to enable them to provide accurate estimates. They informed the National Audit Office that they were unhappy with the technical guidance they had received when preparing their tenders. The Department told the National Audit Office that providing the shipbuilder with more detail and greater guidance would have been counter to the concept of a design and build contract which sought to place responsibility for risk and scope for innovation with the shipbuilder.

The effect of not having discrete design and build phases for a first of class vessel is akin to allowing the development and production phases of a project to overlap. Subsequently, the House of Commons Defence Committee have recognised this as a risk which should not be readily accepted (para 36, 10th Report, Session 1988-891. By way of contrast, the Type 23 Frigate design and build programme contained a discrete design phase. In practice, progress on the construction of AOR 1 has been subject to some delay whilst difficulties reconciling the various standards have been resolved.

Contract awards

In parallel with the Department’s tender evaluation process the Northern Ireland Department of Economic Development commissioned a separate report to establish whether or not the Harland and Wolff bid contained any assumptions as to future Government subsidies. This Report, which was made available to the Department, concluded using a cost build-up based on a merchant vessel that the bid contained no subsidy and that the level of contingency. at 4.1 per cent including profit, was low. Conversely independent consultants employed by the Department, who were not informed of the bid prices for reasons of commercial confidentiality, concluded that tenderers may have included significant contingency sums for the incorporation of Naval Engineering Standards required by the Department.

In comparing the substantial price margin between the two bids for AOR 1, the Department considered that the lower Harland and Wolff price arose from a very challenging estimate of the man hours

22


required and a low profit margin, and could be achieved provided the contractor avoided bad luck. The Harland and Wolff bid was also considered by the Department to reflect the security of their position, at that time, as a Government backed company.

5.16 Harland and Wolff offered the best price for AOR 1 together with a Contract Acceptance Date eight months earlier than their rival, and a Contract In Service Date 13 months earlier. The Department also considered that the Harland and Wolff design was a clear first choice technically though they did not include in their tender assessment a detailed analysis of the likelihood of the firm completing the project on time. On the basis of these conclusions the contract to build the first AOR was awarded to Harland and Wolff.

5.17 It is the Department’s normal practice to allow a lengthy gap between a “First of Class” vessel and the placing of an order for the next ship. This allows time to prepare essential drawings, resolve building difficulties and to make essential refinements to the design. The AOR 2 contract was awarded to Swan Hunters in December 1987, 20 months after AOR 1, and before essential drawings had been prepared and building difficulties had been resolved. In contrast, for the simpler follow-on vessels in the AOR programme the Department are planning for a 3o-month gap between the first two vessels, if the second is to be built in a different yard.

5.18 In their tender for AOR 2 Swan Hunters stated that their ability to cover the material requirements of the specifications had been seriously inhibited by the continuing design development, the high incidence of provisional prices and the lack of precise technical specifications from the Department to ensure that the items to be supplied met the requirement. This added to their costs and in consequence Swan Hunters maintained that they were unable to match the price offered by Harland and Wolff for a follow-on ship.

5.19 After a period of negotiation the final Swan Hunters offer for AOR 2 was still considerably higher than the existing Harland and Wolff quotation of f106.5 million for AOR 2 from the first competition. The Department considered that, in the light of the cost overrun by Harland and Wolff (paragraph 5.4). there was a doubt over

whether the second ship could be built for f106.5 million. The Chief of Defence Procurement did, however, advise Ministers that, in his view, the prudent and economical course was to go to another competition for AOR 2 rather than accept the Swan Hunters price at that stage. He also commented that there would be no significant operational penalty from the consequent delay of about six months. However, the Secretary of State for Defence directed the Chief of Defence Procurement, as Accounting Officer for Class 1, Vote 2, to place the contract for AOR 2 with Swan Hunters.

Contractual arrangements

5.20 The main design and build contract for AOR 1 is similar to those used by the Department with other shipbuilders. As is customary with First of Class contracts, Harland and Wolff were obliged to accept certain other responsibilities such as the provision of design and production information to enable another shipbuilder to build a similar ship if necessary.

5.21 The main contracts for both AOR 1 and 2 are tightly drawn, being fixed price with the Department succeeding in transferring most financial risks to the contractors. Fixed prices were subject to uplift by the application of variation of price clauses to allow for inflation and the AOR 2 contract contained a clause to prevent abnormal profits being taken. All payments are tied to the achievement of specified milestones. Although there is no specific sanction for the late achievement of individual milestones, the contracts also allow the Department to withhold payments, or parts of payments at any time without detriment to the contractor’s obligation to complete the contract. Moreover, variation of price payments do not continue beyond the contractually agreed acceptance date after which the contractor also becomes liable to pay liquidated damages to the Department.

5.22 The milestones used on the AOR 1 contract are based on the original specification which forms part of the main contract. However, the continual evolution of the design under a design and build contract means that, if the specification is not regularly up-dated, disputes can arise over the interpretation of milestones. This can be costly for the

23


5.23

5.24

5.25

5.26

contractor in cash flow terms and lead to delays in project progress as it may be necessary to *e-schedule work to meet changing expectations.

Responsibility for assessing the achievement of milestones rests jointly with the Department’s resident naval overseers, who deal mainly with ship platform matters, and the Department’s weapon acceptance staff. The National Audit Office were told both by the Department and the shipbuilders that sometimes the weapons acceptance staff had been conducting their inspection against the latest design modification state of the weapon equipment, even though it was not always part of the shipbuilders’ main contracts to keep the equipment up to the latest modification state.

The Department accept that there have been milestone difficulties with contractors. However, in their view, difficulties mainly arose where the contractor had fallen behind and was looking for a less stringent interpretation to allow payment to be made. The Department stressed that these were precisely the conditions under which they had to hold a firm line to ensure the milestones achieve their purpose of producing measurable progress.

