Procurement Process II (30 January 2003 to 24 July 2007) -
Financial Constraints and Indecision

At the time of the 30 January 2003 downselect, MOD officials said that it was hoped that BAE Systems and Thales would be able to agree a joint approach structuring the terms and work share of their enforced partnership (technically the  "Future Aircraft Carrier Alliance" but gradually shortened to just the "Carrier Alliance") within three months.  A final 6 month Assessment Phase Stage 3 (AP3) contract, expected to be worth about £20 million, would then be awarded.  During AP3, industry and the CVF Integrated Project Team were expected to work together with the preferred prime contractor (BAE Systems) in order to further mature the design (which originated from Thales and BMT), reduce risk, refine costs and decide key cost/capability trade-offs.  This would lead to the submission of the business case for the pivotal Main Gate decision, with a target date for Main Gate of December 2003   Negotiating this important and testing approval milestone would pave the way for demonstration and manufacture, and the award of the build contract in April 2004.

Talks to properly define the terms of the alliance contracting structure began immediately after the MOD's downselect announcement, but the MOD's timescale was impossible to meet.  Not only did two massive and carefully worked proposals from the BAE and Thales CVF Teams (which had taken three years to put together) have to be discarded and a new joint proposal written, but there was a number of potentially contentious issues with BAE Systems as regards Thales role which had to be resolved - sources from both companies immediately anticipating intense haggling over the value and scope of work.   It was soon agreed that a much longer AP3 study of up to 12 months was now required, also as delays in officially awarding the contract lengthened, it became obvious that AP3 type work had to start soon if the ISD was not to slip badly.  Therefore the two companies merged their CVF Teams to form a joint "Aircraft Carrier Team" consisting of over 350 people working in a joint integrated team under a single management structure.  Work had actually had been in progress for four or five months before the official AP3 start date of September, and indeed by the May 2003 statement the expected actual contract period was again just 6 months (completing in November!) to reflect this.

In early February 2003, BAE Systems split the CVF work in to six areas - design, aviation logistics, air systems, propulsion systems, metal working and support.  The elements were divided between companies as follows:- design: BAE and Thales; aviation logistics: BAE, Lockheed Martin, Northrop Grumman; air systems: BAE; propulsion: EDS, BAE, AMS, Rolls-Royce, QinetiQ; metal: Babcock, BAE, Swan Hunter, Vosper Thornycroft; support: BAE, Rolls-Royce, Vosper Thornycroft, Swan Hunter.  Thus Thales, featured as part of the design element but not in any other part, as one analyst put it: "Thales is being downplayed if not frozen out."

By early April 2003 many major issues were still unresolved: BAE's concerns at being responsible for building some else's design (although many systems in the original Thales/BMT design concept were rapidly being replaced by BAE's preferences), Thales determination to get at least a 30% workshare guaranteed, and BAE's insistence on a cost plus contract (known as Target Cost Incentive Fee (TCIF) which would pass most of the risks associated with delays and cost overruns on to the MOD and the taxpayer, rather than a firm or fixed price contract.  A source involved in the project was quoted by The Times newspaper as saying there was “always going to be a lot to achieve, but things are just not going as hoped.  There are delays and that may mean cost overruns”.  Another source said: “There is no way BAE can go for a fixed-price contract and there is no way the in-service date will be met, yet Baghaei is trying to impose this on them because he has told the MoD that he can deliver the goods.  He is talking nonsense.” The MOD's official position was that no final decision had been taken on the CVF pricing strategy, and the way forward would be finalised as part of the main investment decision (Main Gate) - which had now slipped to February 2004.

At its monthly meeting on 16 April 2003, the MOD's Investment Appraisal Board (IAB) hoped to be able to endorse the joint BAE/Thales CVF partnership agreement, which would allow AP3 to be formally awarded.  But no agreement was presented; instead the IAB received an update which anticipated a 12 month delay to the CVF programme compared with previous plans. 

