Defence budget under threat from poor supplier performance

9 December 2015

The Ministry of Defence should set clear indicators to alert it to poor performance from suppliers when entering new contracts, a report from the Public Accounts Committee has recommended.

The report, Strategic financial management of the Ministry of Defence and military flying training, concluded that the MoD’s management of its contractors has “often been poor” and its ability to manage the risks it faces is dependent on improving the management of its contractors.

In particular, the report highlighted a 25-year contract signed in 2008 with training provider Ascent to develop and manage a new approach to core flying training. The company provides aircraft and simulators for training, runs courses and trains an agreed number of aircrew from all three of the Armed Forces each year.

However, only 151 aircrew have been trained over the six years since the contract was signed, compared with the expected 320 each year, and the programme has cost the taxpayer a total £143 million. The delays are thought to have been caused by a reduction in the frontline aircraft fleet, a £3.3 million decrease in overall funding to £3.5 billion, the change from private finance initiative funding to conventional funding and poor contractor performance.

Following the 2010 Strategic Defence Review the MoD gave responsibility for managing 70 per cent of the £34 million defence budget to the Armed Forces, and reformed Defence Equipment and Support – the MoD’s procurement arm – through contracts with industry, to provide additional skills and capabilities not currently held by the department.

“The department has put its faith in contracts to improve its approach to procuring and supporting equipment,” the report stated. “This risks undermining progress in stabilising the defence budget if these contractors cannot deliver the performance improvements required to secure in practice the £11 billion of savings already removed from the defence budget.”

The MoD’s budget was cut by 7.7 per cent in 2010, but the most recent Strategic Defence and Security Review revealed that the government will spend an extra £12 billion on defence equipment and support over the next 10 years.

“The position has improved, but we are concerned by how slow the department was to take action to address these issues with its contractor and its ability to determine whether the expected benefits of the new training system are being delivered,” the Committee stated.

The report recommended the MoD monitors contractor performance so it can intervene quickly if performance falls below the required level. The department should also add clauses to its contracts which place a duty on contractors to give early warnings of problems with contracts – even if this could be financially disadvantageous to the contractor.

“Ultimately, it is the taxpayer who picks up the bill for failure,” the Committee stated. “It is not acceptable for contractors being paid by the government to see failure and not act to safeguard the interests of the taxpayers.”

In relation to the contract with Ascent, the report recommended the MoD aligns any incentive payments to match the aims of the contract, and incentivise the contractor to seek continuous improvement in time, cost and quality of contract delivery. Ascent hasn’t responded to a request for comment.

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