Progress on construction of the vessels

AOR 1

The contract for AOR 1 required the vessel to he built in 4 years. Construction time is now forecast as 6 years 8 months, a slippage of 32 months (66 per cent] of which the Department have accepted responsibility for 5 months. The Department estimate that their total payments to Harland and Wolff on completion of the AOR 1 contract will be in the region of El40 million whilst they believe total Harland and Wolff costs to january 1992 had reached around f172 million. To April 1992 the Department had paid f124.7 million against this contract.

As the AOR 1 contract progressed a regular dialogue took place between senior officials on both sides, becoming more frequent as the Department’s concerns about lack of progress increased. Their concern was such that, in April 1990, all payments were suspended until such time as Harland and Wolff were

5.27

5.28

5.29

able to produce a realistic schedule for completion of the vessel. This plan was produced in May when payments resumed. Despite the revised timetable, which gave a completion date of December 1990, progress was still slow and, in May 1991, the Department suspended all payments to the contractor except for those on related AOR spares contracts where non-payment would adversely affect sub-contractors. Even after taking this action, progress remained slow. Completion is not now expected before the end of 1992.

None of the sanctions imposed by the Department appears to have had a significant impact on the rate of progress. The Department informed the National Audit Office that, as each sanction was enforced, the contractor made good progress in the immediate aftermath but appeared to have been unable to sustain that improvement for longer periods.

Harland and Wolff acknowledge that they have had problems maintaining production. However, they consider that, when judging their performance, account needs to be taken of the difficulties experienced in obtaining equipments that met naval engineering standards. This produced a knock-on effect on design development and drawing production and, in turn, the shortage of drawings had delayed construction of the vessel. The Department informed the National Audit Office that these difficulties were the responsibility of the shipbuilder within the contract. Harland and Wolff also point to the redundancies and major uncertainties about the future of the company arising during the 16 month run-up to privatisation. This lowered morale and, more importantly, meant that the company also lost through resignation over ZOO of their more senior and experienced staff, including more than 30 key staff involved on the AOR 1 project.

AOR 2

The decision to place the contract for AOR 2 so soon after the AOR 1 contract was let (paragraph 5.17) has had implications for both the costs and progress of AOR 2. Under a separate contract valued at fl million Harland and Wolff were required to provide the necessary drawings and technical information for Swan Hunters to build AOR

24


2 (paragraph 5.20). In practice, for the reasons outlined in paragraph 5.26, coupled with low morale and an overtime ban in the Harland and Wolff drawing office, some of the drawings required by Swan Hunters were delayed whilst others were of poor quality. Significantly, owing primarily to the value of the contract and partly to the immaturity of the design Harland and Wolff only accepted liquidated damages clauses to a maximum of f20,OOO.

5.30 Because of its exposure to damages claims from Swan Hunters the Department agreed that, for a payment of between f8.6 and f13 million [dependent upon delay and dislocation actually experienced) and acceptance of an I&week delay in contract acceptance date Swan Hunters would complete AOR 2 to its own drawings. AOR 2 is therefore running four months behind the original schedule. With the exception of the Machinery Control and Surveillance System-completion of which is at the Department’s own risk - (paragraphs 5.40-5.41), Swan Hunters have had little other difficulty in keeping to schedule.

Role of the Northern Ireland Department of Economic Development in the AOR 1 Contract

5.31 Historically, the Northern Ireland Department of Economic Development as the only shareholder in the nationalised company, had provided considerable financial support to Harland and Wolff. In September 1969 the company was privatised. As part of the privatisation agreement the Northern Ireland Department of Economic Development had undertaken to make payments to H&and and Wolff totalling f53 million, tied to progress in completing AOR 1. By doing so the Northern Ireland Department of Economic Development avoided responsibility for any losses on completion of the vessel. The composition of these payments was examined by the Committee of Public Accounts in its report on the Privatisation of H&and and Wolff (7th Report of Session 1991-92).

5.32

5.33

The money was to be paid by the Northern Ireland Department of Economic Development in five instalments related to the achievement of specified milestones. These were agreed between the Northern Ireland Department of Economic Development, the Department and the shipbuilder. The first two milestones were not intended to coincide with the Department’s own milestone schedule and payment of the first milestone (for flo.145 million) was straightforward being timed to coincide with privatisation. The next two milestones were achieved one and six months respectively behind schedule because progress on AOR 1 had slipped. Payment 4 and part of 5 have yet to be earned but there was a contractual commitment by the Northern Ireland Department of Economic Development to pay Harland and Wolff f2.04 million of the 5th instalment not later than 1 April 1991 irrespective of progress. This payment was made just before the indefinite suspension of payments by the Department in May 1991. When in 1969 they were consulted, before these commitments were entered into, the Department did not raise objections.

Gzy Points

,n the view of the National Audit Office .he following points arise from the xocurement of the AORs and the progress .o date on the contracts:

(i) In undertaking tender assessments of proposed designs, it would be helpful to include a full analysis of the likelihood of firms completing projects on time. This would not necessarily have changed the cwrse of this competition, but it is a point to bear in mind in future appraisals (paragraph 5.16).

(ii) The target price set (paragraphs 5.7-5.6) was a commendable attempt to drive down costs. However, the requirement to both design and build the vessel made it difficult for tenderers to estimate build costs. The two companies involved, as well as an independent firm of consultants, have criticised the depth of information upon which bids were to be based. However, as the invitation to tender was for a Design and Build contract the

25

THE 1991 STATEMENT ON MAJOR DEFENCE PROIECTS

companies were aware of the potential difficulties (paragraph 5.13) whilst the Department protected itself against cost overruns by letting fixed price contracts (paragraph 5.21).