On 13 May 2003 it was officially stated that:

 "Both BAE Systems and Thales UK have agreed to take the programme forward on the basis of the allocation of roles and responsibilities outlined in the announcement made by the Secretary of State for Defence on 30 January 2003.  Specifically, they have agreed to the contract for Demonstration and Manufacture being managed and executed by a single, integrated team staffed from both organisations and the Ministry of Defence.  BAE Systems will lead as preferred Prime-contractor with Thales UK as Key Supplier participating in key management posts within the integrated team.  The precise terms of the contract remain the subject of on-going negotiations which are due to complete by the end of this year."

Another bombshell emerged in early June 2003 when BAE Systems warned the Ministry of Defence that it could not build the now 65,000 tonnes  'adaptable' CVF's within the allocated budget, BAE estimated that it would cost £3.8bn ($6.2 billion) in the D&M Phase to construct the pair - a full £1 billion above the available budget.  The Financial Times reported that both industry executives and MoD officials had said that the government's decision to force BAE to build the ships to the Thales design was largely to blame for the increased costs, although BAE officials refused to respond to questions about whether they could build the two carriers to their own design within the original £2.8 bn budget.  BAE Systems officials also blamed the Royal Navy's continual adding of requirements to the CVF project for part of the cost escalation, one official saying that BAES would be happy to add gold bath taps to the design as well, but the MOD would have to pay for them.

One MOD official responding to situation said: "The choice is bleak.  We either find more money or we build smaller carriers", but the RN was told that there were no more funds available.  The new Chief of Defence Procurement (CDP) Sir Peter Spencer immediately ordered an urgent review of the CVF project.  As a result of the CDP's concerns, the Future Carrier Alliance was tasked by the DPA to undertake a 'quick-look' study into a smaller and less sophisticated design, which while retaining provision for catapults and arrestor gear at a later stage, would have a reduced air group.  Instead of carrying up to 48 aircraft each, as planned, each vessel might now carry as few as 20, although JDW reported in late July 2003 that the sketch design produced would displace 45,000-50,000 tonnes with space for around 35 aircraft (e.g.  24 F-35B, 6 Merlin, 4 MASC) - as opposed to 46 aircraft (e.g.  36 F-35B, 4 MASC, 6 Merlin) for the existing 65,000-ton design - now designated 'Alpha'. 

During the summer of 2003, several options were considered and during August/September 2003 an internal MOD decision was apparently made in favour of two smaller 'optimised' carriers of 45-50,000 tonnes with 34-35 aircraft ("Bravo" design).  In order to further save costs and try to get within budget, the CVF design would be shrunk to the minimum practical size needed to retain "adaptability" and still meet most other key requirements.  The French strongly hinting that they were interested in this reduced size but still potentially CTOL capable design. 

Because of the delays caused by the complex trilateral BAE-Thales-MOD negotiations to establish the Joint Carrier Alliance, the 6-month Assessment Phase 3 contract was not finally awarded until 5 September 2003, and the value had increased substantially from the expected £23.4 million to £50 million.  The Alliance team now comprised over 350 people, based in Bristol, working under one managing director, Nigel Stewart (former BAE Systems Future Carrier Managing Director), and with a single management team drawn from both BAE Systems and Thales.  It was hoped that a formal decision on the size, design and cost of the CVF's would be announced in the Defence White Paper which was issued on 11 December 2003, but this was deferred in order to allow the designs to be refined and compared in more detail.   Main Gate approval of the final design to an agreed price was now set for April 2004, with the D&M contract award planned for the Spring (i.e.  by the end of June).

AP3 was to focus on further risk reduction, and mature the selected design and build strategy, refine costings and decide between key cost/capability trade-offs, and develop the contracting arrangements for the Demonstration and Manufacture (D&M) of the carriers.  BAE Systems, as the preferred prime contractor, was also required to ensure the maximum degree of competition amongst potential sub-contractors in order to obtain the best proposal price.  Thales hoped to get about one third of the work as a key sub-contractor, but BAE Systems said that this is far from guaranteed.  Surprisingly it was agreed that the MOD would bear 10 per cent of any cost overruns - a considerable "U turn" compared with previous defence contracts.

