According to Defence, there has been no way to easily identify and report on contracts from existing Defence systems because they have been designed for financial accounting with very limited information recorded about procurement and contracting.a. For example, in ANAO Report No.52201314, Multi-Role Helicopter Program, the ANAO concluded that the pre-2012 sustainment contract provisions for Defences Multi-role Helicopter Program were largely ineffective.156 The audit report noted that this was largely due to Defence not applying its own processes to the standards required. For example, those sources state: The 2016 Houston Review also found that the full potential of the Australian Tiger program, when reached, will not be adequate to provide the robust, reliable and sustainable aviation reconnaissance and attack capability that Army requires. 202Defence, The Helmsman Sustainment Complexity Review [Helmsman Review], July 2010, p. 29. 5.55In November2016, Defence informed the ANAO that it intends to use the principles of the ISO 55000 Asset Management Standard as a guide of good practice and to further develop Defences framework for the management of sustainment.175 In March2017, it advised that the policy issued under the earlier DMO governance framework was gradually being reviewed and updated. 2.5Defence describes the accountabilities of the Group as follows: The Capability Acquisition and Sustainment Group (CASG) purchases and maintains military equipment and supplies in the quantities and to the service levels that are required by Defence and approved by Government.16. 80An example of a potential comparator database is the US Navys Visibility and Management of Operating and Support Costs (VAMOSC) database. The First Principles Review has pointed out that Defence has treated Systems Program Office staff costs at the project level as a free good, reducing the transparency of the cost of sustainment work and providing inaccurate price signals and a distorted incentive structure to Capability Managers. Parliamentary committees have frequently stated an interest in Defences reporting of its sustainment performance and, in particular, obtaining greater insight into that performance. Defence established Support Command Australia in August1997 to coordinate materiel support to Navy, Army and Air Force, and to help Defence do more with less. 94Defence has advised that around two-thirds of Systems Program Office staff are engaged in sustainment work. The Chief of the Defence Force is Australias senior military leader. Moreover, the many changes to DMO, in response, for example, to the Mortimer and Kinnaird reviews, had not significantly altered its size, shape or footprint. 134Defence, Strategy& [sic] (formerly Booz & Company), Right Sizing the DMOUsing a capability-driven approach: same outcomes, fewer staff, Canberra, March 2013, p. 2. Sustainment costs can exceed those of the original procurement and the challenges can be more complex.26. 40Rather, it would be a Strategic Sustainment Analytic, a high-level sustainment health indicator that can be used for broad cross-product comparison. 4.14Also in September2012, Defence advised the minister that the performance of the broader Strategic Reform Program was continuing to decline, losing credibility as a transformation program, and that the programs financial performance was particularly difficult to assess. 4.20In October2015, Defences First Principles Review Implementation Team decided that work on Smart Sustainment, along with other reform activities underway within Capability Acquisition and Sustainment Group at that time, would cease and the relevant elements were to be incorporated into work on the new Capability Life Cycle. Poor product reliability has contributed to weak serviceability at the 1st Aviation Regiment in Darwin. It provided no explanation of its inability to implement the recommendation in its advice to ministers on the matter. It also agreed that deviation from the endorsed approach will be permitted only in exceptional circumstances, and with the approval of Defences costing authorityits Chief Finance Officer. 5.32Defence is in the early stages of the Systems Program Office reform envisaged by the First Principles Review. Manufacturing (or factory) overhead. This was funding to be spent by DMO on sustainment on behalf of Defence.95 From 201314 forward, Defence also reported the estimated cost of capability sustainment for the whole of Defence. 13Defence, First Principles Review: Creating One Defence, 2015the First Principles Review. F&A (indirect) cost pools must be distributed to benefitted cost objectives on bases that will produce an equitable result in consideration of relative benefits derived., and set forth allowability and allocability principles for selected items of cost. 209Defence, Defence and Industry Policy Statement 2007, p. 28: Defences in-house S&T organisation, DSTO, enables the ADF to be a smart buyer, user and adaptor of military technology. 3.6SPMS was introduced, first, for Navy (MayJuly2015) following work to develop its sustainment performance framework with a standard suite of performance indicators.37 The system was being implemented in Air Force and Army from late 2015 through 2016. Introducing performance-based contracting into Defence sustainment has been underway for over a decade. Part 200 Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards; Subpart E View Full Text; Previous; Next; Top; Details. There is no record of whether the intended savings to sustainment costs were achieved from DMOs 2008 initiative to identify efficiencies. Defence has clear and long-standing governance and organisational arrangements for managing the sustainment of specialist military equipment. There had been limited progress on the 35 action items identified in the 2011 health check with seven action items implemented, five abandoned, and 23 outstanding (among which Defence intended to re-write 14). 