Defence informed the minister there was a significant risk that Defence would fall short of the cost reduction target for the Program ($20.6billion) by some $4billion, almost one quarter of the remaining target ($17.6billion). A primary example is the detailed, technical paper produced by Navy in 2006, A Quantitative Approach to Navy Performance Measurement. Platforms represent a large and complex capability such as frigates, tanks or aircraft. 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. The availability of appropriately skilled, qualified and authorised staff (Navy and Civilian) to fill positions in the Systems Program Office and Capability Manager Representative organisations is a key contributor to all three of the Materiel Sustainment Agreement outcomes and a key constraint to long term Materiel Confidence. The project has spent $133.966million on sustainment in 201516 against a budget for the year of $133.679million, and $1867million of an acquisition budget of $2033million. 110The report did, however, make 25 recommendations to increase the chances of success and decrease risks in the Smart Sustainment Stream. 5.10The ANAO considered how Capability Acquisition and Sustainment Group is managing the reform process, including by the extensive use of industry expertise. 164Defence, First Principles Review, pp. Chemical, Biological, Radiological, Nuclear and Explosive Equipment, Personal Field Equipment, Aerial Delivery and Adventurous Training Equipment and Combat Protective Equipment, and Special Forces equipment and needs. It was not expected to meet key sustainment metrics such as Reliability/Availability/Maintainability, Rate of Effort and cost of ownership, and should be replaced; the Chief of Army has place caveats on its useeffectively limiting what the aircraft can be used for, and where it can be used; Army did not deploy the helicopter in its engagements in Afghanistan or Iraq; the program has consistently underperformed; on average only 3.5 aircraft of the operational fleet of 16 aircraft were serviceable at 10 am on any given day in 2015, against a requirement of 12 aircraft; availability for the aircraft is predominantly limited by premature component level failures and is constrained by inadequate sustainment arrangements, despite the lower than expected hours flown, by June2014 sustainment costs for the Tiger had exceeded the original sustainment contract (, in June2016, the cost per flying hour for the Tiger fleet was $30335, compared to a target of $20000 (the long-term average in June2016 was $39472 per flying hour); and. These letters of assurance provide no details of the specific initiatives or how the claimed savings were calculated. 71 11 The Chief of the Defence Force is Australias senior military leader. Opportunities remain to improve the quality and transparency of Defences publicly reported information regarding materiel sustainment, while being sensitive to national security concerns. Introducing performance-based contracting into Defence sustainment has been underway for over a decade. That review found sustainment is still being treated as a poor relation compared to the generally higher-profile acquisition work.27 The Sustainment Complexity Review (2010), which found 50 plus sustainment business models in DMOs Systems Program Offices, explained this diversity by reference to the greater attention Defence had given acquisition. Such a framework would need to articulate how an organisation responsible for both acquisition and sustainment would carry out those major tasks. Information sharing about asset management was inconsistent and fractured. Defence requires that the first sustainment gate review be held within 12months of the review held before final operational capability is reached.57 Thereafter, further such reviews are to be undertaken periodically (every one, two or three years) with the exact timing determined on a risk basis. Monitor and controls project cost, schedule and scope; Performs analyses and prepares reports in orders to ensure that contracts are within the negotiated and agreed-upon parameters and CASG cost principles guidelines; Timely and accurate project and corporate reporting; Incorporate contractual changes, ensure adequate funding on projects 108-115, available from [accessed 20 April 2017]. 356), items such as Super Hornet fighter aircraft (operating costs) and C-17 transport aircraft (operating costs) are shown as separate line items. These meetings typically involve representatives of the Capability Managers, CASG and other Groups such as Joint Logistics Command. 