Defences sustainment gate reviews could usefully contribute to this assurance process. 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. 200This system was the Sustainment Performance Management System (SPMS). Mortimer identified five principal areas of concern. A key step in the MPR process is the preparation of a Project Data Summary Sheet for each project being reviewed. In May 2016, Defence entered into another contract with Bechtel for $65.8 million, to conclude in June 2018. Funding Adequacy over the Defence Management Finance Plan. Their report made many recommendations generally aimed at reducing complexity in sustainment management, including greater use of performance-based contracts, a more consistent operating model across sustainment and improving commercial asset management expertise. Develop enterprise-wide IT strategy and information management strategy. DMO's stated vision was to become the leading program management and engineering services organisation in Australia. 173In an Australian context, Simon Domberger pointed out that loss of skills to an organisation may be seen as a contracting cost. However, this was not presented as prominently as acquisition costs nor was its significance made clear to decision-makers.72, 3.38In the course of this audit, the ANAO examined nine Defence major capital equipment submissions approved by government between July2015 and April2016 to review the presentation of whole-of-life costs.73 In all but one submission examined, whole-of-life cost estimates are more prominent than in the submissions examined for the 2013 ANAO performance audit. Encouraging Competition 6. If the owner does not have the capacity to operate as a smart buyer, the owner risks project schedule and cost overruns and facilities that do not meet performance objectives.165. for 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. Maintenance Completion (tasks) to Plan is an output measure, which directly reflects achievement against the Materiel Confidence outcome. The Defence Science and Technology Groups Aerospace Division had concluded that a systematic and top-down approach such as enterprise-wide asset management was particularly suitable to address the challenges of reforming sustainment management in Capability and Sustainment Group. 3.7A joint review of Navys performance framework, completed in March2016 by Navy and Capability Acquisition and Sustainment Group, concluded that there was universal acceptance that the framework provides a sound basis for the assessment of sustainment outcomes.38 However, the review decided to remove one of Navys core key performance indicators (cost per materiel-ready day achieved) on the basis that the measure required the Systems Program Office to enter four separate data elements and stakeholder compliance was reportedly low. Defence is now undertaking a rolling program of reviews of all Systems Program Offices, adding a further 17 to those being reviewed. 5.32Defence is in the early stages of the Systems Program Office reform envisaged by the First Principles Review. What Is the Cost Principle and Why Is It Important? - The Motley Fool The Chief of the Defence Force is Australias senior military leader. 118The Australian Strategic Policy Institute commented: Why a savings [sic] should be claimed from a fluctuation in fuel prices is unclear. Smart Sustainment had a ten-year savings target of $5.5billion. Measures the number of occurrences where Cannibalisation was approved by the Capability Manager Representative. PDF Supplement to FRN CAS-GAAP Guiding Principles - White House Defences comments, and suggested editorial amendments, have been provided to the ANAO. The first is a Defence internal review conducted in late 2015; the second comprises work done following the First Principles Review as part of the Systems Program Office reform and consolidation project. The First Principles Review recommended integration. Defence spends similar amounts each year on sustainment and the acquisition of new equipment. Source:Defence, PMkeys Reporting, Full-time equivalent staff in all Systems Program Offices DMO/Capability Acquisition and Sustainment Group, by month, July2004 to June2016. 3.44The Mortimer Review (2008) observed that through-life maintenance and support account for more than half of the DMO annual budget and involve about two-thirds of its workforce. Fragmented management meant Defence did not have an enterprise-wide view of the many Smart Sustainment initiatives, and was missing opportunities for wider reform. 5.49Defence has developed its own meaning for the term smart buyer, which does not clearly capture the intent of the First Principles Review recommendation. In June2017, Defence advised the ANAO that implementation plans for significant reforms to Systems Program Offices would be developed in the second half of 2017. 3.49In October2016, Defences Chief Finance Officer stated that, under current proposals, actual costs will be reported in Defences central financial management system and that system will be consistent with the total cost of ownership model. The assessment method is to be Assessment of sustainment against capability manager requirements. SeeCost Considerations-The Cost Principlesfor additional details. 0000001012 00000 n Bechtel was one of the companies on this panel. 108-115, available from [accessed 20 April 2017]. 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. Source: Abstracted from Defence, Reform Issues, April2011. Nevertheless, developing wholeoflife cost estimates for major capital projects has been a challenge for Defence for decades. Cash management involves: reducing excessive amount of cash in hand utilizing cash effectively maintaining optimum balance of cash to meet planned and unexpected expenditures managing cash flows - that is cash disbursements and receipts at all times Thus, cash management helps to manage your business' working capital efficiently. 