MoD’s financial blunder costs taxpayer £1.35bn

The National Audit Office (NAO) has criticised the Ministry of Defence (MoD) for poor financial management of three critical infrastructure projects on its nuclear-regulated sites

The budget for the projects has overrun by £1.35bn from the original £2.5bn cost projection with delays of between two and six years. The issues relate to the defence nuclear enterprise, a network of equipment, people and infrastructure.

Some of the designs may have been more expensive than necessary, mainly as a result of construction starting before the requirements or designs were fully developed, and changes to the project management or commercial approach, the NAO report said.

This was problematic for the MoD as it has sole financial responsibility and must foot the bill for these cost increases as it did not share the financial risks with the contractors.

The NAO estimated that the department’s decision to start building before both the requirements and design were agreed contributed 48% of the total £1.35bn cost increase across the three projects.

The report stated: ‘The primary supplier contracts for the three projects we examined did not incentivise suppliers to control cost growth.

‘In addition, the contract terms meant AWE earned additional fees when work got deferred, which partly resulted from the department needing to achieve in-year savings.

‘The department’s exposure to cost increases grew as its primary suppliers generally contracted with their supply chain on a cost-plus basis.

This meant subsequent cost increases transferred to the department. For example, for the primary build facility contract, the department has to date paid £65m for cost increases incurred by the supply chain.’

Projects currently scheduled to overrun consist of a new nuclear warhead assembly and disassembly facility, valued at £1.8bn, at the Atomic Weapons Establishment (AWE)-run site near Reading; upgrades to the core production capability (CPC), costing at least £474m, at the Rolls Royce-operated site near Derby; and new facilities at the BAE Systems-operated dockyard in Barrow-in-Furness costing £240m.

An MoD spokesperson told Accountancy Daily: ‘As the National Audit Office has acknowledged, nuclear infrastructure projects are often large and complex with niche designs.

‘We are committed to strengthening the management of nuclear programmes, including investing significantly in infrastructure and working closely with regulators and industry partners.’

While the NAO acknowledged the MoD faced challenges in running these major infrastructure projects, including the need to comply with additional nuclear-related regulations, the limited pool of suppliers and the complexity of the designs, the audit watchdog said some of the delays and cost overruns should have been avoided.

The NAO criticised the MoD for ‘a lack of commercial expertise’ within the department and its primary contractors, which it said contributed to insufficient oversight to reduce its risk exposure.

As a result, on two of the projects it took them some time to identify emerging problems such as a lack of design maturity and poor sub-contractor performance, contributing to cost increases and delays.

The delays to the projects have broader implications for nuclear work, which the MOD must manage. For example, following delays to MENSA, the MOD and AWE had to continue using existing infrastructure. The MOD expects it will have spent £21m between 2016-17 and 2019-20 on site upgrades to ensure they continue to comply with regulations.

The NAO was critical of the MOD’s failure to learn more from the early stages of other nuclear infrastructure projects concluded in the UK and elsewhere. Similar challenges arose for the MOD in the 1980s and 1990s, as well as in American defence projects and UK civil nuclear projects, such as at Sellafield.

Gareth Davies, head of the NAO, said: ‘Although it has recently introduced changes to enhance its oversight of the projects and improve its contracts with suppliers, it should have learnt earlier from past mistakes and the experience of others in the nuclear sector.

Before Christmas, Dominic Cummings, chief special adviser to Boris Johnson, indicated that the new government would be conducting a review of defence procurement amid concerns over value for money.

The NAO report: Managing infrastructure projects on nuclear-regulated sites

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