83Defence, FPR Implementation Committee paper, SPO Reform ImplementationAvoiding Cost Transfers, February 2017. This should be implemented immediately and individual leaders from the first line to the Deputy Secretary Capability Acquisition and Sustainment must be accountable for cost and schedule targets.61, 3.33On the question of the above recommendation about measuring productivity, Defence referred the ANAO to the Capability Acquisition and Sustainment Group Business Framework and, within it, the proposed process for the Capability Acquisition and Sustainment Group Business Review Cycle. Areas for improvement include: 21. Ten such products are listed in the report for the subsequent quarter (July September2016). These are all fundamental skills in an organisation seeking to engage more with industry and contract out sustainment work wherever that represents value for money. The tests are as follows: These four tests apply regardless of whether the particular category of costs is one specified in 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. 135These numbers are for 30 June 2016 and based on the pre-stocktake number of Systems Program Offices. During the course of this audit (9January2017) the Committee announced that it had commenced an inquiry into Defence Sustainment Expenditure. Defence has not explained what became of these initiatives. They are mandatory for all procurements valued at greater than two million Australian dollars (AUD$2m), and guidance for all others, unless exemptions apply. HWrH+z S, ?~#|~!hI&Y{/.>ae0KQ $$ 3,B(3ot=zh6+EZ(Z=\(]/EY&bm>KD_;$8Gb Defence has stated that gate reviews review overall performance of the sustainment system and its fitness for purpose rather than just its outcomes for the past month.. Defence refers to itself as a smart buyer in the Defence Industry Policy Statements in 2007. The Capability Acquisition and Sustainment Group (CASG) is an organisation within the Australian Department of Defence, responsible for acquisition, supply chain management, and sustainment of military equipment and materiel including aircraft, ships, vehicles, electronic systems, weapons, ordnance, uniforms and rations for the Australian Defence Force. Defences comments, and suggested editorial amendments, have been provided to the ANAO. The ability to maintain, change and control the Configuration baseline of the product is key to ensuring long-term supportability and the health of maintenance and supply support outcomes. The 2015 First Principles Review was preceded by earlier major reform initiatives, notably the Strategic Reform Program (SRP) begun in 2009. Develop and implement a contracting strategy to improve performance based contracting [Management Recommendation. Rate of Effort / Aircraft Availability Achievement. The CAJWG has agreed on basic principles where by the standards should be based on work already performed and should reflect future best market practices(rather than solutions currently applied in most markets) that, once implemented, should dismantle the operational part of Barrier 3 as concerns the categories of C orporate Actions addressed. Defence informed the ANAO that it had used this work to reform Maritime asset management, inform its submissions to the First Principles Review, underpin the Systems Program Office reform guide and develop its Systems Program Office review methodology. Defences view is that, once implemented, this initiative will improve Defences cost estimates for major capital equipment projects and will bring Defence practice into line with the approach adopted by capital intensive industries and Defence partner nations. 14. Smart Sustainment is examined in Chapter 4. For example, in April 2015, Defences Lessons Learned report for the Air 87 Phase 2 Armed Reconnaissance Helicopter project stated: By its nature the project definition and contract negotiation stages of the project focus on cost-capability aspects of the weapon system. Cash Conversion Ratio - the amount of time between when a business pays for its inventory (cost of goods sold) and receives payment from its customers is the cash conversion ratio Funding Gap - a measure of the shortfall a company has to overcome (how much more cash it needs) Dividend Payments - CF can be used to fund dividend payments to investors For example, the 201217 Defence Corporate Plan refers to reduced cost of ownership as a Key Benefit of certain strategies addressing capability development, acquisition and sustainment. Further, performance summaries were highly variable and inconsistent between public planning documentsDefences Portfolio Budget Statements and Portfolio Additional Estimates Statementsand the Annual Report. Under the PGPA Act, Defence will need to report meaningfully against this plan in its annual performance statement. Cost Accounting Standards Board Notice on Principles and Other Matters to Guide Conformance of the Cost Accounting Standards (CAS) to Generally Accepted Accounting Principles (GAAP) . From the perspective of the field review, there is some indication that the sustainment models continue to drift apart.202. A RAND study, for example, Maintaining the [US] Armys Smart Buyer Capability in a Period of Downsizing, states that by