AWE consortium retains contract despite poor performance

AWE Management Ltd – the company responsible for operating the factories where the UK's nuclear weapons are built – has narrowly escaped being stripped of the contract for management of the Atomic Weapons Establishment (AWE) following a secret internal review by the Ministry of Defence (MoD).

MoD has announced that it has agreed an “improved contract” with AWE Management Limited (AWEML) for the management and operation of the AWE sites to ensure “best value for money for the taxpayer” and drive AWEML to improve its performance.

The review was undertaken behind closed doors at the highest level by the Chief of Defence Materiel following increasing concern within MoD over spiralling costs, failures in delivery of construction projects, and poor regulatory performance at AWE.  Despite a number of Parliamentary Questions and requests made under the Freedom of Information Act, MoD has refused to release details of the review or the impact of performance problems at AWE.

The updated contract allows greater risk sharing between the MOD and AWEML, with a combination of penalties for targets which are not met and incentives for improved performance.
It sets out a framework of operations until 2025, and will provide the MoD with greater flexibility to vary work undertaken at AWE under the contract according to programme demands and changes in funding.

The AWEML joint venture consists of three partners: military technology giant Lockheed Martin, Jacobs Engineering – both US based – and Serco Group, a British based outsourcing company.   The partnership is responsible for managing and operating the AWE sites at Aldermaston, Burghfield, and Blacknest in Berkshire and has a share in the ABL consortium which operates at the Coulport nuclear arms depot in Scotland.

AWEML was awarded a 10-year contract to run the AWE Aldermaston and Burghfield sites in 2000, which was later extended to run until 2025.  Around £1 billion per year is budgeted to be spent at AWE for the rest of this decade, split roughly equally between revenue (running costs) and capital (construction).

As well as a risk-and-reward structure based on AWEML’s performance, regular pricing assessments will continue under the updated contract.  The next price review for the contract – previously scheduled for 2017 but now deferred as a result of the broader contract review – is now due to take place in 2019.

The review of the AWE contract is believed to be one of the outcomes of a broader review of the MoD 'nuclear enterprise', undertaken last summer by senior MoD civil servants amid concerns about increasing costs, risks, and delays in the Trident programme.  The Strategic Defence and Security Review, published last October, announced that management of the Trident programme is to come under the control of a new delivery body which is expected to draw on project management expertise from the private sector and may be modelled on the 2012 Olympics Delivery Authority.

As part of the deal allowing AWEML to retain the contract, MoD is thought to have insisted on a restructuring of the consortium.  AWE recently announced the appointment of a new Chair and Chief Executive for the company, both with experience of delivering major infrastructure programmes, and shareholdings in the company have been redistributed.  Lockheed Martin is now a majority shareholder in the joint venture, holding 51% of shares, whilst the shareholdings of both Serco and Jacobs have been reduced from 33.3% to 24.5% each.  The redistribution is now said to reflect “the anticipated relative level of resources and workload involved in future operations”.

In 2014 the Nuclear Decommissioning Authority scrapped a similar contract for operation of the Sellafield nuclear reprocessing plant with Nuclear Management Partners as a result of poor performance and failure to meet contract targets.  One reason that the AWEML consortium has been allowed to retain the AWE management and operation contract is thought to be a lack of viable alternatives: MoD does not have the necessary expertise to manage the contract in-house, and appointment of a new private sector management team could increase the risk of programme delays in the short term while the new team beds in and becomes familiar with operations at AWE.

According to an announcement from Serco Group, the operations of AWEML have “grown significantly in scale” since the contract was awarded in 2000, though in the last two years revenues have reduced to reflect “operational activity levels and the delivery of savings to the MoD”.  In 2015 AWEML's total revenues were £978 million and Serco’s share of profit after tax was £18.6 million with dividends of £17.8 million.

Serco state that since 2000 AWEML’s operating margin has varied between 6% and 14%, but over the last two years “has been at the bottom of this range”.  If performance targets are met and levels of operational demand continue at current levels, Serco will “have the opportunity to maintain its returns from AWEML at very broadly similar levels to those seen in recent years”.

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