Originally Posted by
Arclite01
Our Victorian forefathers who ran the industrial revolution would laugh at our incompetence with regard to production runs and CAPEX versus risk profile analysis. And lucky for us they never thought this way or we'd have no railways, sewers, roads, canals or anything else for that matter...........
Our victorian forefathers mostly went bust. Most of the original railways suffered the "sunk envstment syndrome" in which a large number of investors sunk money into the project to build a railway. The company then went bust, and someoine else bought it for under 1p in the £1 (or more probably 1/4d in the £1 in those days). The original invetsors lost their shirts, and the subsequent owners & users benefitted from the free development.
In the UK we don't build military equipment as "speculative developments" because the specific requirements of each user as so different. So the business model used is one of being contracted to design and develop tro a user requirement. That's why the government funds the development programme and the manufacturing tooling. The balance to that is the permitted profit margins on the production and support phases are tiny compared to what would be deemed "normal" in other areas of commerce. The cutom,er also chooses whether the contractor tools up for large or small production volumes - there is no business case for the contractor to investy in larger volume tooling with a customer who almost never follows through with repeat orders while the production line is still open.
The downside is that the user feels free to both (a) continually change the requirement and then blame the contractor for the spiraling cost of change, and (b) at any time cancel the whole project on a whim (veruy common in the UK defence sector). Given that a project may be completely cancelled at any time, and that on cancellation only the costs of
contracted expenditure can be demanded as a cancellation fee, there is absolutely no business case for a contractor to invest a single penny more than actually contracted.
The lack of a business case means that if the contractor's directors decided to spend company money on these things, and it results in a loss, they have failed to discharge their legal obligations in regard to the shareholder's money. The company's shareholders can therefore sue the directors personally to recover the loss, because they have acted contrary to their legal duty and so are not protected by the limited liability status.
It was stumbling blocks like these that made it necessary for the CV(F)/QEC contract to be a 15-year guarranteed ship-building contract rather than a specific contract to design and build two missile magnets. The up-front investments required could not be made due to the risks of cancellation - risks that showed to be all too real because the Camoron government tried very hard to cancel the QEC build in the 2010 SDSR, and would have succeeeded (leaving the cointractor cash-negative to the tune of a few hundred million) had it been contracted "conventionally"...
PDR