(iii) The use of a Design and Build contract without discrete breaks between phases for a vessel as complex as the AOR, especially with a shipbuilder with limited recent experience of warship building, may have been over-ambitious. The effect was akin to entering full production whilst development was incomplete. These factors have contributed to the delays, particularly on AOR I, since the design was continually evolving as the project progressed and problems, such as the conflict between naval and civil standards, arose (paragraphs 5.11 and 5.13).

(iv) One of the problems with a Design and Build contract of this nature is that, as the design evolves, amendments are necessary to the contract and associated specification documents. As milestones, under which payments are made, are derived from the specifications, it is important, if lengthy disputes are to be avoided, that both specifications and milestone definitions are kept up to date (paragraphs 5.22~5.23].

(v) The Department let the contract for the second vessel within 20 months of the contract for the first vessel. The shipbuilder for the first vessel (Harland and Wolff] agreed to provide the drawings for the second vessel but was unable to do so in the Lime available. As a result the Department is now having to make payments of between f8.6 million and f13 million to the builder of the second vessel (Swan Hunters). The problem might have been less severe if the gap between the two ship orders had been longer (paragraphs 5.17, 5.29-5.30).

(vi) Progress on AOR 1 has been very slow, due in part to the factors outlined in (iii) above. The Department have made various attempts to improve the position but have met with little success (paragraphs 5.25-5.28).

( vii) The Department successfully limited their own exposure to cost escalation on the contract to Harland and Wolff (paragraph 5.21). A further f53 million is likely to be paid by the Northern Ireland Department of Economic Development to Harland and Wolff in connection with AOR 1 (paragraphs 5.31-5.32). Harland and Wolff consider that increases in their own costs arose in part because they were unable to make a realistic estimate due to shortcomings in information provided by the Department at the tender stage. However, the Department considered the risk stayed entirely with the contractor (paragraph 5.12).

Vertical Launch Sea Wolf

5.34 Under the “Whole Ship Procurement” approach both Harland and Wolff and Swan Hunters were required to purchase and fit the Vertical Launch Sea Wolf System. This system is also to be used on other vessels such as the Type 23 Frigate. However, at the time the contract was drawn up, no requirement was placed on Harland and Wolff either to purchase the setting to work spares. or provide the requisite setting to work test equipment. For AOR 1 responsibility for these items rested with the Department. As a result of this, and because of the difficulty in obtaining some items at short notice there was a 60-80 week delay in the supply of setting to work spares with the result that the Department was open to delay and dislocation claim from Harland and Wolff.

5.35 Partly because of this and partly because there was a delay in the availability of the Command System which could have involved incurring expenditure on care and maintenance of Sea Wolf if fitted. The Department decided to remove those parts of the system already fitted to AOR 1 at a cost, estimated by the Department, to be at least f300,000.

5.36 In part, therefore, the Department have had to delay fitting this system to avoid contractors competing with their own needs elsewhere for the limited number of spares

26


available. For AOR 2, which is less advanced, the Department agreed with Swan Hunters that the ship should just be made ready to receive the equipment. However, Swan Hunters had already ordered smne of the relevant spares and were expecting to take delivery of them on time. Once delivered, the Department now plan to take over these setting to work spares for use on other ships using the system. This arrangement means that the Department will incur Swan Hunters on-costs which would not have been incurred had the parts been purchased directly for the Sea Wolf project. Overall these difficulties call into question the wisdom of incorporating complex and relatively immature weapons systems within Whole Ship Procurement contracts.

5.37 The Department now intend to recover the position for both ships at refit. On current plans the first refits are likely to take place in the mid 1990’s although the Department has yet to decide whether air defence features will be incorporated at this stage. This decision means that both vessels will be without a full air defence capability for some considerable time and that the refits, if Sea Wolf is fitted, will take them out of service for 47 weeks longer than had originally been planned.

The Command System

5.36 Owing to the complex military equipments to be carried in the AOR, the vessel required a command system to co-ordinate and control the various elements. It was originally intended to utilise a variant of the CACS4 system, designed for use in the Type 23 Frigate. However, owing to technical difficulties this system has been cancelled and a new system is under development for the Type 23 which is also intended, after modifications, for use in the AOR. The forecast in-Service date for this system in the Type 23 is 1996. Thus, both AOR 1 and AOR 2 will enter service without a command system.

6.39 The delay in the procurement of the Command System for the AOR will have a potentially adverse effect on the vessel’s ability to defend itself. However, with the changing threat, the Department is now considering whether the AOR will need such a complex self-defence capability as

originally envisaged. Nonetheless, they acknowledge that some form of self-defence will still be required.

Machinery Control and Surveillance System

5.40 The original design for the AOR envisaged greatly reduced crew numbers compared to those normally required on a vessel of this complexity. The Machinery Control and Surveillance System involves complex computer software, and is critical to the achievement of this objective. However, when Harland and Wolff passed on the technical information relating to the system, via the Department, to Swan Hunters, the latter identified a number of design and specification errors. Responsibility for these errors is the subject of a contractual dispute between Harland and Wolff and their sub- contractors, although Harland and Wolff are ultimately responsible for any additional costs arising on AOR 1. Because responsibility for the surveillance system was specifically excluded from the agreement reached with Swan Hunters in 1969 (paragraph 5.30) the Department is liable to meet the costs of any knock-on effects on AOR 2.

5.41 With a view to minimising its exposure to any claims from Swan Hunters, the Department commissioned a separate risk assessment. As a result of this they have funded Swan Hunters (at a cost of f1.3 million) to validate the specification to permit software corrections to be made before installation in AOR 2. The Department are hoping to re-coup at least part of this expense by selling the results to Harland and Wolff. At present, it is not clear whether or not the system will be fully operational by the time either vessel is otherwise completed, but the Department will not accept the ships without an operational system.

