LONDON — The UK Defence Ministry has mostly gotten budget overruns and procurement delays under control, the National Audit Office (NAO) said on Tuesday. But the ministry could be storing up significant problems by underestimating costs and potential savings.

Overspend and time delays on major British defense procurement and support programs have been largely got under control but the Ministry of Defence could be storing up significant problems for themselves by underestimating costs and potential savings said the National Audit Office in a report released today.

"Our work on the equipment plan revealed a number of positive features, not least the relative stability of forecast project costs and control over in-year variations in approved timings and costs of major projects," said Amyas Morse, the head of the government spending watchdog.

However, the NAO boss warned the MoD has "chosen a higher risk approach to managing the affordability of the equipment plan by relying on over-optimistic forecasts of costs and future savings, not all of which might be achievable in reality."

The MoD's own cost assurance and analysis service reckons the forecast cost of procuring equipment is underestimated by £3.2 billion (US $4.8 billion).

The underestimation trend though is down. Last year's NAO gave a figure of £4.3 billion figure and the year before that it was higher still.

Investigation by the cost assurance service on nearly a third of MoD support contracts has resulted in a £2 billion understatement to date.

Morse, who has served as was previously a high ranking official at the MoD, spoke was speaking as the NAO released its annual examination of the affordability of the MoD's 10-year equipment plan out to 2024 and associated investigation into the department's 11 largest projects for the year to March 2014.

The report said that a forecast £5.4 billion increase in procurement spending was largely caused by reclassifying one project as procurement rather support.

That, and anticipated efficiency savings in the support spend generally are behind an expected £6.2 billion reduction in the support budget over the period.

The MoD has also removed more than £6 billion from budgets in anticipation of achieving substantial program savings — primarily in support which accounts for two-thirds of the figure.

To date only £2.9 billion of the savings in support cost have been identified and the spending watchdog says failure to find the additional proposed reductions could cause the MoD to delay or cancel existing projects.

The NAO report said

that

the £4.6 billion contingency fund set aside for the 10-year equipment plan may not be enough to mitigate the combined effects of underestimates in project team forecasts of procurement and support costs.

If the contingency is insufficient, the report said the MoD will have to "draw on the £9.2 billion set aside to deliver equipment [not yet committed to specific programs]" outside the current £150 billion or so spending earmarked for equipment and support over the next 10 years.

Overall, the projected forecast cost of the equipment plan out to 2024 has fallen by £1.4 billion to £162.9 billion compared with the previous year's estimates.

Despite the concerns, the performance of the Defence Equipment and Support (DE&S) arm of the MoD in delivering major programs to cost and budget has been improving for a while — aside from the £754 million increase in the cost of the Royal Navy's aircraft carrier program reported by the NAO last year.

It's not that long ago that the MoD ministers would have been gritting their teeth in the face of heavy criticism from the media, the parliamentary public accounts committee and others as the NAO reported cost overruns running into billions of pounds and delays amounting to years.

Today, Philip Dunne, the current defense procurement, and support and technology chief, was able to release a statement saying: "We have reduced costs by almost £400 million in our major projects and enjoyed our best performance on cost since 2005 and time since 2001. There is always more we can do, but I am delighted the great strides the department has made."

That didn't stop Margaret Hodge, the chair of the public accounts committee, criticizing the MoD's potential underestimation of program costs, saying it remains unclear whether the equipment plan is affordable.

"Officials are still being far too over optimistic in estimating future procurement and support costs, an issue the NAO and Public Accounts Committee have been raising for a number of years. If its own internal assurance service is telling it that future procurement costs may be underestimated by as much as £3.2 billion and support costs by £2 billion, clearly the Ministry is still lacking enough staff with the right skills to forecast and manage costs properly," she said in a statement.

"If it cannot get its forecasts right, we cannot have confidence that the equipment plan is robust and fit for purpose," said Hodge.

The Warrior infantry fighting sustainment program and the core production capability for Britain's nuclear submarine build program did register delays totaling 14 months between them. But the NAO recorded the MoD as saying neither delay would have any impact operational impact.

Lockheed Martin UK officials who briefed briefing reporters last week on the £1.3 billion Warrior program, on which they are the prime contractor, said delays had been caused by significant contract amendments to add more capability to the vehicle.

The reduction in costs referred to by Dunne relate to lower forecast spending on the Typhoon and F-35B fighter jet programs.

Overall, the improved MoD performance will not have harmed DE&S boss Bernard Gray's chances of retaining his post as the chief of defense materiel.

A decision is expected in the next few weeks on whether to reappoint Gray or award the post to another candidate after the government advertised the post late 2014 as the end four-=year deal to run DE&S approaches its end.

DE&S is in the early stages of a major restructuring of the way it does business, including bringing in industry teams to help raise skill levels and capabilities in the £14 billion a year procurement and support operation.

The ten 10-year equipment plan envisions envisages spending £69 billion on procurement and £81 billion on support.

Most of the equipment spending is already committed and the bulk of the uncommitted funds will not be available until much later in the decade.

By far the largest single element of spending will cover production of the remaining Astute-class nuclear attack submarines and the Successor nuclear missile boats awaiting a go ahead currently planned for next year.

The MoD said in a statement that the 10-year plan includes spending around £40 billion on nuclear submarines — 26 percent of the equipment budget.

The Royal United Services Institute think tank in London has put the figure at more than 30 percent during some years in the 2020s.

Other major spending includes £15.4 billion on land equipment and £11.1 billion on helicopters, said the MoD said.

Email: achuter@defensenews.com.

Andrew Chuter is the United Kingdom correspondent for Defense News.

Share:
More In Defense News