73The ANAO examined nine Second Pass or Combined First and Second Pass approvals including submissions related to Army, Navy, and Air Force capital acquisitions. This resulted in the various parties failing to act on, or enforce, their responsibilities within the sustainment space. Defence subsequently increased the numbers of organisational units it considered to be Systems Program Offices from 54 to 78, with staff numbers ranging from three to 178.135. The objective of the audit was to assess whether Defence has a fit-for-purpose framework for the management of materiel sustainment. 5.16As at November2016, the total estimated value of contracts awarded to support Defence activity in Capability Acquisition and Sustainment Group directly or indirectly associated with implementing the First Principles Review, excluding the Bechtel contract, was $40million. 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. 69Defence Annual Report 199798, p. 224. The objective of the audit was to assess whether Defence has a fit-for-purpose framework for the management of materiel sustainment. They identify, in general, the allowable and allocable items (see Section 2.0) of cost normally associated with MCC-financed contracts. DMOs approach was extremely variable and inconsistent, particularly when compared with most commercial and other government organisations: It has inherited 50+ business models that existed before the DMO was formed in 2000. Defence advised the ANAO that it would have been difficult to implement the contract as a performance-based contract: Unlike standard Defence capability projects, Bechtel has been contracted to develop Defences capacity and capability to deliver rather than for Bechtel to deliver itself. Defence has not kept a systematic record of the outcomes of the Smart Sustainment initiative associated with the 2009 Strategic Reform Program. SPO overhead has increased through a number of avenues: i. In 2011, DMO established a project to develop a Sustainment Business Model to address its extremely variable approach to sustainment that was inconsistent compared to most commercial and other government organisations.203 DMO saw such an enterprise-wide approach to the management of sustainment as a critical component of one of the strategic recommendations of the Rizzo Review of naval sustainment, a review which had come about because of inadequate maintenance and sustainment practices.204. Work continues with the Capability Managers to develop more systemic demand-related reform activities for implementation in the medium to longer term. Defences pubic reporting of program level estimates over time. Following the First Principles Review, Defence first engaged Bechtel from October2015 to April2016 (extended to June2016) to provide initial implementation help.128. Eight underperforming products were listed in the second quarter of 2016. 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. 1.9The audit was conducted in accordance with ANAO Auditing Standards at a cost to the ANAO of approximately $422000. 13. The PBS includes other occasional references to sustainment. 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. Defence suppliers have access to potentially commercially sensitive Defence financial information which could provide an unfair advantage to some service providers. This represents a major investment of at least $120million, including contracts for services from the principal provider (Bechtel) valued at some $107million. 3.9In September2016, Defence decided to expand SPMS to cover acquisition. 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. Delivering what is required with processes, systems and tools being the means not the end. Staff in the Capability Acquisition and Sustainment Group compile the report manually, incorporating information contained in MRS and, increasingly, SPMS. 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. In August 2022, Chris Deeble was appointed Deputy Secretary CASG. What Is Cost Principle? - The Balance The consultants attributed the diversity to historical issues around original parent organisations, [and] individual service influences. Improve leadership skills, knowledge and experience. 5.47Operating as a smart buyer is an essential function for an organisation seeking to outsource work. 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. 200.402 Composition of costs. As noted in Figure 3.2, Systems Program Office staff have numbered between three thousand and four thousand over the last decade. Such cost reductions may be required to re-invest into inventory, obsolescence remedies, new infrastructure to manage an ageing fleet and the transition to future submarines. Its goal was to deliver projects and sustainment on time, on budget and to the required capability, safety and quality. Note: Military units also undertake some operational-level sustainment activities. 33Defence internal documents. 128In mid-2015, Defence established a standing offer panel to support the implementation of the First Principles Review. Demand Satisfaction Rate measures the effectiveness of the supply chain. 5.6Recommendation 2.11 aggregates three First Principles Review recommendations which appear after the following conclusions in the text: In an organisation which routinely manages complex projects and programs we found it remarkable that there is no common project management architecture or artefacts to support it. An output measure, which directly reflects achievement against the Materiel Availability outcome. This suggests that, where in-house expertise is not (or is no longer) available, expertise from industry could be bought in. In 201516, Defence spent about $6.3billion21percent of its total departmental expenditureon sustainment of specialist military equipment. 