smart buyer capability it means: the Army has sufficient in-house technical expertise to stand up to its industry counterparts when dealing with technical issues of the conceptual design, research and development (R&D), and procurement of new military systems. Three principal issues remain for the conduct of a process for sustainment parallel to the MPR for acquisition: 35. The implicit assumption is that future costs will be influenced by the same factors as past costs. CostPrinciples AuditRequirementsentsand ents Reasonableness Allocability Conformance Allowability MUST= Compositionof DirectCost IndirectCost Applicable Costs Credits REQUIRED SHOULD= Bestpractice or recommended 200.404Reasonable costs cost is reasonable if, in its nature and amit not exceed that which would be incurred ount, by adoes Areas for improvement include: Defences second corporate plan prepared under the Public Governance, Performance and Accountability Act 2013 (PGPA Act) identifies sustainment more clearly than the first corporate plan. The PBS includes other occasional references to sustainment. However, in 2013, a further report by external consultants stated that Defence needed an integrated, whole-of-life approach to sustainment and that Defence could realise significant benefits by modelling the management of their assets on the approach taken by commercial organisationsan asset management approach. There are four basic financial . Increased duration for Engineering Change Proposals also presents latent risk to Sustainment Efficiency outcomes due a potential increase in cannibalisations and the requirement to fund future Engineering Change Proposals in out years. 5.30In August2016, Defence finalised a Systems Program Office Design Guide to provide Capability Acquisition and Sustainment Group senior managers with sufficient guidance to design or redesign Systems Program Offices.146, 5.31In March2017, Defence advised that the first 25 Systems Program Office reports had been provided to the Capability Acquisition and Sustainment Group Executive Advisory Committee for exposure and awareness. The objective of the audit was to assess whether Defence has a fit-for-purpose framework for the management of materiel sustainment. 4.3The CEO wrote to all Systems Program Office directors seeking their help. According to the DMO website, the executive team has considerable private and public sector experience, as well as extensive military domain knowledge. 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]. Consequently, DMO retains over 50 SPOs [Systems Program Offices] each operating relatively independently of others and in different positions in the value chain. The fact that a proposed cost is awarded as requested by an applicant does not indicate a determination of allowability. In 2000, when the expected benefits were not being realised, Defence reviewed Support Command Australia and the Defence Acquisition Organisation, finding that serious problems persisted in capital acquisition and whole-of-life support. A key criterion in determining whether consulting contracts would be appropriate is whether the government could maintain sufficient in-house capacity to be thoroughly in control of the policy and management functions of the agency. This high tempo period of exercises has tested the robustness of the logistics system and deficiencies have been identified. 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. 0000002145 00000 n apply to all NIH award instruments, award mechanisms, and special programs and authorities, including modular awards and awards under SNAP with one exception: they do not apply to Kirschstein-NRSA individual fellowship awards. 7Recent Parliamentary inquiries include: Joint Standing Committee on Foreign Affairs, Defence and Trade, Procurement procedures for Defence capital projects, August 2012, p. xxvii; Joint Standing Committee on Foreign Affairs, Defence and Trade, Review of the Defence Annual Report 201112, Canberra, June 2013, p.90; Joint Committee of Public Accounts and Audit, Report 442: Inquiry into the 201213 Defence Materiel Organisation Major Projects Report, Canberra, May 2014, and Report 448: Review of the 201314 Defence Materiel Organisation Major Projects Report, Canberra, May 2015, pp. It is now not clear whether Defence will continue with this work. 5.12Bechtel had made contact with Defence in July2013 seeking an opportunity to help with reform of the DMO, presenting a paper Australian Defence OrganisationDMO Transformation Opportunities. 5.17As set out above (paragraph 5.8), the activities most likely to affect the management of sustainment are: 5.18When Defence established Systems Program Offices in 2000 as the focus of the newly created DMO, Systems Program Offices were to have the following characteristics: 5.19Defence has more recently (April2016) defined Systems Program Offices as: a business unit that works directly with Capability Managers and Suppliers as necessary to deliver agreed capability across the [Capability Life Cycle], coordinating the [Fundamental Inputs to Capability] elements required to achieve this objective.133. 