199In its 200809 Annual Report, Defence stated that to implement this recommendation, it had created the Sustainment Reinvestment Office to co-ordinate DMOs role in achieving the $5.5 billion in savings expected from Smart Sustainment under the Strategic Reform Program. The development of an effective sustainment monitoring system remains a work-in-progress, and the effectiveness of Defences internal reporting system for sustainment could be improved in several areas. The Canberra Times reported that its 'senior public service sources' believe she is the highest-ranking Australian Commonwealth public servant to ever have been dismissed for underperformance. 28The same issue continues to arise. 129A Management and Operations contractor approach involves an external organisation being contracted to take on all responsibility for the day-to-day running of the organisation, including its transformation, but with the government maintaining ultimate ownership and strategic control over the body. The audit had found, among other things, that it was not generally used in the in-service (sustainment) stage. 5.21The report found that the lack of Systems Program Office commonality added complexity, blurred accountability and confounded the ability to build enterprise solutions for common services. 73The ANAO examined nine Second Pass or Combined First and Second Pass approvals including submissions related to Army, Navy, and Air Force capital acquisitions. An ANAO performance audit in 2013 found that, in most cases, submissions to government included whole-of-life cost estimates. Work continues with the Capability Managers to develop more systemic demand-related reform activities for implementation in the medium to longer term. Defence agreed to the recommendation that total cost information be provided to relevant Defence committees, with qualification. 5.66The ANAO recommends that Defence develop and implement an evaluation plan to assess the implementation of the recommendations of the First Principles Review. Defence should give proper attention to asset management, logistic support and engineering requirements. 0000001012 00000 n
Defects post Maintenance Period. Eight underperforming products were listed in the second quarter of 2016. 108Defence, The Strategic Reform Program: Making it Happen, 2010, p. 4. 0000002145 00000 n
4.8The harvesting and reallocation of the $20.6billion from Defences Strategic Reform Program are not apparent in Defences Portfolio Budget Statements and Annual Reports. PDF Cost Principles: Allowable Costs Uniform Guidance 2 CFR 200 206General Accounting Office, GAO/GGD-92-11 Government Contractors: Are Service Contractors Performing Inherently Governmental Functions?, 1991, p. 30, available from [accessed 16 January 2017]. 125Defences current plans for systems development envisage the department implementing support for earned value management in late 2019. According to the online course Financial Accounting: "The purpose of the statement of cash flows is to provide a more detailed picture of what happened to a business's cash during an accounting period." That modelling indicated cost of ownership of between $240million and $360million per year (October2012 prices), or $5.1million to $7.7million per aircraft per year. In its submission to the JCPAA inquiry into sustainment expenditure about this project (February2017), Defence advised that: [Capability Acquisition and Sustainment Group] Systems Project Offices Reform project is undertaking a review of all SPOs across [Capability Acquisition and Sustainment Group]. The two most relevant tables for sustainment reporting are Web Table8.11: Top 30 sustainment products by expenditure, as forecast in the Portfolio Budget Statements 201516, and Web Table8.2: Top 30 sustainment products, performance summary as at 30June2016.193, Table A.4:Web Table8.11: Top 30 sustainment products by expenditure, as forecast in the Portfolio Budget Statements 201516, Variation (under)/over revised estimate $m, E-7A Airborne Early Warning and Control Capability System, AP-3C Orion Weapons System (Electronic Warfare), Navy Munitions, Army Munitions, Explosive Ordnance, Wide Area Surveillance Capability and Air Force Minor Projects, Command and Intelligence Systems Software Applications, Auxiliary Oiler Replenishment HMAS Success, Total sustainment product funds available. This table lists, for each of the nine elements of Defences Capability Sustainment Program: the, Table77: Top 30 Sustainment Products by End of Financial Year Outcome, Web Table8.11 includes a list of the same Top 30 sustainment products reported on in the PBS and PAES. A smart buyer also retains the requisite capabilities and technical knowledge to lead and conduct teaming activities, accurately define the technical services needed, recognize value during the acquisition of such technical services, and evaluate the quality of services ultimately provided. Smart Sustainment had a ten-year savings target of $5.5billion. The gross centralisation, while simple to operate, is inconsistent with the principles of value for money, competition, or any rational industry policy. Revised KPIs could more effectively support more targeted performance based contracting outcomes. 14 of 51. . 