Defence conducts reviews of sustainment performance through sustainment gate reviews that help Defence to obtain insight into a project or products progress and status. %PDF-1.4
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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. 5.43Developing the Capability Acquisition and Sustainment Group Business Framework is the first component of First Principles Review Recommendation 2.11, which provides: that there be significant investment in the development of an operational framework which briefly but comprehensively explains how the organisation operates and the roles and responsibilities within it (the full recommendation is set out in paragraph 5.5, above). 2.7In most cases, a major platformsuch as an aircraft type or class of shipis managed by a single Systems Program Office.18 Systems Program Offices maintain a relationship with industry bodies, particularly those providing maintenance services, spares, engineering and other support, and with the representative of the relevant capability manager.19 Each Systems Program Office has contracts with industry suppliers of services, parts and consumables. Source: NASA Cost Estimating Handbook, v.4.0, 2015, Appendix C: Cost Estimating Methodologies, available from [accessed 21 December 2016]. 56Defence, Plan to Reform Support Ship Repair and Management Practices, [Rizzo Review] July 2011, p. 68. 1 A cost principle will also include expenses incurred in purchasing the asset, such as shipping and delivery fees, as well as setup and . Defence has had no central facility to maintain a register of contracts for sustainment (or, indeed, acquisition) until January2016. The multiple approaches and varying quality for determining baselines and metrics for the various improvements expected for the program, and inadequate tracking of benefits would limit Defences assurance about improvements and cost reductions. For example, sustainment cost has been identified as a key risk for the MRH90 helicopter: 3.25Information from sustainment gate reviews is not routinely incorporated into management reporting on sustainment. Honest and open behaviour which enables others to know exactly what Defence is doing and why. In other cases it may be appropriate to outsource sustainment and partner with industry for the acquisition phase.120. This method produces a rough order-of-magnitude estimate, and is generally used early in the life cycle of a new asset/system when technical definition is immature and insufficient cost data is available. 3.48On the inclusion of staff costs in the new Product Delivery Agreements, Defence informed the ANAO in March2017 that The PDA remains under development, and it is inappropriate to speculate in any detail on how anticipated elements of the document will be used. 3.67The estimates documents generally provide components of these estimates, divided among the Services and other Defence Groups (Navy sustainment, Army sustainment and so on). Parliamentary committees have frequently stated an interest in Defences reporting of its sustainment performance and, in particular, obtaining greater insight into that performance. The Smart Sustainment reform stream of the Strategic Reform Program funded the work (see paragraph 4.6). 71 0 obj<>
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42Defence advised the ANAO in June 2017 that no decision had been made on the scope of the Program Performance Management System, nor its roll-out plan. 25Defence, Inspector Generals Group, Review of Support Provided to DMO Systems Program Offices by the DMO Operations Divisions, 2006, p. 16. 70Defence, Mortimer Review, Recommendation 4.4. 16. 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. This chapter examines Defences governance and operational arrangements for managing the sustainment of specialist military equipment. We understand that there are in more than 580 panellists across 79 skills sets. This Key Health Indicator serves to measure the quality and appropriateness of the work undertaken during maintenance periods. This measure seeks to qualify the degree to which the supply chain is confined by obsolescence - systems or components. 151Defence, DMO Acquisition and Sustainment Manual (2007), pp. A performance measure under this Purpose is Military capability is sustained consistent with Government requirements. 3.59At the time of this audit, the latest set of these documents where both prospective and retrospective elements are available was for the financial year 201516. 139It is not clear from the report how the First Principles Review drew this conclusion. 3.16One potentially useful feature is a list of underperforming sustainment products.48 This is based on information provided through MRS, SPMS and gate reviews. 5.27The First Principles Review recommended that each Systems Program Office be examined and analysed to determine: 5.28The First Principles Review also saw outsourcing as an important element of the reform of Systems Program Offices.143 Under the First Principles Review reforms, Defence expects to reduce the number of Systems Program Offices and, from 2015 levels, the number of staff directly undertaking sustainment activity, though no estimates have been made known and no targets have been set.144. 186Defence Portfolio Budget Statements 201516, Table 6: Capability Sustainment Programme, p. 21, available from [accessed 20 April 2017]. The current approved budget is $2.03billion. There is a risk that insights into a very substantial reform process could be lost. Defence has drawn heavily on contracted industry expertise to support its implementation of the program of organisational change relating to acquisition and sustainment that has followed the First Principles Review. The review also found that while the cost effectiveness of the Collins Class submarine sustainment program was showing signs of improving as submarine availability increased, it was yet to achieve international benchmarks.d The review team recommended that Defence should now focus on cost reductions to improve the efficiency of the Collins Class submarine sustainment program.e. 356), items such as Super Hornet fighter aircraft (operating costs) and C-17 transport aircraft (operating costs) are shown as separate line items. Maintenance Completion (tasks) to Plan achievement is an output measure, which directly reflects achievement against the Materiel Confidence outcome. This has been achieved while managing risks to national security.2. 