132Defence considered not using the term Systems Program Office as this could be confused with the use of the same term in the USA, where Systems Program Offices were said to be concerned only with acquisition and not sustainment. They do this through a combination of internal work and commercial contracts. 13Defence, First Principles Review: Creating One Defence, 2015the First Principles Review. 2.17In late 2015, Defences Audit and Fraud Control Division reviewed the contracted service arrangements within three Systems Program Offices in response to a request by Defences Chief Finance Officer Group. Defence expects that this research will be complete in 2018. The simplified formula is: Military units also undertake some operational-level sustainment activities. 14For the great majority of Defences military assets, Capability Acquisition and Sustainment Group (CASG) is responsible for sustainment. An internal survey a decade ago found that Systems Program Offices attributed the problem to Defence management in Canberra: sustainment still does not get sufficient level of attention and needs to be recognised as the major component of the life cycle. 78The analogy estimating method uses actual costs from a similar asset/system and then relies heavily on expert judgement to adjust these costs to account for differences between the similar asset/system and the new asset/system to develop an estimated cost for the new asset/system. These risks and issues are highlighted so that stakeholders can respond in a coordinated manner to guide the conduct of remediation actions. Defence would benefit from evaluating future major change programs. 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. The majority of contracts could be reshaped to enhance industry accountability for asset management outcomes, which could result in more effective time and materials management; and. 'Some Economic Aspects of the Weapons Systems Acquisition Process' (2003); available from, This page was last edited on 19 February 2023, at 03:28. Following government acceptance of a recommendation of a review of Defencethe First Principles Review, which reported in April2015DMO was delisted from 1July2015.13 DMOs sustainment role then passed immediately to Defences Capability Acquisition and Sustainment Group.14 As at November2016, Defence employed about 5500 people in that Group.15. The Defence Audit and Risk Committee will therefore require appropriate information on sustainment reporting to enable it to provide this advice and assurance to the Secretary. Poor Demand Satisfaction outcomes will ordinarily be reflected in the increase of Urgency of Need Designators A and B demands or directly in Priority 1 stores related Urgent Defect. Accuracy is an output measure, which directly reflects achievement towards the Materiel Confidence outcome. 24. The Principles focus on compliance of the accounting framework to the Principles, not the financial accounting system; the Principles operate within the test of reasonableness and are not intended to mandate what costs Industry are able to incur or not incur. They are mandatory for all procurements valued at greater than two million Australian dollars (AUD$2m), and guidance for all others, unless exemptions apply. 3.60The Defence PBS 201516 reports estimates for Defences Capability Sustainment Program and Top 30 sustainment products, as well as some descriptive information on Defences Top 30 sustainment products. This matter is also taken up in the next chapter. Reviews have consistently emphasised the need for Defence to improve the efficiency of its operations, including in sustainment. SeeCost Considerations-The Cost Principlesfor additional details. It provides only a partial account of materiel sustainment within Defence and is potentially at odds with the One Defence model promoted by the First Principles Review. However, it was not: complete; consolidated in one easy to locate area; prepared in a manner which permitted the comparison of actual expenditure against estimates; or consistent in its presentation of clear reasons for full year variances. 