165United States Government Accountability Office, GAO/GGD-00-172R, Study on Facility Design Reviews, July 2000, available at http://www.gao.gov/assets/90/89986.pdf. 2.11A simplified representation of the essential relationship among elements responsible for the sustainment of specialist military equipment is in Figure2.1 below. The cost principles The government-wide principles, issued by OMB (or, in the case of commercial organizations, the Federal Acquisition Regulation [48 CFR 21], or, in the case of hospitals, 45 CFR 75, Appendix IX, "Principles For Determining Costs Applicable to Research and Development Under Grants and Contracts with Hospitals"), on allowability and unallowability of costs under federally sponsored agreements. Poor planningDefence lacked a clearly stated long-term strategic plan. The Defence Materiel Organisation was formed in 2000 when the then Defence Acquisition Organisation merged with Support Command Australia, bringing together the Department of Defence's capital acquisition and logistics organisations into a single entity. 2.8As a consequence of the 2015 First Principles Review and the decision to consolidate and reform Systems Program Offices, Defence has adopted a new definition of Systems Program Office. Defence should give sustainment much higher attention and priority during the initial phases of the assets life cycle (Needs, Requirements, and Acquisition). 10Joint Committee of Public Accounts and Audit, Report 448, p. 30. Most recently, the First Principles Review recommended immediate implementation of measures of productivity, a related concept. developing the new operational framework (Business Framework) to explain comprehensively how the organisation (specifically, Capability Acquisition and Sustainment Group) operates; development of the smart buyer model; and. The current approved budget is $2.03billion. The Business Review Cycle provides for monthly Project/Product Performance Reviews (PPRs) and, at increasing levels of aggregation, Branch monthly reviews and Domain monthly reviews. ii. In July2011, a further health checkthis time by external consultantsfound that Smart Sustainment had achieved some early successes with cost reductions and changes in practice. The SPMS system was not fully implemented during audit fieldwork but is expected to be fully operational by the end of June2017. For example, a commercial organization An organization, institution, corporation, or other legal entity, including, but not limited to, partnerships, sole proprietorships, and limited liability companies, that is organized or operated for the profit or benefit of its shareholders or other owners. Defence has not been able to provide the ANAO with adequate evidence to support this claim, nor an account of how $360million allocated as seed funding for Smart Sustainment initiatives was used. Defence advised the ANAO that Capability Acquisition and Sustainment Groups expenses on all employees in 201516 were $490.4million. 12For example, the Kinnaird and Mortimer reviews recommended an independent entity. 70.). 2The MPR Guidelines, which are endorsed by the JCPAA, provide that data of a classified nature is to be prepared in such a way as to allow for unclassified publication (see ANAO Report No.40 201617, 201516 Major Projects Report, paragraph 1.16, p. 463). 4.10Defence gave examples of activities it considered successful in its 201011 Annual Report (pp. 15. As noted in paragraph 5.14, in July2016, a former senior Bechtel executive was seconded to the position of First Assistant Secretary Program Performance in Capability Acquisition and Sustainment Group, under the day-to-day direction of the senior Capability Acquisition and Sustainment Group leadership. Acquisition and through life support for armoured fighting vehicles, including ASLAV, M1A1 Main Battle Tank, M88 Recovery Vehicle, M113 Armoured Personnel Carrier and the Protected Mobility Vehicle (Bushmaster) and associated equipment. 14 and 40). Defence has not implemented measures of efficiency and productivity for all sustainment products. 3.45The First Principles Review found that, at the project level, Defence treats staff as a free good across the department: Employee costs are not considered part of a projects costs and a manager cannot adjust numbers of staff based on project need. To facilitate equitable distribution of indirect expenses to the cost objectives served, it may be necessary to establish a number of pools of F&A (indirect) costs. A primary example is the detailed, technical paper produced by Navy in 2006, A Quantitative Approach to Navy Performance Measurement. Note c:Defence defines a materiel ready day as a day in which a submarine is not in planned maintenance or does not have defects that prevent it from being at sea. 3.1To assess whether Defence has in place an effective performance framework to support the management and external scrutiny of materiel sustainment, the ANAO examined: With the introduction of its Sustainment Performance Management System (SPMS), Defence continues to develop a basis for an effective monitoring system for sustainment. 28. 30Defence, Going to the Next Level, the report of the Defence Procurement and Sustainment Review [Mortimer Review], 2008, p. 49, Recommendation 4.2; Defence, Plan to Reform Support Ship Repair and Management Practices, [Rizzo Review] July 2011, p. 46. Support of products represents about 2025percent of sustainment expenditure. Systemic issues identified by Defence from the reviews of Systems Program Offices to date are set out in Box 3. Those prices comprise only the costs incurred by the relevant Systems Program Office for goods and services supplied under contract. Create a collaborative framework for the management of sustainment without diluting individuals responsibilities. Cost accounting standards and disclosure statement. Accuracy is an output measure, which directly reflects achievement towards the Materiel Confidence outcome. In light of the Parliamentary interest in Defence sustainment (see paragraph 1.4 forward) the ANAO has considered, on the basis of the current audits findings, the issue of enhanced scrutiny of sustainment through a process similar to the existing Major Projects Report (MPR).1 The MPR has been prepared annually over the last decade to provide independent assurance of the status of selected Defence major acquisition projects. or any other modern web browser. 