5At the strategic level, guidance is given by the Chief of the Defence Forces Preparedness Directive. 167Deputy Secretary, Capability Acquisition and Sustainment Group, Defence, CASG Bulletin, Issue 4, 2015. The PBS also contains broader commitments on sustainment management for example, the DMO will continue the implementation of a more standardised Sustainment Model to promote better and more consistent practice. Note b:These figures include Australian Public Service and Australian Defence Force staff. Note a:Navy Allowance (NAVALLOW) is the Navy logistics system. It is an output measure, which directly reflects achievement against the Sustainment Efficiency outcome. The tasks articulated in the Directive cover the full range of Defence activities from humanitarian assistance and disaster relief to peace and stability operations, while ensuring the joint force retains the necessary baseline posture to mobilise in the self-reliant defence of Australia. Cash management, also known as treasury management, is the process that involves collecting and managing cash flows from the operating, investing, and financing activities of a company. The recruitment freeze has resulted in the incremental engagement of multiple individual contractors versus a single Integrated Support Contractor; and. Reporting: SPOs report to multiple bodies for performance management and technical assurance, and all require different information, formats, and timings; Policy: implementing changes to policy and process from multiple sources with limited guidance or support; and. 3242. With a substantial amount of its sustainment work contracted out, Defence has often emphasised its desire to have the internal expertise to be a smart buyer: Defences Defence Science and Technology Group has long been represented as providing the technical and scientific expertise to enable Defence to be a smart buyer. a sustainment gate review of Air Forces Airborne Early Warning and Control fleet, which observed that all Systems Program Offices staff needed to be fully capable to deal with a complex platform and small fleet of aircraft. . inefficiencies in the processes leading to government approvals for new projects. Step 2develop a risk-based tailored project execution strategy, covering approvals, project management, and through life asset management, including a coherent approach to the acquisition and sustainment phases. Set realistic performance targets and document them in the Materiel Sustainment Agreements. 923. In March 2016, Defence extended Bechtels contract until 30 June 2016, which increased the value to $9.7 million. Generally, this comprises a description of the asset and an account of the focus of Defences sustainment effort during the prospective year. The assessment method is to be Assessment of sustainment against capability manager requirements. Nevertheless, an internal review conducted by Defence and research conducted for Defence following the 2015 First Principles Review have identified a range of operational problems that detract from the efficient and effective sustainment of Defence capability, including: adherence to procurement principles; staff capabilities; duplication of effort and transparency of internal costs. There is a proven link between lack of conformance to operating intent / requirement and reduced platform life / reduce Sustainment Efficiency. TheCASG Cost Principlesapply to all procurements. Defence has undertaken work on performance measures for sustainment and has developed the infrastructure to collect and report on its sustainment work (see Chapter 3). Key elements are: 2.3While a number of reviews have focused on the optimal distance of the specialist entity from the Department of Defence12with changes over time in its degree of separationand have made recommendations on the units operations and practices, the fundamentals of the sustainment management framework have been stable for over a decade. 47Defence, First Principles Review, p. 17. 177Defence, Defence Asset Management Landscape Document, May 2012, p. 1. 200.410 Collection of unallowable costs. 29Defence, Operational Concept Document for DMO Sustainment Reporting System (Version A, December 2004, Sponsored by Director General Standardisation). The final Contract Acceptance milestone was achieved on 28May2013 within the approved acquisition budget envelope. 4.21There are reasons to doubt some of the savings estimates for Smart Sustainment: 4.22The Smart Sustainment initiative lost momentum and its costs and benefits are uncertain. Failure to pay sufficient attention to sustainment early on would increase the cost of ownership to Defence. Kettl, Sharing Power, Brookings Institution, 1994; and GAO/GGD-92-11 Government Contractors: Are Service Contractors Performing Inherently Governmental Functions?, 1991. 5.33Defence defines performance-based contracting as an outcomes-oriented contracting method that ties a range of monetary and non-monetary consequences to the contractor based on their accomplishment of performance requirements.148. 3.64Published estimates comprise of two separate data series. The most appropriate procurement model for delivering the capability and achieving value for money. 