27

THE 1991 STATEMENT ON MAJOR DEFENCE PRO,ECTS

5.42

Ley Points

n the view of the National Audit Office he following points have emerged on the ntegration of specific equipments on the hOR programme:

(i) On coming into service, both AOR 1 end AOR 2 will be without the self- defence capability required to fulfil the role originally envisaged for them. Incorporation of the various equipments necessary to provide this capability will have a significant impact upon the vessels’ operational availability owing to the time taken to fit them, even if a decision is taken to opt for a simpler system (paragraphs 5.36-5.39)

ii) One of the main objectives of Whole Ship Procurement is to pass on the maximum risk to the contractor. The omission of certain Vertical Launch See Wolf spares from the AOR I contract has exposed the Department to a potential risk which, in this case, will cost at least en additional E~OO,OOO [paragraphs 5.34-5.35). Similarly, the inability of the Department to transfer risks associated with the Machinery Control and Surveillance System to Swan Hunters @aragraphs 5.40-5.41) could have financial repercussions. There is a particular lesson to be learned here in that the inclusion of complex end relatively immature weapons systems within the umbrella of Whole Ship Procurement can expose the Department to both programme and financial risks which need to be carefully managed.

iii] Although the Machinery Control and Surveillance System problems have the potential to produce further delay, the National Audit Office recognise that the Department acted promptly and decisively to limit their exposure (paragraph 5.41).

28


Glossary

ALARM:

AOR:

ASRAAM:

A3-AEW:

ASW:

BATES:

Blowpipe/Javelin:

CDS:

Cost Plus contract:

Collaboration:

Costshare:

CRARRV:

Defence New Works Statement:

Design and Build Contract:

DROPS:

EFA:

Firm Price Contract:

Fixed Price Contract:

Full Development:

IMMLC:

ISD:

IUKADGE:

Air Launched Anti-Radar Missile.

Auxiliary Oiler Replenishment Vessel.

Advanced Short Range Air to Air Missile.

Airborne Early Warning Aircraft.

Anti-Submarine Warfare.

Battlefield Artillery Target Engagement System.

A man-portable surface-to-air guided missile.

Component Demonstration Substage of MLRS III programme.

A contract priced by reference to the Government’s profit formula which reimburses a contractor for the costs he has actually incurred plus a percentage for profit.

Joint procurement between two or more nations to meet a crxnm~n requirement.

The proportion of total collaborative project cost borne by each participating nation’s defence procurement agency.

Challenger (battle tank] Armoured Repair and Recovery Vehicle.

Provides annual information on the progress of major defence works.

A contract placed with a single contractor making them responsible for both the design and building of a first of class vessel.

Demountable Rack Off-loading and Pick-up System.

European Fighter Aircraft.

The amount to be paid is specified in the contract and is not subject to adjustment for inflation.

The amount to be paid is specified in the contract and subject to adjustment only for inflation.

An agreed programme of design engineering leading to the establishment of the final design of an equipment so that production may proceed.

Improved Medium Mobility Load Carrier--a variant of DROPS.

In-Service Date.

Improved UK Air Defence Ground Environment-a system enabling the creation of a recognisable air picture covering the whole UK Air Defence Region.

29


JTIDS:

Lynx:

Maximum Price COIltl-Wt:

MDTT:

Memorandum of Understanding:

Mid-Life Update:

Milestone:

MLRS:

NIS:

Off-the-shelf PrOC”rL?“le”t:

On Costs:

Prime Contractor:

RSDS:

SA 80:

Setting-to-work Spares:

Sting Ray:

Target Cost:

UNITER:

Variation of Price:

Whole Ship PlXX”rel”e”t:

Workshare:

Joint Tactical Information Distribution System,

An attack helicopter.

Contract containing terms placing an absolute limit on the customers’ liability.

A joint venture comprising Martin Marietta Corporation (US), Diehl GMbH (Germany), Thomson-CSF (France), THORN EMI Electronics Ltd (UK] and MDTT Inc. (managing partner wholly owned by the four national partners).

An international agreement which commits partners in a collaborative project to a stage of its procurement process. and defines arrangements for that stage.

A programme of enhancements to an existing weapons platform to prolong its effective service life.

A mechanism which enables the Department to monitor adherence to an overall programme.

Multiple Launch Rocket System

NATO Identification System allowing positive identification of friendly ships and aircraft.

Purchase of equipment that is already fully developed and in “se

Costs levied by a supplier, on to items purchased from a sub-contractor, to cover the suppliers’ own overheads and profits.

A firm or consortium responsible for the co-ordination and integration of industrial work.

Revised System Demonstration Substage of the MLRS III project.

Small Arms for the SOS, comprising rifle, light support weapon and ancillary equipment.

Essential spares purchased to replace items consumed during the testing and tuning of new systems eg for missile systems such as Sea Wolf.

A ship/air-launched lightweight torpedo.

The estimated cost of work on a contract where the risks are too great to agree a fixed price. Supported by incentives for contractors to contain costs within the target.

A secure. survivable integrated ground communications system for the RAF throughout the UK.

Adjustment made to a fixed price contract to provide for the effects of inflation.

Shipbuilder is made responsible for both the build of a vessel and the integration of the various associated equipment.

The proportion of a collaborative project’s work that is carried out by each partner nation’s industry.

Information is either confidential or commercial-in-confidence.