One key objective of AP3 was to attain a high degree of design maturity, driving down risk before Main Gate.  "We will have design maturity from both competitors in the range of 40-50% by the end of this year [2002]," said Baghaei." By the time we get to Main Gate [then planned for late 2003] we will have about 65% design maturity."   It was hoped that by the end of AP3 the Joint Carrier Alliance would have delivered to the MOD a "robust, fully costed proposal"  for the Demonstration and Manufacture of the two vessels of about either 55,000 or 65,000 tonnes full load, a compromise third option (60,000 tonnes) was latter added. 

By Autumn 2003 BAE and Thales sources were saying that the capabilities still being demanded by the CVF IPT team overseeing the carrier project would cost at least £3.5bn.  One contractor working on the project said the MoD's current specifications had been costed at £3.8bn.  And this was after the cost reduction exercise done over the summer which had reduced the displacement  of the ships from 65,000 tonnes to 55,000, cut their length from 295 metres to 265, and reduced the number of aircraft carried from a maximum of nearly 50 to 35.  However over the next few months doubts increasingly emerged about the wisdom of moving to a smaller design which offered only  minimal savings but considerable loss of capability (below what the RN considered to be its absolute minimum) , and also about the risks associated with trying to squeeze everything to a smaller hull.  By late 2003 the Bravo design concept had grown substantially, and at 58-60,000 tonnes and 40 aircraft was now in its Delta form approaching the old Alpha design in size. 

Despite all the efforts to reduce costs, in early December 2003, BAE Systems chief executive Mike Turner, and Alex Dorrian, head of Thales UK, told the MoD's Chief of Defence Procurement, Sir Peter Spencer, that the Government's specifications for the ships could still not be met within the government's £2.9 billion budget for the D&M Phase.  A contractor said: "The brutal truth is, they are not going to get what they want for the money.  We are simply not going to build the ships they are demanding for the price they are demanding.  It can't be done."  BAE sources said that some of the cost problems had derived from integrating the Joint Strike Fighter - designed and built by Lockheed Martin - with the carriers, with both the STOVL and [potentially] CV variants of JSF having to be supported.  Defence officials, reportedly, had rejected savings such as opting to accommodate either conventional or vertical take-off and landing planes but not both, and reducing the number of possible 'sorties' per hour the ships were capable of deploying.

In January 2004 BAE Systems and Thales missed a deadline to provide the DPA with firm pricing for the CVF D&M Phase, indeed BAE Systems was indicating that it simply would not take on the role of ‘prime contractor' on the terms, schedule and pricing that the MOD wanted.  On 26 February 2004, Mr Turner Chief Executive of BAE Systems said pointedly: “We are not going to rush into any firm dates or prices, no chance.”

By January 2004 it was generally accepted by the MOD and DPA that the CVF Alliance would not submit a bid for the Demonstration and Manufacture Phase that both meet the required specification (KUR's) and was within budget, and that extra money would have to be found if two ships were to built.  BAE Systems, largely because its disastrous experience with the Astute and Nimrod MRA.4 contracts, told the MOD that it would refuse to accept a fixed price contract with penalty clauses for the whole CVF Demonstration and Manufacture Phase - the implication being that it would rather walk away from the entire order.  On the other side of the table, the MOD and DPA were less than impressed by what they considered to be BAE Systems arrogant demands in relation to the CVF D&M Phase, which came on top of its extraordinary public campaign in 2002 to have the costly competition for CVF Prime Contractor with Thales cancelled, and the contract simply awarded out right to itself.  It didn't help BAE Systems that this was a far from unique example of it trying to use its position as a dominant, nearly monopolistic, supplier in order to dictate the way things will be done to its biggest customer (the MOD), e.g.  the Type 45 project in 2000/1.  The MOD was also fed up with BAE Systems performance in recent years ("a plumber who keeps flooding the house" as one MOD official put it).

The MOD and CVF Alliance thus adopted mutually opposite negotiating positions for the CVF D&M contract, ironically both sides being driven by a lack of confidence that BAE Systems as the prime contractor would be able to deliver the new carriers on time and within budget. 

