How DRDO projects overshot budgets by up to 426% — CAG flags ‘serious flaws’ in cost estimation

Main reasons for cost overrun include changes in design specifications & user requirement, rise in foreign exchange variation & procurement of additional spares, says audit watchdog.

DRDO Bhawan in New Delhi | Pic courtesy: drdo.gov.in

New Delhi: Pointing out “serious flaw” in the project planning and cost estimation process by the Defence Research and Development Organisation (DRDO), the Comptroller and Auditor General (CAG) has found a significant cost increase of up to 426 per cent in certain projects to the tune of Rs 1,059 crore.

Even while acknowledging that the cost estimation exercise cannot be exact, the national auditor, in its report on ‘Management and Outcome of Mission Mode Projects in DRDO’, has said that “wide variation in cost estimation reflects a serious flaw in the estimation process”.

As per the laid out guidelines, all DRDO projects costing above Rs 2 crore have to be peer reviewed by an expert committee for their viability. This committee, which has representatives of Integrated Finance, examines the cost estimates prepared for sanction of the project, and also reviews if the project cost estimates are commensurate with the requirements.

“Audit noted that there was a significant increase in the cost of 24 projects to the tune of Rs 1,059.56 crore, which was 21 per cent to 426 per cent more than the original sanctioned cost of project,” read the CAG report, tabled in Parliament last week.

It added that in five projects, the actual expenditure incurred as against the sanctioned cost of the project was less than 50 per cent of the sanctioned cost.

Design, user requirement changes among problems

The main reasons for cost overrun included changes in design specifications, changes in user requirement, incorrect cost estimation of equipment, increase in foreign exchange variation and procurement of additional spares. “The increase in foreign exchange variation and procurement of additional spares were due to delay in completion of the project,” read the report.

Some of the cases where cost overrun is more than 100 per cent include product support/product improvement and induction of ‘NAG’ Weapon System where final approved project cost rose 425.54 per cent to Rs 148.99 crore, advanced Torpedo Detection System (MAAREECH) where final approved project cost rose 347.83 per cent to Rs 58.89 crore, low-frequency dunking sonar (210.59 per cent increase in cost to Rs 36.37 crore), and marinised engineered AIP Energy Module (MAREEM) (142 per cent increase in cost to Rs 179.15 crore).

“Such huge variation in the cost estimates depicts incorrect assessment, non-factoring of increase in cost due to foreign exchange variation and fluctuation in the market rates. Audit noted that the cost estimations were based on the last purchase prices which were very old, and generally the products were not available. The cost estimates were at variance with the market prices, as a result of which the actual requirements resulted in increase in foreign exchange component of the product,” it said.

The CAG report added that the necessity of requirement of additional equipment and underestimation of the costing of the equipment indicates incorrect cost estimation and project planning at the initial stages of project formulation.

The audit watchdog has recommended that the DRDO should ensure more realistic cost estimation and provide suitable tolerance to cater to the risks arising from technical complexities. “The DRDO may ensure that all expenses related to a project are booked under that project only to ensure transparency and full disclosure,” it suggested.

(Edited by V. S. Chandrasekar)