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]. Later (April2004), senior DMO managers stated that there was scope to achieve a better risk balance in sustainment program management, where well-defined tasks had, in the past, been transferred to industry successfully with net savings, thereby improving efficiency. Table10: Capability Sustainment Program corresponds to Table6 in the PBS (see above). Commonwealth Procurement Rules | Department of Finance 180Defence engaged a consulting firm to carry out a high level Asset Management maturity assessment of the CASG policy and guidance documentation against the requirements of the Asset Management Standards. DMO engaged the Helmsman Institute to review the complexity of DMO sustainment operations. 169Defence, Observations and conclusions of the Gate Review Board, CA48MRH90 Multirole Helicopter: Sustainment Performance Gate Review, 12 May 2016. What is Cost Principle? (Definition and Examples) | Indeed.com 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. 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. 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. 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. The ANAO recommends that Defence develop and implement an evaluation plan to assess the implementation of the recommendations of the First Principles Review. The primary element of this reform is the consolidation and review of the Systems Program Offices; establishing centres of expertise as part of a matrix organisation within Capability Acquisition and Sustainment Group to make best use of specialist skills that are common across its Systems Program Offices. Some terms are used in an unusual way, for example, expenditure of more funds than had been budgeted is referred to as an overachievement. Eliminating complicated and unnecessary structures, processes, systems and tools. HWrH+z S, ?~#|~!hI&Y{/.>ae0KQ $$ 3,B(3ot=zh6+EZ(Z=\(]/EY&bm>KD_;$8Gb 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. 18Where a Systems Program Office manages multiple equipment lines, one or more product managers with responsibility for specific equipment types may support the Systems Program Office Director. Late delivery has minimal impact on the overall development of the Armed Reconnaissance Helicopter (ARH) capability. Key elements of the governance and organisational framework include: a specialist organisational unitcurrently the Capability Acquisition and Sustainment Groupstaffed by a mix of civilian and military personnel; contract-like arrangements for sustainment between that unit and the Chiefs of Navy, Army and Air Force (Defences Capability Managers); and day-to-day responsibility for most sustainment activities falling to Systems Program Offices, which carry out that work using a mix of in-sourced and out-sourced service provision. They are mandatory for all procurements valued at greater than two million Australian dollars (AUD$2m), and guidance for all others, unless exemptions apply. As an executive agency, the DMO would receive its own acquisition funding stream as a government appropriation, and would be headed by a chief executive with "significant private sector and commercial experience". The 201617 Defence Corporate Plan incorporated a revised set of Defence Purposes and performance measures.89 These identify sustainment more clearly than in the previous plan, under the revised Purpose 2, Deliver and sustain Defence capability and conduct operations. Eight underperforming products were listed in the second quarter of 2016. The ANAO has also observed in Chapter 3 of this audit report that there is scope to improve the quality and transparency of public reporting on sustainment in existing Defence reportsthe Portfolio Budget Statements, Portfolio Additional Estimates Statements and Defence Annual Report. Deployment of the PPR was, at that point (September2016), on pause pending further review of the prototype arrangements. Source:Defence Annual Reports 200506 to 201415, and Defence advice. 72ANAO Report No.6 201314, Capability Development Reform, Chapter 7. 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. There is also evidence of a planned benchmarking exercise to identify appropriate operating and functional models that can support DMOs future End State Design (around May2015). In January2017 Defences Systems Program Offices managed the sustainment of 112 fleets of equipment and services. [12] Gumley had headed an executive team of around 20 senior managers. Defence expects that all sustainment products will be reporting in SPMS by the end of June2017. 34Defence, Decision BriefSustainment Performance Management System Development, 8 August 2011. Improving the How 4. Materiel Ready Days Achievement, measured as a percentage achieved against planned reflects the reliability of the Mission System and the Support System. Defence agreed to the recommendation that total cost information be provided to relevant Defence committees, with qualification. The DMO was to be accountable for whole-of-life materiel management, with Systems Program Offices comprising multi-functional teams to undertake the work. PDF CASG Cost Principles - Department of Defence 168See, for example, Deputy Secretary, CASG, address to Australian Defence Magazine, 16 February 2017. Defence is now undertaking a rolling program of reviews of all Systems Program Offices, adding a further 17 to those being reviewed. Value for Money 5. Systemic issues identified by Defence from the reviews of Systems Program Offices to date are set out in Box 3. [13], In March 2009, the Corporate general manager of the DMO, Jane Wolfe, was dismissed for unsatisfactory performance. CASG Cost Principles | Business & Industry | Defence This could have provided, for the first time, a systematic approach to the organisation of sustainment activities across the Systems Program Offices. 10Joint Committee of Public Accounts and Audit, Report 448, p. 30. 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. 151Defence, DMO Acquisition and Sustainment Manual (2007), pp. Unclear lines of responsibilityMany key sustainment roles and responsibilities were not clearly defined or understood, from both an individual and organisational perspective. It is now too late to revisit these events; nonetheless, Defence could benefit from evaluating future major change programs. 4.19Notwithstanding Defences effort to keep track of the claimed and planned savings from Smart Sustainment, Defence has not been able to provide the ANAO with adequate evidence that the savings were realised. The simplified formula is: There has been no consistent application of fundamental tools such as Earned Value Management. Defence has advised that Collins Class sustainment cost per materiel ready day has decreased by approximately 40percent. During 2012 DMO endeavoured to capture and model the expected cost of ownership for the 47 MRH90 aircraft over the planned life of the aircraft. 