On 26 February 2004, Mr Turner Chief Executive of BAE Systems said that Main Gate, i.e., agreeing the design and price of the carriers, was still a long way off.  There was still a hope in the MOD that this could be agreed in April 2004, but he said “We are not going to rush into any firm dates or prices, no chance.  ...  Who knows? Main Gate could be next year or the year after.”  However several companies were known to be among waiting in the wings in the event of BAE Systems deciding that the risks and potential delays (and potential losses if it fails to perform) associated with the CVF project, and in particular any move to make it a joint Anglo-French project, were too great for it to be able to accept - indeed Thales France and DCN of France were publicly seeking a "slice of the action" in any event. 

An audit" in early 2004 of the CVF Project and the existing procurement strategy by the team led by the Senior Responsible Owner, Rear Admiral Nigel Guild, in order to determine the decisions for the Main Gate strategy recognised the significant successes of the combined CVF alliance arrangements.  However it also revealed so many actual or potential issues outstanding (e.g.  insufficient de-risking, industrial arrangements not agreed, arguments between customer and suppliers over time and cost targets, some fundamental user system capability requirements affecting design features still not definitively decided, and the design itself not sufficiently mature) that an April Main Gate was judged to be impossible, and instead the procurement strategy and road map to Main Gate would have to be revised.  All three parties in the CVF Alliance agreed that there had still been insufficient de-risking and good arguments for continuing to develop and mature the carrier design, systems integration and supply chain aspects.  The MOD thus made available additional funding for assessment phase de-risking work to continue to the end of the year. 

The risk assessment aspect was of particular concern, later (on 5 May 2004), Sir Richard Evans, Chief of the DPA told the Defence Select Committee “there simply has not been sufficient work done to get us to the point where anybody … could realistically today make a full assessment of the risk.  If that were the case … this programme would have gone through Main Gate.  I suspect that there is realistically at least another year’s worth of work to be done.”

The DPA’s suggested new strategy for the phases of the CVF procurement was presented to the Defence Secretary by March 2004.  Key recommendations were extending the Assessment Phase, moving away from a traditional prime contractorship arrangement, reducing the role of BAE Systems, bringing the D&M project management role in-house to the DPA, adopting an enhanced “best practices” alliance approach for the D&M phase, and appointing a new company as an “Integrator” to provide the DPA with specialist advice and consultancy services and manage the highly complex build process.  Critics argued that the new procurement approach has some risks - for example the MOD was assuming that the DPA could expand and skill-up its currently just 30-person strong CVF IPT - which had so far has been orientated towards proposal validation, verification and evaluation - so that it could perform a complex project management role so successfully that the CVF’s enter service both sooner and at a lower cost than BAE Systems and Thales believed to be possible. 

On 10 March 2004, as AP3 drew to a close, and with an April Main Gate still the theoretical target, the MOD's Investment Approval Board met to consider for the first time the CVF design iterations that had been developed during AP3 by the Carrier Alliance, and the cost/capability trade-off's associated with each:- the now favoured Delta design was considered by the Royal Navy to be the smallest which meets its aviation requirements, but it had been costed by BAE Systems at about £4.0 billion.  With the defence budget under enormous pressure and defence cuts being planned, there remained very strong pressure for a CVF design of no more than 50,000 tonnes which costing no more than £3 billion for two.  The Board was unable to recommend an investment decision.

The Aircraft Carrier Team completed its 12-month AP3 activity in March 2004.  This stage of design development saw over 270 deliverables submitted to the DPA; considered a range of cost/capability trade-offs; evolved three major design iterations (Alpha, Bravo and Delta); and concluded Design Review 1 (DR1).

Agreement on the contractor and industrial structure for the D&M was still not close, nor was agreement on cost.    The 60,000 tonnes "equilibrium" or "Delta" CVF design had become preferred, but it was clear that AP3 had failed to meet all its objectives - as was almost inevitable given all the indecision, delays, problems and arguments - and that before it would be possible to proceed to demonstration and manufacture, considerable additional work was still required in order to refine a CVF design which had been badly affected by major cost driven changes during the previous 9 months, and to achieve certainty on construction costs, also the contracting and alliance arrangements were still far from agreed.