2.19Following the First Principles Review, Capability Acquisition and Sustainment Group is undertaking a project to reform and consolidate Systems Program Offices. Therefore it was important to approach this from a Capability and Sustainment Group or Defence perspective.183. Such tools will be required to support the new leadership team.124. 3.56The first planning and reporting cycle under the PGPA Act requirements was for 201516. 195Defence Annual Report 201516, Chapter 8, Web Table 8.2: Top 30 sustainment products, performance summary as at 30 June 2016, available from [accessed 20 April 2017]. It has engaged a consultancy (at an estimated cost of $1.2million) to undertake the data identification and cleansing for active major contracts for the top 15 Acquisition and Sustainment projects/products (about 60 contracts) by 30June2016.c After completing approximately 15 major contracts the project was suspended due to competing priorities within Capability Acquisition and Sustainment Group. are set forth in HHS regulations at 2 CFR Part200, Subpart E, 45 CFR Part 75, Subpart E, and Appendix IX (Hospital Cost Principles) to Part 200 and Part 45. 3.41Defence also decided that, in the absence of tender quality cost information it would mandate an analogous78 or a parametric79 approach to developing cost estimates for all Defence major capital equipment projects. Defence concurs with the ANAOs conclusion that the fundamentals of the governance and organisational framework for the management of sustainment are clear, and fit for purpose. 58ANAO Audit Report No.52 201314, Multi-Role Helicopter Program. 27. Defence is not easily able to identify the effort, in terms of staff numbers, expended on each. Defence has clear and long-standing governance and organisational arrangements for managing the sustainment of specialist military equipment. An output measure, which directly reflects achievement against the Materiel Availability outcome. The Review proposed the immediate implementation of productivity measures at a project level: It is also incumbent upon the organisation to have a process in place that effectively measures its cost, schedule and productivity at a project level. Defence has advised that it has done limited benchmarking elsewhere, in particular, within the Aerospace Domain for two platforms: C17 (Globemaster transport aircraft) and C130J (Super-Hercules transport aircraft). The cost recovery method is a method of revenue recognition in which there is uncertainty. 5.3Otherwise, the report does not discuss sustainment as a topic separate from the acquisition stage of the equipment lifecycle. Defences sustainment gate reviews could usefully contribute to this assurance process. 103DMO internal paper, Reform Issues, April 2011. This prevents accurate lower level plans and targets (for example, for maintenance and operations) being established and achieved. In 2011, a health check by external consultants found some early successes with cost reductions and changes in practice. consolidation and review of Systems Program Offices; any further development of Defences approach to asset management. The performance of the Armed Reconnaissance (Tiger) Helicopter is reported thus in the Quarterly Performance Report for April June2016, produced in August2016: The Final Acceptance Milestone under the Acquisition Contract with Airbus Group Australia Pacific (formerly Australian Aerospace) was declared achieved on 28May2013, approximately five years later than originally contracted. Contracts with the principal provider are not performance-based. 145According to AusTender records, the cost of the review and resulting report was $613 000. The review considered the causes of this complexity, made comparisons with commercial organisations with similar operations and analysed the impact of this complexity on DMO. The Reviews terms of reference included one specific reference to sustainmenta requirement that Defence ensure a commercially astute, focused and accountable materiel acquisition and sustainment capability. Source:Defence, PMkeys Reporting, Full-time equivalent staff in all Systems Program Offices DMO/Capability Acquisition and Sustainment Group, by month, July2004 to June2016. 77The total cost of ownership (whole-of-life costing or lifecycle costing) includes the costs of: capital acquisition; bringing the equipment into service; operating it; sustainment; disposal; and financing. internal reporting practices for sustainment; whether Defence has established measures of efficiency and productivity for sustainment activity; whether Defence assesses whole-of-life costs and the total cost of ownership of its assets; and. For example, Quarterly Performance Reports could include a section providing an update on how the issues identified in the sustainment gate reviews are being addressed over time. An output measure, which directly reflects achievement against the Materiel Availability outcome. Thus, for example, slippage in new acquisition projects can increase sustainment costs for ageing platforms. 21In April 2015, the ANAO completed a performance audit of Materiel Sustainment Agreements (ANAO Report No.30 201415, Materiel Sustainment Agreements). These meetings typically involve representatives of the Capability Managers, CASG and other Groups such as Joint Logistics Command. 90In the 201718 Defence PBS, Defence presents the estimates and descriptive information for its Top 30 sustainment products in a single table.
