Public Accounts Committee (Reports)

Part of the debate – in the House of Commons at 12:00 am on 3 December 1973.

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Photo of Mr Terence Higgins Mr Terence Higgins , Worthing 12:00, 3 December 1973

I cannot give an immediate answer. My hon. Friend the Member for Oswestry raised several other points, and I shall deal with those first.

I was dealing with the estimates of development costs and development expenditure at each stage. Estimates are based on the best forecast that can be made of the work that is necessary to complete the various tasks. It is in the nature of an advance project. I think that my hon. Friend the Member for Croydon, South appreciated that. It is difficult initially to form a sound assessment of that kind of work. That is the experience in all the major industrial countries.

Throughout the project an attempt has been made to do this assessment by bringing into play all the available experience of similar work, but the amount of work outstanding is obviously increased if unforeseen problems arise. As all hon. Members recognise, it has been a continual source of uncertainty. The more complex and integrated a programme is, the more likely is it that one will run into unforeseen costs.

While recognising the essential difficulty of the Committee, the Government share the view that the estimate should be as accurate and reliable as possible and that every effort should be made to achieve that.

The right hon. Member for Birkenhead asked about cost control. It is important to distinguish between long-term estimates to the completion of a project presented to the Government and estimates necessary to control work in day-to-day management. The distinction is not always appreciated. In the case of the former, the further one goes ahead, the greater is the degree of uncertainty as the attempt is made to estimate into the future. But, for control purposes, the latter estimates have been tightly drawn to give line management a clear target for conducting work in hand. The Department's monitoring activity is concerned primarily with ensuring that the estimates are realistic and that they are checked against the progressive performance of the manufacturers. I should stress that that does not in any way inhibit estimates being as realistic as possible.

I turn to the question of incentives raised by a number of hon. Members. The Committee has commented that the contractual arrangements for the airframe and engine lacked effective incentives and did not place the contractors at risk. But it acknowledged the difficulties in constructing an effective scheme of incentives where there was firm distinction of work a contractor had to undertake. In those circumstances, it is difficult to make any reliable estimate of costs. That is a fundamental dilemma in a development programme of this kind, and particularly in the case of Concorde.

The situation is one to which there is no easy solution, but the incentives negotiated in 1968 contained the maximum degree of incentive practicable in the circumstances. The inclusion of the basic profit rate followed from the uncertainty in the estimating and cost programme, but by applying the profit rate to the target cost some incentive was introduced compared to a simple cost-plus target.

The right hon. Member for Birkenhead and I have both been involved in this kind of problem in previous incarnations in industry. This is obviously a problem in which one can benefit from an exchange of views such as we have had with the Committee.