The Review team has considered five major areas where delays in delivery of new equipment lead to additional costs and have a significant consequence for the "productive Defence output" available from the MoD:
• unproductive output embedded in the equipment programme ("unproductive project costs") - captured by MoD reporting through NAO and management information on CMIS;
• industry costs ("Hidden industry cost") - invisible to the MoD;
• opportunity costs arising from gaps in capability ("Potential capability gap costs") - invisible until realised;
• support costs for existing equipment ("Run on equipment costs") - not tracked, other than through the NAO Major Projects Report; and
• project costs arising outside the project budget ("Other direct project costs") - overall level tracked by MoD in aggregate, but not in relation to specific projects so no good idea of "efficient level".
These costs arise across a number of budget areas (primarily DE&S in-year, Capability Sponsor and FLCs beyond year 0). Although "caused" by the equipment procurement programme (c.£6bn near cash), the base on which they apply is debatable, and they could be applicable against a wider MoD budget given significant support and non-cash impacts179.
The Review team has estimated these costs in ranges as shown in Table G-1. The significant ranges arise because the costs are neither simple to identify nor generalise. In either high or low case, the Review team believes that the majority of cost of delay is borne in the EPP in the form of "unproductive project costs".
£m p.a. | Low estimate | High estimate |
Unproductive project costs | 500 | 1,200 |
100 | 350 | |
110 | 250 | |
Run-on equipment costs | 100 | 130 |
MoD internal costs | 110 | 220 |
Estimated annual cost of delay | 920 | 2,150 |
Source: CMIS, Review team analysis |
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Table G-1 : Estimates of cost of delay (indicative)
In summary, Table G-2 describes the analysis undertaken by the Review team to identify the costs of delay (and generalise them where necessary) as follows. Further detail is available in the following sections.
| Estimation techniques used to generalise | Source information |
Unproductive project costs180 | Regression analysis of cost increase vs. time increase | Series of regressions undertaken on various data: (Regression inputs used shown in bold) |
| (range reflects on ~95% confidence range for regressions undertaken on "capability adjusted cost per unit" per month delay) | - "capability adjusted cost per unit" vs. costs not adjusted - MPR projects only vs. all available projects from CMIS - year by year delay and cost increments vs. MG for project to date Total portfolio and rate of slip p.a. based on CMIS analysis |
High case: Generalise from three known projects to portfolio based on total portfolio and rate of slip p.a. based on CMIS analysis Low case: Known examples only, provisions over elapsed time since IG approval | Review of provisions in accounts of major suppliers to MoD (BAe Systems provisioning for Astute, Nimrod, and EADS for A400m) and CMIS records of slip and MG approved cost | |
Generalisation only of type of UOR spending from Op Telic to Op Herrick (UOR spending for both) | UOR spending over last six years based on MoD accounts Proportion of UOR spend by type on remediating capability gaps from answers to Parliamentary questions on Op Telic | |
Run-on equipment costs | Method 1) Based on run on support costs per year of delay and annual project spending Method 2) Based on "stock value" of projects being delivered | Review of run on costs noted in NAO Major Project Reports |
MoD internal costs | No generalisation necessary (wide range results from lack of transparency over IPT manning / costs associated with projects (i.e., how are DE&S staff numbers reduced as projects slip)) | DE&S Administrative Cost Regime costs (mainly payroll) - estimated those incurred in delivery of new equipment, NOT delivering support to existing equipment Annual rate of slip in duration from analysis of projects in CMIS |
Table G-2: Summary of methodologies and sources used to identify the cost of delay
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179 Cost of capital (i.e., non-cash) component of unproductive project costs could be considered against Government spending - funding costs arise at central government level (notional 3.5% charge on capital only levied against MoD)
180 It should be noted that whilst some unproductive project costs are incurred in directly overcoming technical issues in developing the capability, others are incurred essentially as a result of Departmental behaviour in managing the portfolio of projects underway