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. The Defence Annual Report 201516 provides information relating to the PBS and PAES tables, referred to above, in online web tables. A service optimisation program for Army Land Rovers, saving $590000 a year. 5.15The contracts with Bechtel are not performance-based. 25. 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. This historic cost of an asset is used to provide reliable and consistent records. Acquisition and sustainment salaries are held by [Capability Acquisition and Sustainment Group] and not funded by [Capability Managers], so reductions in this Commonwealth APS workforce do not generate a saving for [Capability Managers]. 187Defence Portfolio Budget Statements 201516, Table 94: Top 30 Sustainment Products by End of Financial Year Outcome 201516, p. 190, available from [accessed 20 April 2017]. However, Defence continues to address specific operational shortcomings and there remains scope for Defence to improve its performance monitoring, reporting and evaluation activities to better support the management and external scrutiny of materiel sustainment. The cost principle states that any asset should be recorded at the purchase price. Maintenance Completion (tasks) to Plan is an output measure, which directly reflects achievement against the Materiel Confidence outcome. Current proposals appear to be limited to an independent health check on progress.184 On the face of it, the scope of the health check is narrow, focused on closing recommendations and assessing progress. Defence procurement guidance did not reflect some of the requirements of the Commonwealth Procurement Rules in place at the time of the review. consolidation and review of Systems Program Offices; any further development of Defences approach to asset management. In 2008, the Mortimer Review recommended that decisions to purchase new equipment or maintain existing systems should be based on the through-life cost of each option. As noted in Figure 3.2, Systems Program Office staff have numbered between three thousand and four thousand over the last decade. In this light, the cost of those staff is a substantial omission from the apparent price of services facing the capability manager. The Department of Defence welcomes the Australian National Audit Office (ANAO) performance audit on Defences management of materiel sustainment. 3.36Numerous reviews and audits have urged greater focus on whole-of-life costs and better knowledge of the total costs of ownership of military assets, including sustainment, but have found that Defence has struggled to establish the skills, systems and data for this activity66: 3.37In recent years, Defence has generally estimated whole-of-life costs when seeking government agreement to a proposed acquisition. Systems Program Offices are located in different parts of the country but are organisationally all part of the Capability Acquisition and Sustainment Group within Defence. Opportunities also remain to increase the completeness and transparency of publicly reported information regarding materiel sustainment. 22. reliance on a mix of public and private equipment and facilities for sustainment activity. This is a project relevant to sustainment and which has been underway for many years. The Program was largely based on the findings of the 2008 Audit of the Defence Budget (the Pappas Review)104, led by consultant Mr George Pappas and undertaken in parallel with the development of the 2009 Defence White Paper, companion reviews, and the Mortimer Review. 188Defence Portfolio Budget Statements 201516, Top 30 Sustainment Product Descriptions, pp. They do this through a combination of internal work and commercial contracts. 5.4Although sustainment does not attract a separate focus in the First Principles Review, the reviews findings and recommendations have major implications for how sustainment is performed. Efficient, Effective, Economical and Ethical Procurement 7. As discussed, a quality assurance process for the Quarterly Performance Report would provide a firmer basis for internal and external scrutiny of sustainment reporting. Bechtel was one of the companies on this panel. This equipment never made it into service before the project was cancelled, yielding no capability whatsoever at a cost of $1.5billion. Note:For 200506 to 201415, expenditure was made through the Defence Materiel Organisation. Consequently, even if an asset is acquired at an original cost of $50,000, and that asset's market value increases over five years to $75,000, the cost principle will remain recorded at the . 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. While poor outcomes in the Key Health Indicator represent risk across all Materiel Sustainment Agreement outcomes, these risks are more acute in relation to Material Confidence and Materiel. 1.6The ANAOs observations on this aspect of the audit are reflected in the Summary and Recommendations section of this report (paragraph 32 forward). FCF = Net Income + Non-Cash Expenses - Incrase in Working Capital - Capital Expenditures. 106The reforms were aimed at: simplifying our internal processes to reduce time and/or waste; consolidating where process work is conducted so it is not duplicated in other parts of the organisation; aligning some of our more complex processes, like the acquisition of new capability, so there is a clear linkage between the identified need and the final product; ensuring our policies reflect contemporary standards; improving our decision making around expending resources; reducing our demand for goods and services; and building a cost-conscious culture in Defence. Recommendations with potential Defence-wide application: 3. 4.18By June2015, Defence was claiming approximately $2billion in savings from the Smart Sustainment Program since its inception in 2009. 