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23 Jan 04. Still reeling from the double whammy of being the company blamed for the major cost overruns in the ‘Major Projects: National Audit Office (NAO) Report’ published Ministry of Defence: Major Projects Report 2003 (MPR 03), BAE SYSTEMS is believed to be in further trouble with regard to its contract price to build the Eurofighter Typhoon. (MPR 03 covered the year to 31 Mar 03 and provides details of 30 projects: the 20 largest for which the main investment decision had been taken (Post-Main Gate) and the 10 largest which had yet to reach that point (Pre-Main Gate). The Bowman, Skynet 5 and Support Vehicle programmes feature in the Post-Main Gate category for the first time). Four projects involving BAE – the Eurofighter Typhoon, Nimrod reconnaissance planes, Astute submarines and Brimstone air-launched anti-tank missiles – together accounted for 87 per cent of the cost overrun and 79 per cent of the total “slippage” in delivery times. The Tories yesterday branded the situation “a scandal” and called on the Government to “get a grip for the sake of our servicemen”.

The Ministry of Defence (MoD) was warned to “raise its game” after a National Audit Office (NAO) report showed that BAE Systems projects were largely to blame for a massive £3.1 billion overspend on MoD equipment last year.
The cost of the 20 Post-Main Gate projects increased by £3,086m in the year to 31 Mar 03 and in-service dates by a total of 12 years. Four BAE projects accounted for most of the problems: Astute Class SSN (£1,003m and 43 months); Brimstone AAAW (£126m and 18 months); Nimrod MRA4 (£538m and 40 months) and Typhoon (£1,037m and 12 months). (Source: DNA DEFENCE NEWS ANALYSIS, Issue 04/05, 26 Jan 04)

A combination of a slowdown in production numbers following delays in the signing of Tranche 2, coupled with the company’s low bid to win the contract has led to concerns over the overall profitability of the project for BAE. BAE is believed to wish to renegotiate a major portion of Tranche 2, given delays to the signing due to a changed requirement for the aircraft to introduce a ground attack role. However we understand that a requirement has been issued in Germany that all contractors involved in Euro Fighter must significantly reduce their costs and that if all signatories are not in place in time for the second tranche release in June of this year, the entire programme could be scrapped, this puts BAE in a vice between expected increase in the German requirement and further cost cutting. These delays will not only affect BAE but major subscontractors Rolls-Royce, Smiths, Cobham, Ultra and Chemring. Another source suggested that the JSF requirement could be cut to only 80 aircraft which may explain the rumours of up to 7000 redundancies at the company’s Warton site

Following these reports, in an interview with the Times, Sir Raymond Lygo, chief executive of BAE Systems during the 1990s, told BBC Radio 5 Live that his firm would deliberately price contracts at an attractive rate and then charge more later as the costs rose to a more realistic level.

His revelations come on the day Sir Raymond said: “I think it’s a well-known fact, whether anybody admits it or not, is you’ll never get any programme through the Government if you ever revealed the real cost. “Whatever you want to get through Government, you have to first of all establish what is the Treasury likely to approve in terms of money? And then you think, what can you offer for these terms within the parameters that have been set? And pretty often it is pretty nearly impossible.

“So you say right, we can do this and we’ll do it for the price and then the programme goes ahead. But you know automatically that it’s going to cost more than that because it will.

“And so after a year you say ‘I’m terribly sorry but the costs have now risen for this reason and the other reason’. “There are always a thousand reasons because the customer will never stop mucking about with the co

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