Safeware, you are a star and clearly have a good understanding of what goes on in the T&E world

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Jungly and LunchMonitor, it seems you do not, so I suggest you pay a visit to the not so secret place in Wilts and speak to some of the people there, then you might be able to contribute more to this debate.
Here is my tuppence worth, based on service in the RAF and QQ, and working daily with some darn good TPs and Military colleagues on some pretty important stuff at the moment.
1. The TPs are not "free". When DERA was privatised, an enabling contract was created whereby the MOD and QQ would act as PARTNERS, with each making a contribution, sharing cost and risk. IMHO this arrangement works well and is good value for money for the taxpayer and the MOD.
2. Yes, the MOD could go elsewhere for T&E advice but they would get a worse product. Many of us are ex-Military, most of the pure civvies have a lot of specialist experience and, contrary to popular but ill-informed belief, we are not boffins with no idea of front-line ops

but are actually extremely focussed on front-line capability while maintaining operational efficiency and safety. Even if a piece of kit/software is marginal, we work bl**dy hard to give the best RTS recommendations we can, while managing risk in conjunction with the IPT, and providing carefully developed recommendations on how the IPT can fix or improve the kit/software in the most effective and efficient way. The major purpose of our job is to get the best capability we can to the front-line, often in the face of massive hurdles such as tight timescales, lack of aircraft, spares, supporting technical documents, etc. Speak to the IPTs and you will find that, with notably few exceptions, they are usually very pleased with the work we do for them, particulary UORs

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3. Co-location of the T&E organisation and OEUs would be beneficial in many ways, but if the MOD try to do this by de-centralising from BCE it will almost certainly cost them more, take longer and they will get a poorer service. The problem AIUI is that a combination of high-level organisational politics and cost-cutting at STC is driving this, and STC will probably not care much if the resultant additional costs pop up in the IPT budgets as a result. However, I am sure they will moan like hell if the T&E timescales grow larger as a result, which I think they probably will because there is no way the current synergy we have on one site can be maintained if we are all spread over half the country. One thing is for sure, if the Test Sqns are split away from BCE then the T&S budget will probably skyrocket and the efficiency will plummet because the TPs and technical staff will be on the road for much of the time. And I can promise you that more travel, hotels and hire-cars are variables we really do not need alongside the weather, moon-phase, pilot currency, aircraft availability, instrumentation, range slots, spares shortages, trials paperwork and all the other ducks we have to coerce in to line on a regular basis

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4. I have done a lot of work in conjunction with one of the OEUs, and generally this combined approach has been fruitful for all concerned. We benefit from OEU input in to the trials design and planning, they benefit from flying the kit much earlier than they otherwise would, often we can share assets, and as a result the kit potentially gets into service quicker.
I just hope that the decision, if/when it is made, considers wider and more important issues than how many 1* posts are involved, balances ALL of the cost and efficiency implications (not just those within STC budgets), fully accounts for the operational and technical issues and pays due attention to the opinions of those who have years of T&E experience....
....aerobatic farm animals anyone?