Apparently a 8-month long Assessment Phase Extension contract was quietly awarded by the MOD to BAE Systems and Thales UK - taking the CVF Assessment Phase to November 2004 with the Main Gate set for December 2004.  The objectives for this extended AP work were defined as: concluding the formation of the Aircraft Carrier Alliance, involving key suppliers and partners; finalising the shipbuilding strategy; de-risking work on technology and supply-side arrangements (including the selection of suppliers for sub-systems and equipment); and further developing the design through an integrated team involving the Department and industry to ensure that performance, cost and schedule were sufficiently matured to enable the project to progress successfully through Main Gate.  The Alliance formation activity included undertaking benchmarking activities to benefit from the experiences of other programmes including in the commercial sector; consulting independent expert advisers on the proposed alliance and on commercial risks;  and establishing the appropriate contractual arrangements.

In total the MoD had already spent  £153 million on pre-feasibility studies and the first 3 stages of the CVF Assessment Phase (including about £20 million supporting its own CVF Integrated Project Team).  In addition the two originally competing consortia put in a considerable amount of their own money.  No official value has been given for the extension stage, but it seems to have been estimated at £16 million in March 2004.

On 25 April 2004, BAE Systems leaked to the newspapers that its shipyards were potentially up for sale, and Thales UK and VT Group quickly indicated serious interest.  This development was widely was regarded as an attempt by BAE Systems to put pressure on the MOD to award it CVF on its own [profitable] terms, or risk BAE walking away from large UK defence projects. 

Following this revelation, a meeting the following day between BAE Systems Chief Executive Mike Turner and Defence Minister Geoff Hoon is believed to have been very stormy.  Soon after this the MOD sent a letter to BAE Systems formally informing it that it was no longer regarded as the preferred Prime Contractor for the CVF D&M contract.   BAE issued a statement on 30 April 2004 saying that “The [CVF]  program must deliver value to our shareholders, and we will not enter into any contract that does not do that.  It is also important that this large and complex program is delivered in a contract management structure that ensures cost effectiveness and efficiency.”

But by mid-May BAE Systems was trying to rebuild bridges with the MOD (its largest customer) and indicated that it might accept the revised CVF procurement strategy that the DPA was proposing.  In early July 2004, Alex Dorrian, the chief executive of Thales' UK operations, said that the French owned group and BAE Systems had agreed in principle to an MOD-led alliance in which the two companies would work with the ministry to oversee the project.

With the published target dates for the CVF Main Gate milestone long missed, finally on 19 July 2004 the Secretary of State for Defence (Mr. Geoffrey Hoon) made a written statement:

"I am pleased to announce that we have decided to extend the future aircraft carrier (CVF) programme assessment phase.  …  We anticipate moving into the D&M phase during 2005, following the main gate decision.  At this point we intend to finalise performance, time and cost parameters of the carriers.  … Our target in service dates (ISD) for the CVF remain 2012 and 2015.  ....  We will now discuss and agree the detailed alliancing arrangements with industry, including the roles and responsibilities of alliance members."  

Main Gate was now expected Spring or Summer 2005.

In August 2004 the CVF IPT invited six companies to bid for the task of drawing up and managing a manufacturing master plan for the two new planned ships.  Alstom (Chantiers de l'Atlantique), AMEC, BAE Naval Ships, Halliburton Kellogg Brown & Root (KBR), VT Group and Bechtel (UK) were asked to submit proposals for the role of Physical Integrator on the project.  The core responsibilities defined for the role were innovation, prioritisation of design activities; block integration and management of the ship build strategy.   BAE Systems and VT Group only got themselves added to the list after considerable lobbying but then decided to withdraw from the competition, while Bectel was knocked out at an early stage. 

In November, American owned KBR and British owned Amec were recommended to the IAB by the MOD as being suitable for the Physical Integrator role, politics having ruled out French owned Alstom while KBR had overhauled Amec on the basis of stronger presentations. 

