Summary

The Ministry of Defence (the Department) continues to struggle with managing its equipment programme on an affordable basis, resulting in the cancellation or deferral of major projects and a damaging impact on value for money.

In 2010-11 the forecast costs to complete the 15 largest defence projects increased by £466 million. Since their original approvals the estimated costs of these 15 projects have increased by £6.1 billion and now stand at approximately £60 billion (an 11.4% increase). In aggregate these 15 projects are forecast to be completed 322 months later than originally planned.

We acknowledge that on more recently approved projects there have generally been lower cost increases and fewer technical problems. Projects approved since 2002 show significantly lower cost growth than those approved before this date. In particular we are encouraged by the recent improvements in reducing cost increases arising from project-specific technical issues. Technical issues have not led to increased costs on projects since 2008.

Having allowed its equipment programme to become unaffordable the Department faces unpalatable decisions. Decisions to cancel or slow projects and to reduce equipment numbers have added significant long-term costs to the whole defence programme and to unit costs within the programme. Capability has been affected and this has all resulted in poor value for money. The Department has made a number of decisions to save cash in the short term without a full understanding of long-term costs and the knock-on effect of increased costs in other areas of the defence budget.

Large defence equipment projects have contributed disproportionately to overall cost growth. In the past, the Department has repeatedly failed to challenge unrealistically low estimates for the largest and most complex equipment projects from suppliers. The Astute submarines have been delayed, leading to increased costs of £1.9 billion. Due to repeated delays, cancelling the Nimrod at this late stage has resulted in £3.4 billion being wasted with no new capability being added. In the case of the Queen Elizabeth aircraft carriers the forecast cost has so far risen by £2.8 billion since they were first approved in 2008.The taxpayer has had to pick up the bill when decisions on these projects were taken.

While we welcome the trajectory of improvement, the Department is still unable to set out openly the extent of the gap between income and expenditure it still faces, and how and by when any shortfall will be resolved. We are concerned that the assumptions the Department is making about its budget in the future may prove unrealistic. Financial contingency planning by the Department to model the impact of further budget reductions may therefore be needed.

Last year we concluded that the turnover of the Senior Responsible Owners (SROs), who oversee individual projects, was often too great and recommended that SROs remain in post and responsible during key phases of a project's lifecycle. We were also concerned that some individuals were given the impossible task of being the SRO for too many multi-billion pound projects. We are disappointed that there is little evidence of progress in this area.

On the basis of a Report by the Comptroller and Auditor General,1 we took evidence from the Ministry of Defence on its progress in delivering its major defence equipment projects