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. In May 2008, the Australian Government commissioned a review of Defence procurement, which included in its terms of reference a report on the progress of implementing reforms from the last such review the 2003 Kinnaird Review. Defence advised the ANAO in March2017 that it was looking into what became of the [unquantified] residual seed funds. Defence has not kept a systematic record of the outcomes of the Smart Sustainment initiative associated with the 2009 Strategic Reform Program. The primary impact of poor outcomes in this Key Health Indicator is Sustainment Efficiency outcome. Defence has elaborated on its approach to being a smart buyer in its submission to the Joint Select Committee on Government Procurement, April 2017. How Are Principles-Based and Rules-Based Accounting Different? Recommendations with potential Defence-wide application: 3. 2732. 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. Chapter 237 Principles of Antiviral Therapy. Reforms to the management of sustainment flowing from the First Principles Review remain at an early stage, and this stream of activity is likely to take much longer than the expected two years. 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.. 49 of 51. 5.10The ANAO considered how Capability Acquisition and Sustainment Group is managing the reform process, including by the extensive use of industry expertise. In spite of this limitation, a number of agents are . 4. The anticipated transfer transactional workloads to industry will therefore increase the unit cost of capability delivery as far as the [Capability Managers] are concerned, regardless of the expected overall improvement in Defences budget.83, 3.47Systems Program Offices have had between three and four thousand staff over the last decade (Figure3.2, below). Minister Smith also said that he had asked Defence to review the effectiveness of its management of major projects. This chapter examines Defences performance framework to support the management and external scrutiny of materiel sustainment for specialist military equipment. The absence of an asset management approach within Defence makes it difficult to piece together a holistic asset management view across the myriad individual policies which focused on discrete processes. 191Defence Portfolio Additional Estimates Statements 201516, Table 10: Capability Sustainment Programme, p. 21, available from [accessed 20 April 2017]. 5.8The ANAO identified the following streams of workeither directly flowing from the First Principles Review or from Capability Acquisition and Sustainment Groups own list of deliverablesas having the most apparent potential to affect the management of sustainment: 5.9The First Principles Review specifies few targets or measures of performance. 192Defence Portfolio Additional Estimates Statements 201516, Table 77: Top 30 Sustainment Products by End of Financial Year Outcome 201516, Appendix F, pp. Defence conducts reviews of sustainment performance through sustainment gate reviews that help Defence to obtain insight into a project or products progress and status. Defence had not defined the cultural changes it expected from the program and therefore may not deliver the behavioural changes required for long-term reform. The Support and Operating Intent of the capability are not being adequately articulated by Capability Managers, which results in: Activities assigned to the Services that affect asset management and asset condition are not being completed, and limited feedback is being provided to the Capability Manager Representative regarding the impact of non-completion on cost and availability. 114Defence, Final Audit Report, Audit Task: 12-041, SRP Savings and Performance Reporting, Audit and Fraud Control Division, August 2012. A target expenditure cut of five per cent of sustainment costs over a financial year was set by the Chief Executive Officer of the DMO in February2008. An amended version commenced on 1 March 2017. 29Defence, Operational Concept Document for DMO Sustainment Reporting System (Version A, December 2004, Sponsored by Director General Standardisation). Bechtel is now, with others, providing the UK with tailored private sector expertise and human resources, indicating relevant experience in the Defence procurement field. This Key Health Indicator relates to the Engineering Change Proposal action, which is yet to be finalised - either raised and not actioned or incomplete. Key health indicators are, generally, lead indicators of factors contributing to future outcomes, for example, external maintenance backlog. This issue could be managed provided the scope of any sustainment review is appropriately selected. 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. The recruitment freeze has resulted in the incremental engagement of multiple individual contractors versus a single Integrated Support Contractor; and. They tend to manage outcomes by testing quality and auditing activity rather than assuring capability outcomes governing supplier processes; this results in man markingb [industry], duplication of effort, rework, and delays. Defence is not easily able to identify the effort, in terms of staff numbers, expended on each. In . The CASG MSP implementation is inconsistent with the intent of the First Principles Review, opting for the ease of 'body shopping' rather than thoughtful outcomes-based procurement. In November 2016, the contract was amended and increased by $32 million. 