Lord Bach told the House of Lords on 15 December 2004:

"Building and physically integrating the vessels is one of the biggest challenges facing the [CVF] project. The role of the physical integrator is to help to strengthen that aspect of the project. We expect whoever is appointed to work with all potential shipyards—four have been named—manufacturing facilities and alliance participants to draw up a cost-effective strategy covering the manufacturing element of the programme. Among the core requirements are likely to be innovation, the prioritisation of design activities, block integration and management of the ship-build strategy.  The role of the physical integrator will not be limited to those tasks."

After over five years in the job, Mr Ali Baghaei submitted his resignation in early December, on 17 January 2005 Mr John Coles, Head of the Warship Support Agency (which was disestablished on 1 April 2005) took over as the temporary CVF IPT Team Leader, tasked with shepherding the Project through Main Gate. 

The appointment of a physical integrator continued to be a problem.  It was reported by the Daily Telegraph that BAE Systems had warned the Government that it would pull out of the CVF Alliance if Halliburton was awarded the role to manage the carriers construction. posed structure. 

On Saturday 5th February negotiating teams lead respectively by the DPA’s Sir Peter Spencer and two of BAE’s Chief Operating Officers, Chris Geoghegan and Steve Mogford, reached an eleventh hour agreement which addressed most of BAE’s concerns. It was agreed that KBR would primarily act on the DPA’s behalf as a Programme Manager for the CVF Demonstration and Manufacture Phase.  KBR would be responsible for developing and proposing the optimum build strategy for approval by the Alliance participants, creating and maintaining the programme Master Schedule, and providing support to the MoD on drawing up and negotiating the Alliance contracts.  The MOD also agreed to BAE’s demand that KBR should not directly oversee the design and manufacture of the ships, or be able to allocate such work.  Instead, a new team will now be set up to manage and undertake this task, although the Minister for Defence Procurement, Lord Bach has warned that “The MoD, as client, will of course retain the right to have the final say on all work allocation and selection decisions".  This statement can be taken as a clear sign that the government wanted final assembly to be done at the Rosyth dockyard, not the KBR owned Nigg fabrication facility. 

On 7th February 2005, the Secretary of State for Defence, Geoff Hoon, informed the House of Commons that he was “pleased to confirm the selection of Kellogg Brown and Root Ltd. as the preferred physical integrator for the future aircraft carrier project”.  Lord Bach explained:  "KBR bring significant experience from other alliances and in the management of major, multi-site programmes. We look forward to the contribution they will make in further de-risking the programme and helping to shape the shipbuilding element of this important programme.”

KBR become a risk bearing member of the CVF Alliance, alongside BAE Systems, Thales and the DPA.  An initial three month contract worth about £5 million was expected to be placed with KBR before the end of February 2005.  A key deliverable was to be a detailed description, agreed by all parties in the Alliance, on the role and responsibilities of KBR as Physical Integrator.  Estimates of the potential total value of the PI assignment to KBR varied between £15 million and £40 million, depending upon the final scope of work.

In early March 2005, Mr John Coles, the new CVF Integrated Project Team (IPT) Leader initiated a "100-day" major review of the CVF project, which completed on Friday 10 June.  The review examined and re-assessed key requirements, options, costs, schedules and risks. 

Mr Coles' final report on the CVF review rapidly found its way to the desk of the Sir Peter Spencer (Chief Executive of the DPA), and soon after to the new Secretary of State for Defence, Dr John Reid.  The report  apparently stated that the budget request for the D&M phase would have to be increased from £2.9 billion to £3.5 billion if the key user requirements were to be met. 

A report was requested from industry in 2004 by the French and British governments in to possible areas of joint procurement or collaboration between the CVF and PA2 programmes, and the associated risks.  BMT is believed to have undertaken much of the work, comparing the two preliminary design concepts to identify areas of commonality, and estimating costs.  The resulting 500-page document was jointly submitted by BAE, Thales UK, Thales France and DCN to the two defence ministries on 24 June 2005.  Officials said that the study had found that excluding flight deck and combat systems where there are significantly different national requirements, some 75 to 80% of these two programmes could be common.  Later French newspaper reports (clearly using a common source) said that the figure was 80-90%, and that an important factor was whether a collaborative Anglo-French carrier programme based on CVF would cost less than the €2.2 billion (£1.5 billion) estimated as being necessary to complete their own national project for PA2.