MoD allocates £4.8 billion to deal with cost rises

1 February 2013

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1 February 2013 | Adam Leach

The Ministry of Defence (MoD) has allocated £4.8 billion from its budget over the next 10 years to deal with an increase in costs on the equipment requirements of the armed forces.

Yesterday, defence secretary Philip Hammond announced a 10-year equipment plan for the Army, Royal Air Force and Royal Navy. The £159 billion budget includes £35.8 billion to be spent on submarines and nuclear deterrent, £18.5 billion on combat air power such as the Typhoon-class jet, and £17.4 billion on ships. In addition to specified equipment, the budget also included a contingency fund of £4.8 billion, which is to be used to cover higher-than-forecasted costs on purchases. A further £8 billion has also been left unallocated, to fund changes and new equipment requirements that arise over the decade.

Ministry of Defence: Equipment Plan 2012-2022, also published yesterday by the National Audit Office (NAO), which reviewed the MoD equipment plan for the first time, praised the ministry for “approaching the task on a more prudent basis”. It welcomed the move to “include greater contingency and provide greater protection to a core of prioritised projects. It also said that it cut unaffordable expenditure.”

However, the auditing body questioned some of the logic employed by the MoD when forecasting costs. It found the department will use the fiftieth percentile cost forecast - which calculates the risk of a cost being higher than forecast as having a 50 per cent chance - irrespective of the stage of a project. The NAO said previous evidence shows that the chance of a forecast being inaccurate is higher during the initial stages of a project.

Margaret Hodge, who chairs the Committee of Public Accounts, welcomed the ambition to have a more robust plan, but highlighted past failings to forecast costs accurately. She said: “The Ministry must have a realistic equipment plan if it is to strike a better balance between delivering the capability it requires and the taxpayer funds it has available. However, the Ministry’s track record in forecasting accurately the cost of its largest projects hardly inspires confidence. Between 2000 and 2012, the cost of its 69 largest projects ballooned by £11 billion.”

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