0000001615 00000 n 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. Can the Department assure the Government of the day and the Australian taxpayer that the resourcesthe people, processes and toolsused to create that output are being utilised in the most efficient way? This represents a major investment of at least $120million, including contracts for services from the principal provider (Bechtel) valued at some $107million. The Chief of the Defence Force is Australias senior military leader. The initiative was not prescriptive except that capability and safety should not be compromised by any savings proposal. This affects financial planning, as it makes it extremely difficult to set an agreed baseline position and accurately link expenditure to outputs. 3.57Defence provides information about sustainment in its Portfolio Budget Statements (PBS), Portfolio Additional Estimates Statements (PAES) and Annual Reports. 126This mirrors similar changes underway in the counterpart UK organisation, Defence Equipment and Support. In March2017, Defence informed the ANAO that work was underway to address this. In Defences case, this should eliminate the need for some 20000 manual update transactions to AusTender each year. 130139, available from [accessed 10 May 2017]. Note a:The Collins Class submarine sustainment program has been a project of concern since November2008. SeeCost Considerations-The Cost Principlesfor additional details. The most substantial reform effort was Smart Sustainment under the Strategic Reform Program, associated with the 2009 Defence White Paper. In the Quarterly Performance Report, Defence does not identify the Tiger as an under-performing acquisition or sustainment project, even though the other sources suggest just that. 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. 109Defence, Helmsman Sustainment Complexity Review, July 2010, p. 5. 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. 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. The ANAO found that, 18months after implementation commenced, there had been limited progress. 122Defence, First Principles Review, pp. The ANAO has recommended that Defence institute a risk-based quality assurance process for information included in the Quarterly Performance Report. Manufacturing Overhead Costs | Explanation | AccountingCoach As a result: service providers may have been contracted to provide services for which Defence has previously determined they were not suitable to deliver, and/or charge higher rates than previously negotiated with Defence; and there is a risk that the documentation required to support the procurement decision may not be adequate. Other reforms flowing from the First Principles Review remain underway: 30. Cost Recovery Method - Definition, When to Use It, and Examples Note b:The availability of the Collins Class was about half that achieved by comparable submarine fleets; time spent in planned maintenance was about one third greater; and maintenance overruns and percentage days lost due to defects were approximately double. 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. 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. A Defence Central Contracts Register facility commenced operation in January2016.b This enables efficient collection of data for new Defence contracts: it does not include existing contracts, which can be added only by a separate stream of work. In August 2022, Chris Deeble was appointed Deputy Secretary CASG. Maintenance Completion (tasks) to Plan achievement is an output measure, which directly reflects achievement against the Materiel Confidence outcome. 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. The most appropriate procurement model for delivering the capability and achieving value for money. 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. 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. 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. eCFR :: 2 CFR Part 200 Subpart E -- Cost Principles 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. Final Operational Capability was declared in April2016 and ministerial advice was noted on 3May2016. It is both a lead and a lag indicator, which has a direct correlation to decreased near term and future unit availability and increased corrective maintenance and Priority 1 Maintenance Deficiency Report (Urgent Defect). 33. 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. The SPMS system was not fully implemented during the ANAOs audit fieldwork but is expected to be fully operational by the end of June2017. The Materiel Ready Days measure is applicable to Platform related products only. Cost accounting standards and disclosure statement. These meetings typically involve representatives of the Capability Managers, CASG and other Groups such as Joint Logistics Command. Performance has been effective but unstable during the recent high demand collective training exercise series period that culminated in Exercise Hamel. 107The Pappas Review examined a sample of equipment fleets and interviewed senior Defence personnel. xb```f`` 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. Due to the nature of the Key Health Indicator, it seeks to measure disruption post External Maintenance Period and consequential impact on Materiel Ready Days (Materiel Availability outcome). It is now planning to implement a new model, which seeks to capture the full cost of ownership throughout the life of an asset, with implementation planned for completion in July2018. 14For the great majority of Defences military assets, Capability Acquisition and Sustainment Group (CASG) is responsible for sustainment. 5.1The most recent major review of Defence, the 2015 First Principles Review, was a comprehensive examination with a suite of recommendations for reform. 229. Smart Sustainment had a ten-year savings target of $5.5billion. 5.47Operating as a smart buyer is an essential function for an organisation seeking to outsource work. Data is entered monthly by subject matter experts, usually based in the relevant Systems Program Office. 80An example of a potential comparator database is the US Navys Visibility and Management of Operating and Support Costs (VAMOSC) database. 