143The First Principles Review (p. 36) states: The Capability Acquisition and Sustainment Group should outsource significant elements of the project management associated with sustainment contracts to an appropriate provider or providers We envisage efficient implementation would result in reductions in the public service workforce and the transfer of military personnel to other functions within Defence. 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.. SeeCost Considerations-The Cost Principlesfor additional details. 2.13Generally, the lifecycle of Defences military assets falls into two periods: acquisition and sustainment. Note d:In late 2016, Defence estimated that the Collins Class submarine sustainment program would achieve international benchmarks for cost per materiel ready day by 202223. Its goal was to deliver projects and sustainment on time, on budget and to the required capability, safety and quality. DMO's stated vision was to become the leading program management and engineering services organisation in Australia. This issue could be managed provided the scope of any sustainment review is appropriately selected. When conducting procurement, an official must consider the relevant financial and non-financial costs and benefits including, among other things, whole-of-life-costs.63 Sustainment expenditure is a major contributor to whole-of-life costsin some cases, the largest contributor. Defence advised the ANAO that Capability Acquisition and Sustainment Groups expenses on all employees in 201516 were $490.4million. 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. establish standards for the allowability of costs, provide detailed guidance on the cost accounting treatment of costs as direct or F&A costs Necessary costs incurred by a recipient for a common or joint purpose benefitting more than one cost objective, and not readily assignable to the cost objectives specifically benefitted, without effort disproportionate to the results achieved. Ruth L. Kirschstein National Research Service Awards, Cost Considerations-Allocation of Costs and Closely Related Work, Cost Considerations-Allowability of Costs/Activities. 200.405 Allocable costs. 229. In the longer term the system is to be expanded to cover acquisition. 3.69When sustainment costs are presented cumulatively, the contribution of items other than Navy, Army and Air Force sustainment to sustainment cost growth over the forward estimates can be seen. 83Defence, FPR Implementation Committee paper, SPO Reform ImplementationAvoiding Cost Transfers, February 2017. 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. 1See, for example, ANAO Report No.40 201617, 201516 Major Projects Report. Defence has clear and long-standing arrangements for managing the sustainment of specialist military equipment. Note c:Defence, Current e-Procurement Projects, June2016. Source:Defence, PMkeys Reporting, Full-time equivalent staff in all Systems Program Offices DMO/Capability Acquisition and Sustainment Group, by month, July2004 to June2016. The Focus on core business principle led to the contracting of many roles within CASG, and the lowest number of civilian APS staff within Defence. 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. This suggests that, where in-house expertise is not (or is no longer) available, expertise from industry could be bought in. Defence planned to reallocate the $20.6billion to other areas of Defence capability and contribute to the governments 2009 Defence White Paper, Defending Australia in the Asia Pacific century: Force 2030. There is no record of target for these objectives. Commercial organizations 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. Develop enterprise-wide IT strategy and information management strategy. The lack of funds to deliver necessary Mission Support outcomes across the DMFP will result in increased risk to Materiel Confidence in outer years. Cannibalisation reflects an inability of the supply chain to support requirements, but is not an indicator of Supply Chain performance alone as the requirement may be the result of induced failure from a number of domains. 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. address four tests to determine the allowability of costs. 85Deputy Secretary, Capability Acquisition and Sustainment Group, 5 July 2016, email Message [to CASG staff]. Table6: Capability Sustainment Program lists estimates for nine elements of Defences Capability Sustainment Program (Navy Sustainment, Army Sustainment and so on) over the four financial years of the forward estimates period. 166Defence, Smart BuyerDetail Design, approved 20 October 2016. 0000000016 00000 n
157Defence, Report on Defence Governance, Acquisition and Support, (KPMG), April 2000, p. 51. However, they are in a different order, which may reflect changes in organisation following the delisting of DMO. or an F&A cost Necessary costs incurred by a recipient for a common or joint purpose benefitting more than one cost objective, and not readily assignable to the cost objectives specifically benefitted, without effort disproportionate to the results achieved. 17ANAO comment: The Secretary is the Departments accountable authority under the Public Governance, Performance and Accountability Act 2013. Note e:The 2016 report from the Coles review team states that Attaining benchmark performance was a higher priority than efficiency. CASG Cost Principles | Business & Industry | Defence 125Defences current plans for systems development envisage the department implementing support for earned value management in late 2019. From the perspective of the field review, there is some indication that the sustainment models continue to drift apart.202. They are mandatory for all procurements valued at greater than two million Australian dollars (AUD$2m), and guidance for all others, unless exemptions apply. 119Australian Strategic Policy Institute, Graphs of the week: finally getting the Collins class we paid for, 27 October 2016 available from
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