Guide Weapons Contracts

Part of the debate – in the House of Commons at 12:00 am on 29 April 1964.

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Photo of Mr Peter Thorneycroft Mr Peter Thorneycroft , Monmouth 12:00, 29 April 1964

I have a lot to say. Perhaps the hon. Gentleman will let me get a little further. What I think we are concerned with here is not simply the money. We are concerned with the viability of a system, because if we suspect that the system which is operating, and has been operated not simply by one party but by all parties in the country, is not viable, it goes to the root of our relations not simply with one firm, Ferranti's, but between any Government and the aircraft and electronics industries.

I therefore want to start by making one or two observations on that theme. I recognise that the debate has gone wider. I will try to deal with some of the wider issues raised a little later, but the point of departure is the Report of the Public Accounts Committee and the Ferranti case and I am anxious that on no side of the House of Commons should we flinch from the implications of that and that we should face it quite honestly and objectively today.

I should like to tell the House what I see to be the essentials of this. There is a lot in between, but there are two main types of contract which can be entered into. There is the cost-plus contract where one does the job and costs it and everybody looks at all the facts and the figures and then one adds a percentage or perhaps, rather better, a fee. It is a fairly simple concept. It is widely applied in research and development contracts, but it has never been welcomed by any Report of the Public Accounts Committee or any other objective inquiry made into it.

The other is the fixed-price contract and, let us face it, very often in this country it is not on a competitive basis. We have not that number of firms to be able to compete in this country. We are not the United States of America and therefore very often it will be on a non-competitive basis and then we have to depend upon very elaborate technical cost estimates. It is, as the hon. Member for Newton has said, a very skilled and complicated job. Let us not be too critical of those who make mistakes. It is a complicated job for anybody to do.

If a fixed-price contract is the system, one sticks to it whether it is a profit or a loss. That system first estimates what a job will cost. The system has been very widely applauded by everybody who has looked at it. I take only one quotation from the Third Report of the Public Accounts Committee for 1953–54 where it says: …it appears to Your Committee that the building up of the price from estimates of labour, materials and overheads, checked by the appropriate experts, with a known addition for profits is the surest way of arriving at a demonstrably fair and reasonable price. I think that this is generally accepted to be the case.

It is true that it would be tempting to say that it is a good thing to look at the books. This was at one time part of the system. It was actually dropped by the party opposite—I am not saying wrongly—as part of the contract condition in 1947. It was dropped because it was in their view, and at the time in the view of the Treasury, essentially irrelevant to the situation because the whole basis was that one made this estimate and one abided by it. Sometimes it might make a profit and sometimes a loss, but it had the benefit of putting this incentive element into the operation. The fixed-price system has been in operation for over 20 years. There has been considerable experience of it and it has been approved by industry and by the Government.

What has happened here? Certain facts are known and accepted, but by far the most important fact, in my view, is that the technical cost staff of the Ministry of Aviation, over whom I was presiding at the time—I do not want to shirk any responsibility in the matter—made an error of 100 per cent. in their estimates of the direct labour cost. That is the essential element in this case, and I think that it is much better to state it plainly. It is true that that error is multiplied by the overheads and so on—I shall have a word to say about the technicality of overheads later on, perhaps—but the basic error here was in the estimate of the direct labour cost.

As a result, an excessive profit was made. By an excessive profit, I do not mean 15 or 20 per cent. I mean 63 per cent. on cost. It is easier to take it on cost, and we all know that we are talking about the same thing. But 63 per cent. is, on any standard, an excessive profit.

The account given by the technical cost department people was that they applied all the knowledge and experience which they had. They took the firm's estimate as a starting point, which was 120 per cent. of what turned out to be the true figure, they negotiated it down 20 per cent., to double the figure as it eventually turned out, and they settled the contract at that figure.

As I said, technical costing is not a simple art. It is complex, and quite obviously, errors are possible. We must all admit that errors will be made. Indeed, if we are to have the system at all, some degree of error—10 per cent. or 15 per cent.—must, I think, be acceptable. I shall refer in a moment to one or two examples which we have. But a 100 per cent. error is not acceptable. If such an error is possible, what is called in question is not the skill of individuals or the capacity of the Ministry of Aviation's technical cost officers but the viability of the system itself. It is that which comes in issue.