121Annex A to the First Principles Review report indicates that the reviewers considered six FPR recommendations, including one key recommendation, to have been influenced by Coles earlier review. Defences pubic reporting of program level estimates over time. 1 A cost principle will also include expenses incurred in purchasing the asset, such as shipping and delivery fees, as well as setup and . Coles also draws an insightful distinction between acquisition and sustainment work in relation to submarines. The Secretary of Defence and Chief of the Defence Force. Defence continues to strive towards efficiencies in the delivery of sustainment outcomes for Defence capability and to report on outcomes, noting the need to balance transparency and accountability to the Australian public and Parliament, with the national security interests of the Commonwealth. It addresses sustainment management at a high level and is not focused on the sustainment of individual platforms or the technical aspects of their maintenance. Source: K. Horn, C. Wong, E. Axelband, P. Steinberg, and I. Chang, RAND white paper, Maintaining the Armys Smart Buyer Capability in a Period of Downsizing, 1999. Note a:Defence, CASG Executive Advisory Committee paper position paper reflecting the views of the SPO Reform Project, 13February2017. 159Defence, First Principles Review Implementation Committee, Outcomes, 11 February 2016. Defences second corporate plan prepared under the Public Governance, Performance and Accountability Act 2013 (PGPA Act) identifies sustainment more clearly than in the first corporate plan. 4.2In February2008, the Chief Executive Officer (CEO) of DMO announced a target of reducing by five per cent in real terms, in 200809, the sustainment cost of each of the 100 or so fleets of equipment then sustained by DMO.101 The CEO announced this measure as an ongoing reform program that aims to identify efficiencies within the DMO and reduce the cost of ownership to the Commonwealth in the operation of sustainment fleets.102 This, he wrote, was to satisfy a key priority of the government to reduce inefficiencies across the public sector. Part 200 Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards; Subpart E View Full Text; Previous; Next; Top; Details. Obsolescence will result in increased Urgent Defect, Cannibalisations and reduced Demand Satisfaction Rates. But no such global improvement approach had been implemented across sustainment. 5.57A briefing to DMO Division Heads in September2011 summarised the shortcomings of Defences approach to sustainment in the absence of an asset management approach: 5.58In 2011, DMO set about developing a Sustainment Business Model drawing on generically applicable asset management principles.179 There is then little evidence of substantial progress of the project for some years. Cost accounting standards and disclosure statement. The ANAOs analysis found that the report may not include additional information available to Defence that is critical to the readers ability to understand the status of significant military platforms. the project was approved in March1999 with a budget of $1.58billion (December1999 prices). The fundamentals of Defences governance and organisational framework for the management of materiel sustainment are fit-for-purpose. Research and reviews conducted for Defence have revealed a range of specific operational problems that are detracting from the efficient and effective sustainment of Defence capability, including the functioning of Systems Program Offices. Commercial organizations are subject to the cost principles located at 48 CFR Part 31.2 Federal Acquisition Regulation. He described the areas where he expected they could make cost reductions, including by: reducing spares; more performance-based contracting; discouraging end-of-year spending to meet budget; travel efficiencies; and improved maintenance philosophies. A Defence instruction on lifecycle costing has been in place since at least November1992.64 In addition, a Through Life Support Manual Volume 6Life Cycle Costing Analysis has been available since 2001 (and remains current).65 The issue of instructions and availability of guidance has not provided assurance of adequate costing action. Recommendations with potential Defence-wide application: 3. Appendix 5 of this audit report sets out both the root causes and those of the Coles Reviews consequential recommendations that have wider applicability in Defence sustainment. Therefore it did not take into account any reductions (or increases) in staff costs in assessing that programs outcome. Bechtels role is to support, train and transfer knowledge to Defence staff. SeeCost Considerations-The Cost Principlesfor additional details. The Department of Defence welcomes the Australian National Audit Office (ANAO) performance audit on Defences management of materiel sustainment. Typically, sustainment entails repair and maintenance, engineering, supply support and disposal of equipment and supporting inventory.4 Effective sustainment of naval, military and air assets is essential to the preparedness of the ADF and to enable Defence to conduct operations in accordance with the Governments requirements.5, 1.2Defence has commented that sustainment management is not a technical discipline: it is an over-arching business-oriented management function focused on meeting the outcomes required of Capability Acquisition and Sustainment Group customers.6.

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