22Performance measurement and reporting on sustainment is considered in Chapter 3 of this report. Specifically, the review identified instances where: 2.18Defence makes extensive use of external service providers and contractors to deliver acquisition and sustainment services. The allowable use of funds under those awards is included in Ruth L. Kirschstein National Research Service Awards in IIB. This information is presented in multiple tables and sections of the PBS and an explanation of the variation between tables is not provided.90 Further, some of the descriptive information about sustainment activity is not always expressed in clear language, which detracts from its usefulness. Defence should base its selection of systems/equipment on systems sourced from credible/proven suppliers. 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. [9], On 1 April 2015, the Minister for Defence released the First Principles Review. A project to reform and consolidate Systems Program Offices is currently underway, with 24 out of 64 Systems Program Offices (37.5percent) reviewed as at February2017. It is likely that some unquantifiable portion of claimed savings derive from the five per cent across-the-board cut among Systems Program Offices imposed by the Chief Executive Officer before the Strategic Reform Program commenced. The report is expected to be a direct acquittal of the performance measurement and reporting intentions identified in the corporate plan.87. Closure of the Materiel Acquisition Agreement and project closure will be completed during 2016. The report includes performance summaries for the Top 30 major acquisition projects, all major acquisition projects reported in the Major Projects Report and the Top 30 sustainment products. No of contract staff as advised 2June2017. The 2003 Australian Defence Aerospace Industry Sector Strategic Plan, produced jointly by Defence and industry representatives, recommended this approach, as well as a move to long-term through-life support contracts.149 Aerospace Systems Division then led in this reform area, producing a Performance-Based Contracting Handbook in 2005. In 2011, a review of the Smart Sustainment program by consultants engaged by Defence identified that there were no records to support how these funds were spent or what benefits had been realised. This practice: has created the risk of dependency on particular suppliers; raises concerns about probity as contractors and APS staff involved in the procurement may not be dealing with each other at arms-length; and means that Defence may not be getting value for money. [Materiel Acquisition Agreement] Closure and accompanying Product Schedule Change Proposal (PdCP) to transfer the delivery of the Deployable Aircraft Maintenance Rig capability to CA12 completed and awaiting Assets Under Control (AUC) balance adjustments before paperwork can be processed for signature. Failure to achieve planning milestones has been identified as a key constraint and has a direct impact upon the ability of Capability Acquisition and Sustainment Group to deliver platforms out of maintenance periods on time. Source: NASA Cost Estimating Handbook, v.4.0, 2015, Appendix C: Cost Estimating Methodologies, available from [accessed 21 December 2016]. It expressed concern that without such a feature Defence was exposed to risk. Key Takeaways Accrual accounting records revenue and. They may also be involved in acquisition projects but the greater bulk of their work involves sustainment. Defence has achieved key outcomes expected from the Smart Sustainment reforms and has progressed its implementation of the reforms to sustainment flowing from the First Principles Review. There are four basic financial . Further, performance summaries were highly variable and inconsistent between public planning documentsDefences Portfolio Budget Statements and Portfolio Additional Estimates Statementsand the Annual Report. Performance measures in Materiel Sustainment Agreements must be realistic and must be consistent with the requirements in sustainment performance artefacts such as the sustainment contract. 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. In the longer term the system is to be expanded to cover acquisition. Defence has not kept a systematic record of the outcomes of the Smart Sustainment initiative associated with the 2009 Strategic Reform Program. The audit found that Defence had established and continued to refine a generally sound Materiel Sustainment Agreement (MSA) framework to facilitate the management of sustainment activity for specialist military equipment. 8. Project Accountant at Northrop Grumman | The Muse The SPMS system was not fully implemented during audit fieldwork but is expected to be fully operational by the end of June2017. Implementing the Mortimer Review recommendations became, as a whole, one of the 15 streams of the Strategic Reform Program in 2010. 71 0 obj<> endobj During the course of this audit (9January2017) the Committee announced that it had commenced an inquiry into Defence Sustainment Expenditure. 89Defence advised the ANAO in March 2017 that The 201516 purposes have been replaced by the 201617 purposes and will not be reported on in 201617. 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. 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. Bechtel was one of the companies on this panel. 157Defence, Report on Defence Governance, Acquisition and Support, (KPMG), April 2000, p. 51. 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. Note b:Staff numbers are rounded to the nearest whole number. Defence has not published program level expenditure data on a consistent basis over time, or time series analysis, to assist with external scrutiny of its sustainment expenditure. Develop a through-life capability management plan. The Chief of the Defence Forces Preparedness Directive provides the strategic preparedness guidance for Defence Groups, Services and Capability Acquisition and Sustainment Group. The Review makes no recommendation about the right number of Systems Program Offices. Table A.3:Navy Materiel Sustainment Agreement Performance Framework - Core Key Health Indicators. 200.402 Composition of costs. Initial establishment of centres of expertise in Capability Acquisition and Sustainment Group is underway. Note e:The 2016 report from the Coles review team states that Attaining benchmark performance was a higher priority than efficiency. 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. Contracts with the principal provider are not performance-based. 3.17The ANAO observed marked differences in the information provided about Armys Armed Reconnaissance (Tiger) helicopter between: 3.18A comparison shows that the Quarterly Performance Report does not include information available to Defence that is critical to the readers ability to understand the gap between the expectation of capability and reality for the Tiger helicopter program (See Appendix 3).
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