3.55Sustainment has been identified as a distinct category of expenditure since 1July2005.88 In effect, this was the point at which the term sustainment came into regular Defence use. 1.4Parliamentary committees over several years have stated an interest in Defences reporting of its sustainment performance and, in particular, obtaining greater insight into that performance.7 In May2014, the JCPAA recommended that the DMO prepare a suitable methodology for reporting sustainment activity and expenditure, within six months.8 The Government disagreed on the basis that current arrangements balanced Parliamentary scrutiny of sustainment expenditure with the protection of classified information on the military capability, readiness and availability associated with that sustainment.9 In September2014, the Committee sought a sustainment options paper from the ANAO, which was made public by the Committee. However, the skills may be retained in the marketplace and the real issue is whether the organisation loses the capability of being a smart purchaser (The Contracting Organization: A Strategic Guide to Outsourcing, Oxford 1998, p. In other cases it may be appropriate to outsource sustainment and partner with industry for the acquisition phase.120. In the Defence Annual Report 200405 (p. 242), DSTO nominated ensuring Australia is a smart buyer of defence equipment as one of the ways in which it supports Australias defence. Defence has developed its own meaning for the term smart buyer, which does not clearly articulate the intent of the First Principles Review recommendation. Defence was able to provide the ANAO with copies of a suite of standard letters of assurance from managers throughout DMO, each stating that, to the best of their knowledge, cost reductions of various values had been implemented for the respective financial year. In that later report the list was labelled sustainment products of interest rather than underperforming, though the items are still listed in order of concern. They are mandatory for all procurements valued at greater than two million Australian dollars (AUD$2m), and guidance for all others, unless exemptions apply. 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) . A consultancy found in March2013 that: DMO evolved through the amalgamation of many dispersed business units, without undergoing typical post-merger integration activities needed to drive efficiency. Under the PGPA Act, Defence will need to report meaningfully against this plan in its annual performance statement. 1. SeeCost Considerations-The Cost Principlesfor additional details. This, it states, is to be measured tri-annually and reported annually for each year of the corporate plan. The simplified formula is: We recommend this process cease immediately. 3.57Defence provides information about sustainment in its Portfolio Budget Statements (PBS), Portfolio Additional Estimates Statements (PAES) and Annual Reports. Most of the sustainment budget is for maintenance of major platforms which, in turn, depends on age and use. Further detail is provided in Appendix 4. 18. for Institutions of Higher Educations (IHEs). The number of SPO staff supporting activities such as planning, contract management, and assurance may not be sufficient and this is a risk to achieving FPR goals (including SPO reform) and ongoing delivery of [Integrated Investment Program] activities. 88Previously, the relevant expenses would have been allocated across several categories, including repair and overhaul, and inventory supplies. The MPR has added value through the review process and the transparency of information providing increased assurance to the Parliament and the Government. Figure 2.1:Simplified representation of organisational arrangements supporting Defence sustainment of specialist military equipment. ~rEy0Eq2I;+t4NY1. Combat Support Vehicles, including Fire Vehicles, C and D Vehicles, Bulk Liquid Distribution equipment, Special Forces Vehicles and Engineer Equipment, Management of vehicle maintenance and support equipment, electrical systems and general stores. Gate reviews are conducted to provide high quality and reliable advice to Defence and Government regarding the health and outlook of both acquisition projects and sustainment products. 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. Defence has initiated a reform project as part of its First Principles Review implementation. Cost Recovery Method - Definition, When to Use It, and Examples 17ANAO comment: The Secretary is the Departments accountable authority under the Public Governance, Performance and Accountability Act 2013. 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. 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. 4.10Defence gave examples of activities it considered successful in its 201011 Annual Report (pp. The ANAO has recommended that Defence develop and implement an evaluation plan. 200.410 Collection of unallowable costs. 5.63The Sustainment Business Model project has not delivered all that DMO expected. 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. 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. 3.4This led to the commencement of work on a new IT system, the Sustainment Performance Management System (SPMS), in mid-2011 to replace the sustainment module in MRS.32 Defence agreed in August2012 to the continuing refinement and implementation of a shared Sustainment Performance Management Framework and reporting system for use in the sustainment of all products jointly managed by Defence and DMO.33 An objective of developing SPMS is that the system should provide the central source of truth for sustainment management data and reporting for sustainment management personnel at all levels of both Capability Acquisition and Sustainment Group and Capability Manager organisations.34 This was contrasted with the MRS, which reportedly required substantial work-arounds requiring double and triple handling. 26Paul J Rizzo, Plan to Reform Support Ship Repair and Management Practices, July 2011, p. 8the Rizzo Review. This matter is also taken up in the next chapter. The achievement of this should be greatly enhanced by the application of the cost model.

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