Last year the Ministry of Defence refused to pay about £400 million in costs claimed by its suppliers.
The department says contractor error was the most common reason. Some claims broke contractual limits; some lacked a valid purchase order. Rejection does not mean the contractor was trying to defraud the government.
But £400 million is not loose change, particularly when the MoD is spending about £40 billion a year on contracts.
Procurement spending is expected to pass £70 billion by 2028–29. More weapons, equipment and services will be ordered as the government increases the defence budget. The opportunities for money to be lost will grow with it.
The department has estimated that it may be exposed to fraud and economic crime worth £1.5 billion each year. It has also admitted that it doesn't have much confidence in that number.
Officials called it an "academic construct" when they appeared before MPs. They had used loss rates taken from elsewhere and applied them to defence. The £1.5 billion was not a total drawn from fraud uncovered in the MoD's own contracts.
Work on a replacement figure is still under way. The MoD expects to publish its first assessments of the simpler areas by the end of 2026. Putting a figure on procurement fraud will take longer.
The uncertainty came to light during an inquiry by the Public Accounts Committee. MPs had been studying an earlier National Audit Office investigation into the department's handling of fraud, bribery, corruption and misconduct.
The NAO had heard from whistleblowers. They said some allegations took a long time to deal with or finished without a satisfactory answer. It also found that the department was probably investigating and recovering considerably less money than it was losing.
Figures covering four years give some idea of the problem. From 2021–22 to 2024–25, the MoD spent an average of £5.7 million a year on counter-fraud work. It recovered 48p for each £1 spent. The government expects a return of £3.
There was an improvement in 2024–25, when the return reached £1.34. Officials searched digital procurement contracts for "commercial leakage". The phrase covers potential overpayments and other charges which should not have been accepted.
They identified £17.5 million. The cost of running the exercise was not included when the return was calculated.
The department plans to repeat the work in other areas. It has told MPs that recoveries should rise during 2025–26 and that the £3 target will be reached no later than 2028.
Most of the suspected losses are thought to involve procurement. Bid rigging may take place before a contract is awarded. Companies may collude. After the contract is signed, the risks include overcharging, duplicate invoices and claims for costs which the agreement does not cover.
The committee also raised the possibility of suppliers working with individuals inside the system. Payment arrangements might be abused for personal gain, or an official could have an interest in a company without declaring it.
The movement of staff between the MoD and defence companies has caused concern because an official may end up working for a business affected by decisions they previously helped to make. That movement is not evidence of corruption, although the relationship may require examination.
Other risks have little to do with contractors. The department records possible theft of defence property, abuse of office and misuse of sensitive information. Its latest central register also includes cybercrime and deception involving artificial intelligence.
For years, the MoD spread this information across more than 100 registers. About half the risks recorded in them were marked critical or severe. What they generally lacked was a figure showing the possible loss.
The department has since brought the main categories together. They cover procurement, controls on personnel, the misuse of defence property, cybercrime and AI deception. It has asked the Public Sector Fraud Authority and NHS Counter Fraud Authority for help with the next stage: estimating the money involved.
There is also a question over what happens after somebody reports a suspicion. The MoD has several organisations capable of receiving or investigating it, and they have not always shared information well.
The central Fraud Defence unit operates a confidential reporting line. The Ministry of Defence Police investigates civilian cases involving major fraud, theft, bribery and corruption. The Army, Royal Navy and Royal Air Force have their own police forces for offences involving service personnel. Finance and commercial staff check payments and suppliers.
Past reviews found that these groups sometimes duplicated one another's work. There had been mistrust and a reluctance to share information. They also used different systems to record cases, leaving the department without a complete view of what was being investigated.
Officials say the position has improved. The confidential reporting team now includes an officer from the Ministry of Defence Police. Separate boards bring together senior policing figures, while the department is examining whether investigators could use the same system for recording cases.
The committee's report dealt at some length with claims made by contractors. Commercial officials sometimes encounter what the MoD calls "sharp commercial practice". The problem, officials told MPs, is deciding whether they are looking at an aggressive claim under a contract or something that should be investigated as fraud.
That decision may determine whether the MoD merely refuses payment or refers the people involved to its police or counter-fraud staff.
A new playbook is promised by April 2027. It is intended to show procurement staff what warning signs to look for and whom to contact. Guidance on suspicious contract activity has already been added to training for new commercial employees.
Changes have also been made at senior level. The Director General Finance has taken greater control of counter-fraud work. A two-star Director Assurance will concentrate mainly on fraud and error, with senior sponsors appointed in the principal parts of the department.
The government accepted the committee's recommendations. A revised strategy is expected in the autumn, and the MoD must send MPs a recovery plan by November.
The promised improvements will be introduced as the procurement budget rises towards £70 billion. On the department's present timetable, its counter-fraud work will not produce the return expected across government until 2028.
The £1.5 billion estimate may turn out to be wrong. The MoD is now trying to find out.