The MOD and project overruns

The TPA recently produced a survey of capital project overruns and found that on average they ran 38 per cent above their original budgets. Procurement and the the Ministry of Defence (MOD) have made particularly uncomfortable bedfellows in the recent past, and the MOD unsurprisingly fared badly in our report, with the projects assessed by the National Audit Office (NAO) for 2008 running 6 per cent over budget on average. The Defence Industrial Strategy, introduced in 2005, was clearly failing in its key objectives: providing suitable kit for the armed forces, and delivering projects that are on time and value-for-money.

Today the NAO has updated their Major Projects Report and the situation has not improved. In fact, the NAO reckon that there could be a £36 billion gap between defence funding and the cost of delivering ongoing projects if there is no increase in the defence budget over the next years. Even a 2.7 per cent rise over the same period would leave a £6 billion black hole.

A variety of factors abet this failure. One is the enormity and complexity of the department itself. Another is that the MOD has also allowed projects to slip, or purposely run late, in order to save on short term costs. This only makes projects more expensive in the long term, however. Projects that have been slipped will often end up with reduced capability too, meaning that the right facilities may not be provided to troops in order to save money in the short term. Civil Servants will often justify these decisions by talking of ‘prioritisation’, but the case most often quoted today – the Queen Elizabeth Class Aircraft Carriers – really highlights how expensive these short-sighted decisions eventually become. Slipping the project will save £450 million in the next four years, but will add more than £1.1 billion in costs in subsequent years: a net increase of £674 million.

Ministers and Civil Servants across departments may not mind so much about long term consequences though. Ministers chop and change departments as if on some sort of pre-designed fast-stream programme for a cabinet seat. Senior Civil Servants have a median departmental tenure of 2.7 years, and if they can show that they have made instant savings then they too may have a more desirable post in mind.

In order to avoid consistent and significant overspends on capital projects, the British public, politicians and officials need to keep the results of these studies in mind when new schemes are proposed. Good headlines in the short term are no substitute for long term stability, especially with an escalating public debt.

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