This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
Given the associated costs, military procurement projects often attract a high level of audit scrutiny. The United Kingdom’s military procurement program is no exception to this rule. In fact, the UK’s National Audit Office released multiple reports raising concerns about massive cost overruns in military procurement projects.
For example, in its January 2013 report entitled Equipment Plan 2012 to 2022, the UK Auditor General reviewed the UK’s 40 largest Defence Department projects, which were valued at £54 billion. The Auditor General found that project costs were understated by £5.2 billion (6.5 percent) when using the government’s more lenient guidelines, and by £12.5 billion (15.7 percent) when using “more realistic” costing guidelines. The report underscored the importance of accurate cost estimates on government procurement practices and stated that while the “Department has made progress in bringing its forecast costs within its budget and adding a contingency provision, we have a concern that there are still areas of risk to affordability which need further attention.” It also stated that “there is systemic over-optimism inherent in the Department’s assumptions around the costing of risk and uncertainty at both project and portfolio levels, which may not be sufficiently mitigated by the contingency provision.” In other words, the report found that the government allocated insufficient reserve funds to cover the cost overruns that are endemic in military procurement.
Five years later, in its January 2018 assessment of Ministry of Defence spending entitled The Equipment Plan 2017 to 2027, the UK National Audit Office once again concluded that the UK government allocated insufficient funds for future equipment purchase and maintenance needs:
The Equipment Plan is not affordable. After assuming that the £6 billion of contingency funds set aside in the Plan to supplement budgets will be utilised, the Department is facing a minimum affordability gap of £4.9 billion. There is an additional affordability gap of £15.9 billion if all identified financial risks of cost growth materialise and the Department does not achieve any of the savings assumed in the Plan. Overall, the potential affordability gap is £20.8 billion.
The report found that the Department had not included all estimated costs in its plan and also noted that unless “the Department takes urgent action to close the gap in affordability, it will find that spending on equipment can only be made affordable by reducing the scope of projects, delaying them, or cancelling them altogether.” These findings underscore the importance of proper budgetary planning as a prerequisite to the sustainable execution of longer-term procurement strategies.
