Sunday, 30 March 2014

Calculating total acquisition costs: the case of the aircraft carrier.

Every good procurement person knows you should calculate Total Acquisition Costs and they need to be included within the business justification. But whose responsibility is it to identify all the potential costs and factor those into the business case and options appraisal? Equally, whose responsibility is it to identify the various dependencies which will impact on a successful delivery?

For example, when Northern Ireland recognised the need for a better Dublin to Belfast train, it was quite late in the day they discovered the platform in Belfast's new station in the centre of the City was too short to accommodate the train and many of the bridges en route too low for the train to go under - that leads to significant extra costs, which add to the costs of the procurement.

As much as that may seem impossible to believe the MOD appear to have given us another example, had it been two days later you may well have suspected an April Fool.

Aircraft carriers are big cost, in this case the budget cost has now risen from £800m to £6.2bn, yes, billion. But aircraft carriers don't just stay at sea. In this case the idea was that the carrier should be based at Portsmouth. Unfortunately the new carrier won't fit into Portsmouth harbour. To make the hole fit the ship £40m needs to be spent on dredging a new 30 foot deep channel. Fine, but then we discover that the dredging can't be carried out more than a year in advance because the harbour would silt up again - hold on a sec., does that mean that dredging, at £40m isn't a 'one-off' cost but a running cost?Who picks up that tab? In addition to the dredging, the jetty needs to be strengthened. Then there are concerns about the demand on the local electricity supply when the carrier is in port - can the network handle the demand or will additional investment be required there too?

How on earth could Procurement have been expected to know those costs? I think most would agree they wouldn't. But then someone has to ask the questions about dependencies and costs, and if Procurement don't ask those questions, we can't assume anyone else will.

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