Defence takes blame over frigate cost blowout

The Ministry of Defence has faced up to MPs over a $148 million budget blowout in its Anzac frigate upgrade project, saying it takes full responsibility for the cost overruns.

Secretary of Defence Helene Quilter says the ministry has overhauled its procurement systems following problems with the project.

Defence Minister Ron Mark revealed the $148 million cost overrun for the Anzac frigate systems upgrade project during Question Time on Wednesday, saying there had been “a series of inaccurate estimates and project management errors” by the ministry.

Previous Defence Minister Gerry Brownlee sought to place the blame on contractor Lockheed Martin Canada, saying his government had been trying to renegotiate a price “far in excess of what would be reasonable”.

However, Quilter told Parliament’s foreign affairs, defence and trade committee her ministry accepted the blame for the issues with cost and delays.

“We are trusted by the Government and the people of New Zealand to manage and deliver projects that are key to our national defence capability ... we did not meet the standard.”

She said the ministry had made a number of errors which led to the cost overruns and project delays.

The contracting strategy chosen for the frigate upgrade project means installation costs could only be estimated – a process it had since changed – while the estimates themselves had been inaccurate.

Because the frigate equipment was purchased before the ministry received the cost of the detailed design, the Government had “limited choices” due to the level of investment already made.

Quilter said it was not possible to enter into a “firm fixed price” for the installation costs when the business case was approved in 2014, due to the level of uncertainty and unknowns related to the project.

As the ministry became aware of the inflating costs, it spoke to an international firm about alternatives to using Lockheed Martin for the installation.

However, it was advised the company provided the best value to the Defence Force due to the lower levels of risk and cost and its experience in frigate upgrades.

Quilter said the ministry had “systematically reviewed” its approach to procurement in recent years, significant increasing the number of staff in the area and reviewing its project management processes to bring them in line with best practice.

The Government’s decision to reallocate funding to the frigate upgrade from the littoral operations support capability project, going with a commercial vessel over the military option, had been backed by the ministry, she said.

“It’s a lesser capability than what we had planned, but it’s a lot better than what we’ve currently got.”

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