Hi PDR
I'd love to read more, I'm guessing this was for a technical degree rather than a legal or commercial subject?
So it is not sufficient to have penalty clauses defined in a contract; the owner of the Mission needs to have confidence in the viability of the proposed solution together with faith in abilities and trust in the diligence of the organisation that an availability/capability contract will be awarded to. Availability/capability contracts are partnerships based on mutual trust and shared, common objectives, and developing that trust requires extensive collaboration in the planning stages. The current contracting environment inhibits this collaboration until after a contract is awarded, and imposes an adversarial environment until that point.
If I were designing a contract for development and I read the above in the brief my initial thoughts would be:
A penalty clause is not designed to guarantee availability/performance. It is an incentive to the supplier to show some interest, and part fund the fix required by the user. Effective penalty clauses are usually combined with a number of other risk measuring/reducing mechanisms in a contract - such as KPIs/escalation/geared incentives etc.
Any responsible project owner would be expected to conduct rigorous due diligence into all of the major risk areas of their project. In the commercial world, evidence that dd has been carried out is usually a pre-requisite to secure funding.
If you are competing a requirement (say, for a new engine/aircraft/armoured vehicle) then VfM would be difficult to achieve if you simply paid each supplier a large sum to collate reliability data. You would probably want to make confidence levels in reliability a significant element in your evaluation criteria. (Hence, P8 purchase makes a great deal of sense; see also Boeing's pitch for the T 38 replacement - they have manufactured 2 production aircraft (not prototypes)). The risk has been managed by the contractor (still owned by the operator though).
If the project has to award to a single chosen contractor without competition - then funding reliability could reduce risk - but you have to make sure you ask for relevant data - just look at the Type 45 engine saga. "Nothing to do with us" say BAe, "MoD is operating its ships in warm climates and that's not what they told us they wanted to do". No supplier risk - and no financial liability.
Finally, "mutual trust" and "partnering" are loose, woolly phrases bandied around in the forlorn hope that an inadequate contract will protect the MoD from poor performance. There are many non-commercial specialists involved in MoD procurement, most are intelligent and capable within their specialist areas, but a little bit of legal and commercial training followed up with some real experience would serve them and the Country well. Sadly, it does not always happen: hence a contract is viewed as adversarial; development contract methodologies are largely unknown, and industry is still occasionally allowed to run rings around bright, professional people operating well outside of their competences.