MoD knuckles rapped over Devonport fiasco

The Ministry of Defence (MoD) has admitted that it has lessons to learn from the fiasco of the building of the Royal Navy's refit centre for nuclear submarines at Devonport in Plymouth after a National Audit Office (NAO) report revealed project costs ballooned from £650m to £933m.

The MoD is blaming the extra costs on project manager Devonport Management Limited (DML), which in turn is blaming the MoD. However, the report criticises the MoD for not monitoring project costs properly, claiming that in early 1999 the MoD was aware that Devonport was incurring extra costs, but it was not until a year later that the extent of DML's cost problems became apparent.

In 1997 the MoD obtained Treasury approval for £650m funding and estimated that the project's most likely cost would be £576m.

But the project has proved to be "exceptionally challenging" with delays in design and construction resulting in a significant cost increase. Total project costs are estimated to be £933m, but the result is still uncertain as construction of some facilities is on-going.

The MoD has agreed to fund most of the cost increases and will consequently pay £199m, 31% more that its 1997 budget, but in doing so it is bearing the cost of risks it had originally transferred.

Defence procurement minister Lord Bach explained that this was because the MoD needed the base to be ready for HMS Vanguard to enter the dock on time in February 2002 to begin its refit.

"The NAO agrees that re-negotiation of the contract with DML was the best way for us to ensure that key facilities were completed on time and that the refit of HMS Vanguard went ahead and our nuclear deterrent was not compromised. The alternative would have been a difficult, potentially expensive, legal battle that would have threatened the completion of the facilities," said Bach.

Discovering the reasons for the huge cost increase has proved difficult, according to the NAO, with both parties having different views. The MoD considers the main reasons for the increases are poor performance by DML and its subcontractors, while DML said the fundamental cost driver on the project was the need to meet the requirements of the nuclear regulator.

Both the MoD and DML told CJ that they accept the NAO's report, with DML believing that the recommendations will, if implemented, provide the basis for yet further improvement in schedule and cost control on complex military infrastructure projects of this type.

NAO recommendations

* Government departments should consider a partnering approach when planning a project.

* Departments should aim to allocate risks to the party best able to manage them.

* Departments should make adequate provision in their budgets if there is a significant risk that a contractor will be unable to meet its contractual obligations.

* Departments should identify key external stakeholders (ie regulators) that could affect a project.

* On technically complex schemes, the design must be robust. A two-stage prime contract, where construction does not begin until the design is cleared, may help.

* Departments should seek to place limits on capitalising overspends.