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The National Audit Office (NAO) finds that there are recurring underlying causes of the persistent delays and cost increases that have affected the Ministry of Defence (MoD)’s major equipment contracts. To improve its performance and deliver value for money for taxpayers it must embed good practice in its relationships with its suppliers.

Full report

Improving the performance of major equipment contracts

The MoD is responsible for some of the most technically complex, risky and costly equipment programmes in government. The NAO reviewed 20 of these programmes, which have a combined forecast cost of £120 billion. The Department relies on a limited number of specialist suppliers to deliver these projects and programmes1.

There are several root causes where contracts fail to deliver to MoD’s expectations: underperformance against contract by suppliers; a lack of MoD skills in areas such as project management; and the Ministry’s short-term financial planning around the management of its overall equipment portfolio. The MoD also does not rigorously review whether it is continuing to secure value for money from the programmes as costs and schedules change.

Some suppliers have consistently failed to deliver to time and to cost, resulting in the Armed Forces not receiving, when needed, all of the equipment originally planned. The forecast cost of nine of the 12 programmes examined by the NAO increased prior to the main investment decision, in three cases by more than 59%, although cost increases were lower once contracts were let. Altogether 13 programmes examined by the NAO are forecasting net delays of 254 months in achieving entry into service since going on contract. 

A lack of technical ability to execute contracts to an agreed timetable was a recurring issue for both the MoD delivery teams and suppliers. Suppliers often fell short of defence requirements and MoD delivery teams highlighted issues with their ability to project manage effectively, particularly managing other parts of the supply chain. The Department sometimes causes these problems by changing its requirements during the contract, or by failing to meet its own contractual obligations.

The MoD has historically struggled to recruit and retain staff with the skills and expertise required to manage programmes and oversee suppliers effectively in some areas of delivery. 2 This was found to be a recurring concern for teams in the equipment programmes examined by the NAO, especially digital programmes. There is strong competition for specialist staff across the public and private sectors, leading to reliance on costly contractors to fill posts, which also prevents the Department from developing in-house expertise. The MoD will continue to rely on contractors for the foreseeable future but has established relationships with private sector partners to reduce these costs.

The MoD’s short-term financial planning within its equipment portfolio has also affected suppliers’ ability to deliver contracts effectively. A focus on short-term cost savings mean suppliers lose skills and are reluctant to take on risk when contracts are let. Through its Industrial Strategy3 the MoD is now seeking to build capacity in the UK defence industry to address gaps in capability in areas like shipbuilding.

The MoD is working to address the root causes of problems in defence equipment programmes by introducing major initiatives to improve contract delivery with suppliers and to embed commercial and Project Management good practice.4 These initiatives are at a relatively early stage but have the potential to address some of the challenges raised in the report. The NAO recommends that the MoD should: ensure that these good practice initiatives become embedded in everyday practice, while being prepared to penalise suppliers for past poor performance; work with the Treasury and Cabinet Office to address shortfalls in vital skills; and become more systematic in how it evaluates past work to avoid repeating the same mistakes.5

“Too often, the MoD doesn’t deliver its major equipment contracts as planned due to a combination of supplier underperformance, a failure of the MoD and suppliers to get to grips with the technical complexity of projects, and short-term solutions to affordability problems.    

“To ensure defence contracts deliver value to taxpayers, the MoD must follow through on its efforts to embed good practice in its relationship with suppliers. Strong leadership and skilled staff are needed to translate good intentions into results that deliver real benefits for the armed forces and value to taxpayers.”

Gareth Davies, the head of the NAO

Notes for Editors

1. The companies acting as lead contractors in the projects and programmes examined by the NAO are: Lockheed Martin UK; General Dynamics United Kingdom Ltd; ARTEC Gmbh; Airbus Military SL; The Boeing Company; General Atomics Aeronautical Systems Inc; Aquilla Air Traffic Management Services Ltd; BAE Systems Surface Ships Ltd; Babcock International Group PLC; BAE Systems Marine Ltd; BAE Systems PLC; ATLAS Consortium; MBDA UK Ltd and Airbus Defence and Space Ltd.
2. The 2019 NAO report Reforming the Civilian Workforce found skills shortfalls in the Department's civilian workforce, including commercial and portfolio and programme management staff.
3. Ministry of Defence, Defence and Security Industrial Strategy: A strategic approach to the UK's defence and security industrial sectors, March 2021: Defence and Security Industrial Strategy - GOV.UK (www.gov.uk)
4. Initiatives include the Strategic Partnering Programme, which involves the Ministry of Defence working with its most important suppliers to improve contract performance and manage strategic risks. Category Management is a strategic approach to procurement whereby organisations group together related products that they buy into market ‘segments’ to generate efficiencies.
5. The NAO has recently made related recommendations on the affordability of the defence equipment and support programme in its report on the Department’s 2020–2030 Equipment Plan: https://www.nao.org.uk/report/equipment-plan-2020-2030/

About the NAO

The National Audit Office (NAO) scrutinises public spending for Parliament and is independent of government and the civil service. It helps Parliament hold government to account and it uses its insights to help people who manage and govern public bodies improve public services.

The Comptroller and Auditor General (C&AG), Gareth Davies, is an Officer of the House of Commons and leads the NAO. The NAO audits the financial accounts of departments and other public bodies. It also examines and report on the value for money of how public money has been spent.

In 2020, the NAO’s work led to a positive financial impact through reduced costs, improved service delivery, or other benefits to citizens, of £926 million.

Contact

NAO Press Office
+44 (0)20 7798 7400 or email pressoffice@nao.org.uk