9 The Department's short-term approach to the financial management of its equipment portfolio has affected suppliers' ability to deliver contracts effectively, although it is now seeking to address this through its industrial strategy. Our recent report The Equipment Plan 2020-2030 found that the Department's focus on short-term financial management and delaying expenditure into future years is increasingly restricting Front-Line Commands' ability to develop the capabilities they need. The Department depends on its suppliers to deliver defence capability. However, a lack of clarity over the future programme, and the use of departmental savings measures designed to manage short-term affordability challenges, mean suppliers lose skills, and are reluctant to take on risk when contracts are let. The Department is now seeking to rebuild capacity in the UK defence industry to address gaps in capability, including through long-term strategies for shipbuilding and combat aircraft (paragraphs 2.2 to 2.4).
10 The Department has not opened to competition the majority of the programmes we examined. In the past, the Department has found it more difficult to secure value for money from procurement where there is no competition. In March 2021, the Department announced it is moving away from using competition as the default option for defence equipment programmes, but in fact competition has not been the norm. Out of the 20 projects and programmes that we examined, 14 are being wholly or partly procured non-competitively. The Department only made this choice because of government national security policy in a minority of cases. In other cases, the Department chose not to let the contract through competition, either because of a lack of alternative suppliers for particularly complex requirements, or as a result of its own internal analysis of the most cost-effective solution. Cost overruns and schedule delays have affected programmes adopting both competitive and non-competitive procurements. In the absence of competition to help demonstrate value for money, delivery teams and the Department report that the Single Source Contract Regulations 2014 have proved effective at driving out unnecessary cost from contracts covered by the legislation and in strengthening the Department's negotiating position, although the full benefits will take some time to become apparent (paragraphs 3.2 and 5.5 to 5.8).
11 Suppliers have failed to deliver contracted levels of performance on a number of programmes. Figure 6 on pages 34 to 38 sets out challenges to successful delivery faced by the projects and programmes we examined, including the areas in which suppliers were not delivering to the contract. Problems with supplier performance referenced by delivery teams in the projects and programmes that had experienced problems with supplier performance included:
• the technical ability of suppliers to execute complex design work and meet the requirements of defence standards. The ability to provide safety cases that satisfy the various military safety regulators is a recurring problem; and
• the suppliers' ability to manage the programme effectively, including their ability to oversee other parts of the supply chain.
On occasions - such as on the Ajax armoured vehicle programme - the Department has changed its requirements after the contract was let, making it more difficult for suppliers to achieve cost and schedule milestones. This has led to renegotiation of aspects of the contract (paragraphs 3.7 to 3.11 and Figure 6).
12 The Department's lack of accurate information on the progress of some programmes makes it more difficult to monitor suppliers' performance, but it is taking steps to address this. For example, in the case of the Crowsnest radar system, neither the Department nor the prime contractor identified the lack of progress being made by the key sub-contractor. Staffing issues described in paragraphs 16 to 18 also contribute to a lack of oversight. The Department is now introducing earlier support and scrutiny to programmes in order to identify gaps in knowledge and is measuring supplier progress more accurately using Earned Value Management techniques. Once problems are identified, we saw evidence of the Department addressing issues, such as through engagement by senior leaders or by embedding staff with the supplier (paragraphs 1.5, 3.7 and 3.11 to 3.15).
13 The Department does not meet its own obligations to suppliers under some contracts. Government Furnished Assets (GFA) are assets purchased separately by the Department, or existing departmental assets, which are integrated into a programme and used by the supplier. Problems with the supply and availability of GFA persist despite programme teams recognising the risks involved and trying to minimise GFA use. The Department has also experienced difficulties when attempting to take on the role of integrating GFA with the work of suppliers (paragraphs 3.16 and 3.17 and Figure 6).
14 The Department uses different contracting approaches to better control costs and, less successfully, to speed up delivery. The Department adopts different contracting approaches depending on the risks and challenges of a project or programme. The Department has sometimes imposed financial penalties on suppliers for poor performance and failing to meet milestones and has contracted with suppliers in a way that will reward them for over-achieving against cost and schedule targets. Despite this, schedule delays remain common. The Department wants to speed up procurements by deploying 'agile' programme delivery more widely, but this does not sit comfortably with contracting approaches designed to minimise costs, or the Department's existing culture and skills, and requires better transparency on progress (paragraphs 3.3 to 3.5).
15 The Department needs strong leadership to embed accepted commercial good practice. The Department is adopting accepted commercial good practice, which it estimates could realise benefits of £788 million over the next 10 years. This includes development of a Strategic Partnering Programme with 19 of its main suppliers. The Department and BAE Systems, the pathfinder company for the programme, have together developed a shared view of programme performance, and are carrying out specific interventions to improve contract delivery. The Department is drawing on its experience of individual projects and programmes to inform its interventions. Under new government proposals, it will also be easier to take past performance by suppliers into account when letting new contracts. The Department is also implementing Category Management, a best-practice approach to realising greater efficiencies from procurement, which it has previously tried, and failed, to embed. Strong leadership will be needed to manage the risks to realising the benefits of these initiatives, including: that adequate levels of skilled resources will not be available to implement the initiatives properly; that cultural barriers in the Department and suppliers will block progress; and that failure to capture evidence of benefits will undermine the case for change and lead to withdrawal of funding (paragraphs 3.17 to 3.20).