30


Appendix 1 Extracts from the 1991 Major Projects statement

Table I: Approved work

Sea systems

Project

Development D Title

Production P (a (4 Surface Ships 1. Type 23 Frigate1 D I

DlPI 2. Auxiliary Oiler Replenishment VBS#

Estimated total expenditure (Em) Expenditure (Em)

In-Service date to 31.3.91 At approval of work At present

Forecast Actual/ at first present OUtbNll Present present Present

approval forecast prices prices Historic prices prices prices (CJ (d) (N (f) (91 (h) (il

72.0 94.1 76.3 (80. 83) 135.4 240.8 88 69

167.6 229.7 139.6 (81. 64) 250.0 239.7 90 92 131.3 156.9 128.7 (84. 85) 192.2

SUrfaCe WeaQOnS 3. GWS 26 MOD 1

Vertical Launch Sea Wolf Missile and Ship System’

4. Harpoon Surface Launched Missile and Ship System1

Underwater Weapons 5. Spearfish

Torpedo’ 6. Sonar, 2054

Sonar Suite for Trident

0 I 123.9 171.1 79.4 (82) 136.9 90 91

P 156.2 190.8 165.0 (62) 322.4

D 1 10.2 12.0 15.2 (64) 22.3 16.3 a7 a0

P 134.1 150.3 192.7 (84. 90) 235.6 197.5

D&P I a7 92 604.6 836.2 399.7 (60) 903.7 897.7

D 1 167.9 230.5 164.9 (83,64.65. 250.5 250.5 9415 9415 86.87,88,89,90)

P 90.3 110.3 120.2 (tn64.65, 179.5 160.6 86.87.88.89.901

Notes: 8 See explanatory note below. Present prices are average 1991/92 outturn prices.

Table I-Project descriptions and explanatory notes

General Projects in full development or production with Treasury Approvals in excess of f’250 million by 31 March 1991.

Compared with MPS 90, the entries for the Single Role Minehunter, the Type 2400 “Upholder” Class submarine, the Stingray torpedo, the Blowpipe/Javelin missile, the E-3 AEW aircraft, the ALARM missile, Harrier GR5/7 and IUKADGE projects have been omitted as all were in service on 31 March 1991 and nme had significant remaining expenditure. As a separate project, TRIGAT MR does not qualify for inclusion in Table I and has been reattributed to Table III. UNITER stages 1 and 2 and JTIDS (which have been transferred from Table III] are the only new entries in Table I.

Paragraph numbers refer to the serial number of the project in Table I.

31

THE 1991 STATEMENT ON MAJOR DEFENCE PROrECTS

Sea systems

In its original form Table I is supported by two separate sets of notes, the first giving project descriptions and the second giving explanations of cost variances and/or in- Service date delays. To ease understanding, the National Audit Office have amalgamated these notes so that, for each project, all relevant information is contained in a single note.

Surface Ships and Submarines-General

(a] ISDs in the case of warships correspond to the acceptance dates.

(b) Columns (e) and (f) exclude expenditure on production of weapons except where these are procured under the ship build contract.

(c) Production expenditure includes First of Class costs.

Sarfare shin. ------- ----I--

1. TYPE 23 FRIGATE: Anti-Submarine Warfare frigate. Principal features include towed array sonar, Harpoon surface to surface missiles, Vertical Launched Sea Wolf point defence missile system to meet the air threat, and the EHlOl ASW helicopter capable of carrying Stingray torpedoes and sonobuoys.

The increase in development cost between Columns (h) and (i) is attributable to the costs of the special-to-type replacement command system which were not included in the original Treasury Approval. Associated projects are GWS 26 MOD 1 Vertical Launch Sea Wolf missile system, Harpoon surface launched missile system and EHlOl anti-submarine helicopter. all of which have separate entries. and the Type 23 Frigate Command System.

2. AOR: Auxiliary Oiler Replenishment vessel. A new concept of Royal Fleet Auxiliary capable of supplying fuel, ammunition and other solid stores from the same hull-the “one-stop-replenishment” principle.

The approved development costs of the special-to-type replacement Command System are included in Column (i). ISD slippage has been caused by shipbuilder delays. Associated projects are Vertical Launch Sea Wolf (described separately] and the AOR variant of the Type 23 Frigate command system.

Surface Weapon systems

3. GWS 26 MOD 1: Vertically Launched version of Sea Wolf missile system, to be fitted to the Type 23 Frigates and AORs.

The increase in development costs (Columns (h) and [i)) was largely due to problems with software and system integration, which resulted in the contract being renegotiated. Reapproval for the contract was given by Defence Ministers and the Treasury in 1966.

4. HARPOON: Surface to Surface anti-ship guided missile fitted to the Batch 3 Type 22 Frigates and which is to be fitted to Type 23 Frigates. Purchased from the USA. The increased production cost estimate reflects Treasury Approval received for an additional eight systems previously shown in Table II.

Underwater Weapon Systems

5. SPEARFISH: Submarine-launched heavyweight torpedo with both anti- submarine and anti-surface ship capabilities.

The further slippage in ISD since MPS 90 is due to the need to demonstrate that the required level of reliability has been achieved. A Reliability Assurance Programme is now underway within the original contract and the resultant modifications will be incorporated into the initial batch: further production will be to the modified design.

32


6. SONAR 2054: An integrated sonar suite being developed for the Vanguard class submarine. Includes both hull-mounted and towed arrays with advanced on-board electronics for signal processing and display.

The figure at Column (g) is lower than that in MPS 90. The figure in MPS 90 was erroneous in including a significant element of double counting: the revised figure has been confirmed as accurate. There has been a further Treasury Approval since MPS 90. The associated project is the Vanguard class nuclear-powered SSBN. These costs are also included in the Trident entry in the Nuclear MPS.

Land Systems

Title

(d

Project

Development D

Production P t’)

In-Service date

Forecast Actual/ at first present

app,OKl forecast 63 Cd)

Expenditure (fm) to X.3.91

OUthXll Present prices prices

c-3 (0

Estimated total expenditure (fm)

At approval of work At present

Present Present Historic prices prices prices

(9) 03 0) Fighting Vehicles 1. Warrior’ 01 129.1

PI Weapon Systems 2. Rapier Field DBP

Standard Cl 3. High Velocity D&P

Missile’ 4. AS90 D‘

P, 5. MLRS II D

P, 6. LAW 80’ D

P, 7. TRIGAT Long D

Range’

Electronic Systems 8. GATES’ D&P

~pg~~ispehicles D&P

86 88

89 93

91 93

92 92

90 90

83 88

98 98

85 91

89 90

458.2

628.1

119.5

5.2

22.2 19.0

238.2 65.1

148.2 85.2

176.3 249.1 190.0 (85. 88)

77.74 80.8 250.1 (88, 89 90)

218.2 125.0 (79)

530.2 764.6 (84)

841.1 1235.5 (81, 83, 84, 85)

147.2 242.0 (84, 86)

5.5 18.6 (89)

23.7 317.7 (89) 24.1 14.6 (80)

271.8 433.1 (82, 85) 105.2 86.3 (84)

172.9 237.9 (84) 95.6 244.9 (61, 87)

278.4 221.2

1061.6 845.4

1805.3 1805.3

348.0 355.7

22.7 25.6

383.8 427.3 27.1 24.1

605.9 575.5 123.5 105.2

340.4 305.4

279.3 277.4

301.1 387.7

Notes: * * New item in Table I this year. 1 see expk3flatmy note. Present prices are average 1991/92 outturn prices.

Land Systems Fighting Vehicles

1. WARRIOR (MCV 60): Tracked Combat Vehicle for mechanised infantry battalions.

The ISD slippage resulted from technical problems and delays in finalising vehicle numbers and variants. The post-Options reduction in the quantity of vehicles required is reflected in the lower production figure in Column (i).

Weapon systems

2. RAPIER FIELD STANDARD C (FSC): Completely new low level air defence system currently under development which will have a full day/night and poor weather capability. Will incorporate new surveillance radar, improved tracking and missile guidance system, eight-rail launcher, electronic counter measures against anti-radiation missiles, new Rapier tracker, and new missile (Mk II). The achievement of Reliability and Maintainability (R&M) of the overall system has been accorded second highest design priority after resistance to ECM.

33


The slippage in the ISD occurred before the incentivised contract was placed in 1986 and was the result of technical difficulties [now overcome), to a degree compounded by a restricted funding profile in the early years. There has been no further slippage in the ISD since the contract was incentivised in 1986.

3. -: Designed to enhance the Army’s close air defence capability by providing a highly mobile armoured platform for a new generation of short time-of-flight missiles. The system consists primarily of a self-propelled (SP) launcher vehicle [Stormer) which carries a lightweight multiple launcher and a shoulder launch aiming unit for deployment away from the SP vehicle.

The reported slippage to the in-Service date was caused by difficulties during development. Considerable progress has been made and it is felt that this aspect of HVM development is no longer likely to pose a major threat to the successful completion of the HVM programme. However. there is a good deal of development work still to be completed.

4. ASSO: New 155mm Self-Propelled Howitzer to replace the obsolete 105mm Abbot and all 155mm M109s. Will be capable of firing all natures of 155mm ammunition.

5. Multiple Launch Rocket System (MLRS) I: Depth fire artillery system. Basic system comprises a Self-Propelled Launcher Loader (SPLL) carrying two rocket/pod containers each containing six rockets. Phase I rockets have bomblet warheads.

There has been a volume reduction in SPLLs and rockets since the initial Treasury Approval. This accounts for the reduction in the production costs in Column (i). Associated project is MLRS III. This consists of the M26 rocket body, used for MLRS I, with a terminally guided warhead, containing three terminally guided submunitions which, ““ce ejected from the warhead, use radar to locate and destroy enemy armoured vehicles.

6. LAW 80: A disposable short-range lightweight anti-tank guided weapon (ATGW) carried by one ma” and discarded after use. For use by all arms but principally by infantry. It replaces the 84mm Carl Gustav and 66mm M72 anti-tank guided weapons.

The ISD slippage was caused by the need for improved performance to meet changes in the threat. Technical problems were encountered in the subsequent development and production and a solution has had to be produced to counter potential premature detonations induced by static electricity. As a result of “Options for Change”, the quantity of missile launchers was reduced from the original quantity approved by the Treasury and this is reflected in Column (il. The costs include those of LAW 80 training aids, and indoor and outdoor trainers.

7. TRIGAT LONG RANGE: A Long Range anti-tank guided missile of the “fire and forget” type using an infra-red seeker head.

At 31 March 1991, the UK was still a full participant in the Long Range TRIGAT project and this is reflected in the Table I and II entries. Formal notice of the UK’s intention to withdraw from the Long Range project was given to our French and German partners in September 1991. Continued UK participation is dependent upon negotiation with “UT partners of a revised programme with a significantly lower cost to the UK.

34


Electronic Systems

8. BATTLEFIELD ARTILLERY TARGET ENGAGEMENT SYSTEM (BATES): An automated artillery communications, command, control and information system. Consists of automatic data processing equipment located at battery, regimental, divisional and corps level, and artillery command posts, together with appropriate data entry devices and display units at remote cells (eg guns, MLRS fire units, observation posts). Data will be transferred via Ptarmigan secure digital links and Clansman radios.

Funding difficulties and inadequacies in the prime contractor’s management resulted in the project being submitted for re-approval in 1985. Since that date, further slippage has occurred due to problems in software development and inconsistencies in the specification.

Logistic Vehicles

9. DROPS: Ammunition resupply system incorporating wheeled Demountable Rack Offload and Pickup System. A transport vehicle with its own integral crane designed to carry pallet&d loads.

The difference between the cost shown in Columns (h) and (i) is explained by the incorporation of various equipments not previously incorporated in the original Treasury Approvals of 1988, 1989 and the most recent of 1990.

Air systems

Project In-Service date

Development D Forecast Actual/ Title at first pment

Production P approval forecast (a) 01 CC) (d) Aircraft 1. European Fighter D

Aircraft (EFA) 2. Tornado GRl Mid D&P 93 96

Life Update’ 3. Harrier TlO’ O&P 94 94 4. Sea Harrier Mid D&P 94 94

Life Update’ 5. Tristar 1st D&P a4 86

Batchl 6. Tristar 2nd D I

Batch> 87 97 P

Helicopters 7. EHlOl ASW’ D 93 98

Electronics 8. JTIDS”l D&P 88 9. UNITER STAGE D&P 90

z:

1 & 2”’ Notes: **New item this year.

1 see exptanatory note. Present prices are average 1991/92 outturn prices.

Expenditure (Em) to 31.3.91

outturn present prices prices

@I (f)

482 561

70.1 78.4

13.8 14.7 234.0 265.0

187.0 279.1

15.0 18.8

82.5 122.7

618.5 927.8

122.0 185.0 124.3 144.9

Estimated total expenditure (fm)

At approval of work At present

Present Present Historic prices prices prices

(91 PI 0)

1841.0 (63. 85. 2609.0 2723.0 861

376.7 (87) 491.7 657.3

264.6 (89) 301.9 297.7 330.3 (84. 88) *

183.6 (82, 87) 303.9 355.7

11.3 (87) 14.8 27.5

120.0 (87) 153.6 162.1

699.4 (62, 90) 1252.7 1356.0

285.0 (89) 314.0 314.0 367.6 (89) 389.7 408.5

Air Systems Aircraft

1. EUROPEAN FIGHTER AIRCRAFT--FA: Agile fighter aircraft with offensive support capability. Collaborative programme with Germany, Italy and Spain.

2. TORNADO GRl MID-LIFE UPDATE: A package of work to improve the GRl’s avionics and update its armament to meet the threat into the next century.

35


The ISD has slipped three years because of problems in development, primarily with software, and the need to reduce the overlap between the development and production phases in order to avoid cost escalations or risk. The increased Column (i] figure is due to:

(al clearer definition of the development specification which has, in turn, led to increased costs of the development and production phases:

(b) the revision of initial indicative cost estimates from industry which were significantly understated; and

(c) the additional costs associated with making provision in the MLU programme for the possible modification of 19 batch 1 aircraft to the GRl standard. The previous Tornado MLU entry in MPS 90 Table II has now been deleted.

3. HARRIER TlD: Two-seater trainer version of the Harrier GR7 utilising the TAVB-B airframe, which can be used in both training and operational roles.

The decision to purchase the aircraft was taken in February 1990. Funding for the purchase of the TlO was offset by the cancellation of an expected attrition buy of Harrier GR5/7.

4. SEA HARRIER MID-LIFE UPDATE: Uprating the Sea Harrier to meet the threat through the 1990s. It is planned to be equipped with an advanced Blue Vixen radar (the costs of which are included here) and other avionic equipments. and to be capable of carrying Advanced Medium Range Air-to-Air Missiles (AMRAAM). Taken together, the programme will endow the aircraft with an all weather. beyond visual range, look-down, shoot-down capability.

Blue Vixen radar is a multi-mode, pulse doppler radar being developed to replace the Blue Fox radar currently installed in the Sea Harrier FRSI. AMRAAM, intended for FRSZ, is being developed in the USA. The UK has the option to procure the system.

5. TRISTAR Batch 1: The conversion of six w-British Airways Tristar aircraft for RAF service in tanker/passenger or tanker/freighter roles.

This programme has encountered a number of unforeseen technical problems, which caused the ISD to slip by two years. These include carrying out smaller packages of work than originally planned at any one time in order to preserve aircraft geometry. Differences between the individual aircraft prevented the production of six identical aircraft modification sets and the production methods for dealing with large reinforcing areas were inadequate. All aircraft have been completed with the last delivery taking place in December 1990.

6. TRISTAR Batch 2: The conversion of three w-Pan Am Tristar aircraft for use by the RAF in the tanker/passenger role.

The ISD has slipped by a total of 10 years as a result of savings measures; the revision of the requirement from a three-point to a two-point configuration, the decision to put the production element of the programme to competition and slippage in the development work on the wing pods. The development cost has increased significantly. This arose from an underestimation of the amount of work remaining following deletion of the centreline refuelling point. It was not foreseen that it would be necessary to conduct a major revalidation of the design analysis carried out for the first batch. On being stripped down, the development aircraft was also found to require more extensive recovery. rectification, modification and servicing than originally envisaged. Ministers are to decide on the future of the project in early 1992.

36


Helicopters

7. z: A medium sized helicopter developed collaboratively by the UK and Italy for a range of different applications, both civil and military. The version reported here is the Merlin ASW variant.

The forecast ISD has now slipped by an additional year over that reported in MPS 90. This followed our annual review of the forward equipment programme. An additional Treasury Approval was given in 1990. The associated project is the EHlOl Utility variant.

Electronics

8. JOINT TACTICAL INFORMATION DISTRIBUTION SYSTEM (JTIDS): ECM- resistant secure data and voice communications link developed in USA. Entry covers the fitting of JTIDS to Tornado ADV and IUKADGE for Air defence data exchange. (There is a separate, similar Navy programme for fitting JTIDS to the Fleet and to Naval Aircraft). JTIDS also forms part of the E-3 system.

There have been four separate budgetary savings measures which have deferred the LSD initially by two years and then by a further year on each subsequent occasion. Approvals to date cover the Project Definition and Development stages and the first production buy for the Tornado. Associated project is IUKADGE.

9. UNITER l&Z: A secure, survivable integrated ground communications system for the RAF throughout the UK. Associated project is JTIDS.

The initial two and a half years slippage was caused primarily by delays in the provision of accommodation arising out of RAF/PSA works services. A further year’s slippage arose from the resubmission and renegotiation of the contractual arrangements when the remaining works services element was brought under PE management through a “turnkey” hybrid arrangement with the equipment prime contractor. UNITER has only qualified for inclusion in Table I following Treasury sanction of the programme which, for the first time, also includes the works element. Associated project is IUKADGE.

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Sea systems

Electronic Systems

Land Systems

Table III: Expenditure on the early stages of projects -ElOm or over

Forecast ISD and total expenditure are shown for projects which had entered Full Development at 31 March 1991.

Project tide Sea Systems Submarines 1. SSNZO 2. Swiftsure 8

Trafalgar Class Sonar Update

Expenditure to 31 March 1991 (Em at present

prices)

44 14

Forecast IS0 at 31 March

1991

FOreCaSt toti cost

at 31 March 1991 (fm at

present prices)

Eleclronic systems 3. Type 23 Frigate

Command System 48 1996

Land Systems Fighting Vehicles 4. Challenger 2 108

Demonstration Phase Weapon Systems 5. TRIGAT Medium 42 1996 125 6. MLRS Phase III 61 Air Systems Air Weapons 7. ASf?AAM 77

Present prices are average 1991/92 outturn prices.

Annex to Table III: Project descriptions

Submarines

1. e: Feasibility studies into a follow-on class of Fleet nuclear-powered submarines. Since 31 March 1991, the decision has been taken to begin studies on a new class of SSN based on the Trafalgar class design rather than continue with the SSNZO concept.

2. SWIFTSURE & TRAFALGAR Class Sonar Suite Update: To match the predicted submarine threat into the next century and to extend the cost-effective lifespan. Although the first two stages of the project are underway, including both development and production spend, the largest and the most technically complex stages are only in the early stages of Project Definition. It is not yet possible to give firm cost and timescale estimates for these.

3. TYPE 23 FRIGATE COMMAND SYSTEM: An automated computer-based command system, which will process data from a ship’s own sensors and other sources for the purpose of information management, command planning and the co- ordination of weapon direction. The forecast cost of the programme has been reduced in line with the lower force levels envisaged in “Britain’s defence for the 1990'S".

Fighting Vehicles

4. CHALLENGER 2: The new Main Battle Tank to succeed Chieftain, to be equipped with the CHARM gun in addition to other improvements including better mnhility, protection and fire control.

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Air Weapons

Weapon systems

5. TRIGAT MEDIUM RANGE: Planned as replacement for MILAN ATGW System. The Operational Concept of MRT is to develop and produce a crew-portable ATGW which is capable of defeating improved enemy armour using a tandem warhead missile (twin charge]. Fitted with a thermal imager to give an all weather, day/night capability.

6. MLRS III: Depth fire artillery system. Phase III is a terminally guided submunition warhead rocket under collaborative development by the UK, US, France and Germany.

7. ASRAAM: Advanced Short-Range Air-to-Air Missile for Harrier GR5/7, EFA and originally (before the decision not to proceed with the upgrade) the Tornado ADV.

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Appendix 2 Project Summary Sheet

General information

Purchase arrangements

Quantities Required

Project description, progress to date and key future events

Project Title: Harpoon Controllerate Responsible: Sea systems

Title ISD Associated Projects: Type 23 Frigate 1969

Contractor Contract Type Procurement Route McDonnell Douglas Fixed Price International Competition Data Sciences Fixed Price UK Competition

Ship Systems: Missiles: 20 *

Harpoon is a surface-to-surface anti-ship guided missile fitted to the Batch 3 Type 22 Frigates and which is to be fitted to the Type 23 Frigates. The missile is an off-the- shelf purchase from the USA with a separate contract for system integration let with a UK company. The Department has already taken delivery of 15 ship systems and the original contract with McDonnell Douglas is substantially complete. An order for a further eight ship systems was placed in 1991. This is reflected in the increase in both approved and total estimated costs when compared to 1990.

Project costs (at current prices)

In Service dates ISD definition

Prod. WI

MOD Approval 235.8 Current Estimate of Outturn 197.5

Difference 38.3

Estimated Expenditure to date: f162.3 million.

DW. Totals (Em) Ml 22.3 258.1 18.3 215.8

4.0 42.3

Explanation of significant differences

Factor Specification Changes Quantity/Volume Variations Price Variations Other Factors (Unused Contingency, etc)

Total

Further expenditure in clear prospect

None foreseen

WI -19.79

-6.63 -1.99

-11.96

-42.36

ISD is defined as the date by which the first complete missile system is fitted and operationally effective on a warship.

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Achievement of ISD

Original ISD Current Forecast/Actual ED Slippage

Explanation of slippage

Factor Unforeseen technical difficulties Need for project redefinition Procurement delays Budgetary constraints Delays in associated projects Other

Total

1 - -

1 -

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Documents

The 1991 Statement on Major Defence Projects · 2018. 11. 15. · THE 1991 STATEMENT ON MAJOR DEFENCE PROJECTS (b) consideration of the ways in which data Cd) an examination of the