casg cost principles

3In February 2017, Defence advised the Joint Committee of Public Accounts and Audit in a submission to the Committees Inquiry into Defence Sustainment Expenditure that A recent review by [the] Defence Intelligence Organisation determined that the current public reporting regime is safe. 150D Abraham, Performance based contractinga panacea for supporting legacy aerospace platforms?, Defence Geddes Papers, 2005, available from [accessed 16 January 2017]. Web Table8.2 provides a one-paragraph performance summary by product for each of the same Top 30 sustainment products. The cost principle states that any asset should be recorded at the purchase price. The envisaged end state is the deployment of a Program Performance Management System (PPMS), see paragraph 3.9 of this audit report), covering both acquisition and sustainment, commencing 30June2017.62. 34. 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 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. are set forth in HHS regulations at 2 CFR Part200, Subpart E, 45 CFR Part 75, Subpart E, and Appendix IX (Hospital Cost Principles) to Part 200 and Part 45. Project Accountant at Northrop Grumman | The Muse Design and implement sustainment arrangements that encourage performance-based behaviour. 0000002593 00000 n 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. Consequently, DMO retains over 50 SPOs [Systems Program Offices] each operating relatively independently of others and in different positions in the value chain. 73 0 obj<>stream 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. 104Defence, 2008 Audit of the Defence Budget, April 2009. 3.58Since 200708 Defence has reported financial and descriptive information for the Top 20 or Top 30 sustainment products (Top 20 to 201213 and Top 30 from 201314). Moreover, the many changes to DMO, in response, for example, to the Mortimer and Kinnaird reviews, had not significantly altered its size, shape or footprint. 0000002669 00000 n Defence has not kept a systematic record of the outcomes of the Smart Sustainment initiative associated with the 2009 Strategic Reform Program. Smart Sustainment is examined in Chapter 4. Set realistic performance targets and document them in the Materiel Sustainment Agreements. Defence doing only for itself what no one else can do more effectively and efficiently. Defence has had no central facility to maintain a register of contracts for sustainment (or, indeed, acquisition) until January2016. 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. The initiative was not prescriptive except that capability and safety should not be compromised by any savings proposal. Defences sustainment gate reviews could usefully contribute to this assurance process. 165United States Government Accountability Office, GAO/GGD-00-172R, Study on Facility Design Reviews, July 2000, available at http://www.gao.gov/assets/90/89986.pdf. 71 0 obj<> endobj The documentation does not specify which elements remained relevant. 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. It is now too late to revisit these events; nonetheless, Defence could benefit from evaluating future major change programs. For more information or to provide feedback on the Cost Principles, please send an email to theDefence Financial Investigation Service. 141Defence, DMO End State Design Final Report, December 2013. Sustainment can be considered as falling into three categories: sustainment of platforms, products and commodities, as well as the provision of services such as test and measurement. 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. 123Defence, First Principles Review, p. 10. public reporting principles and requirements, including under the, Defences public annual reporting of sustainment activity; and. 3.30More recently, after the release of the 2015 First Principles Review, one of the Review panel members characterised inefficiency as the most prominent problem across Defence: The big problem that the Review team saw was one of efficiency and not of effectiveness. achieving a clearer line of sight between planning and reporting documentsfor both expenditure and descriptive information at the corporate and project levels; and. The First Principles Review recommended integration. 158Defence, CASG First Principles Review Implementation Plan, version 2.9, 15 December 2016; Capability Acquisition and Sustainment GroupMatrix Management, 8 September 2016. Figure 2.1:Simplified representation of organisational arrangements supporting Defence sustainment of specialist military equipment. 185For example, a 2015 Lessons Learned Report prepared by Defence states that Defence did not adequately enforce the provisions of the [sustainment] contract . Rate of Effort / Aircraft Availability Achievement. The document details the cost principles that Defence and industry will utilise in costing contracts. CASG was established in June 2015 after the Defence Materiel Organisation was disbanded after recommendations from the First Principles Review. 66Defence, Report on Defence Governance, Acquisition and Support (prepared by KPMG), April 2000; Defence Procurement Review (Malcolm Kinnaird AO, chairman), August 2003the Kinnaird Review; Going to the Next Level: the Report of the Defence Procurement and Sustainment Review (David Mortimer AO, chairman), September 2008the Mortimer Review; 2008 Audit of the Defence Budget (George Pappas, consultant), April 2009the Pappas Review; and Review of the Defence Accountability Framework (Associate Professor Rufus Black), January 2011the Black Review. 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. Poor product reliability has contributed to weak serviceability at the 1st Aviation Regiment in Darwin. 151Defence, DMO Acquisition and Sustainment Manual (2007), pp. 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. 5.66The ANAO recommends that Defence develop and implement an evaluation plan to assess the implementation of the recommendations of the First Principles Review. Defence 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. At its core, this is a two-step decision-making framework comprising risk analysis and a tailored strategy done at the earliest practicable stage of a project: 5.50Defence considers that The game changer for Capability Acquisition and Sustainment Group will be the Smart Buyer model that will unleash our organisational capability.167 Defence sees the main benefit of this process as early identification of risks and, as a result, better allocation of Defence resources.168 Its smart buyer paper sets out detailed issues for consideration in areas of risk separately for both acquisition and sustainment. SeeCost Considerations-The Cost Principlesfor additional details. The framework had enabled Defence to clearly identify roles and responsibilities at a functional level, and individual agreements documented funding, deliverables, risks and performance measures for sustainment products. 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. 3.65During DMOs existence, the data represents expenditure by DMO on capability sustainment excluding DMO service fees/DMO departmental appropriation (representing DMO staff and other operating costs). Fuel and lubricants, combat clothing and explosive ordnance fall into this category, which makes up about 20percent of sustainment expenditure. The ANAO found that, 18months after implementation commenced, there had been limited progress. Instead, it would usually be done as several separate calculations, as we showed in the first 4 steps of the derivation. 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. There was/were: In all, Mortimer made 46 recommendations, with 42 accepted in full by the Government and three accepted in part. 182Defence, ISO55000 Gap Assessment, Capability Acquisition and Sustainment Group, ibid. The development and maintenance of the MSA framework had also encouraged and facilitated collaboration between Defence and the (then) DMO at both the management and operational levels (see paragraph 12). Defence has an implementation plan with target dates, concluding in July2018. At the time DMO developed MRS it was noted internally that DMO currently spends around 3billion dollars per year on sustainment activities and at this stage has no system that can adequately report on the effectiveness or efficiency of these activities.29 Work began in September2005 to introduce sustainment reporting capacity into MRS. 3.3Several major reports have criticised sustainment reporting over the last decade, including Mortimer (2008) and Rizzo (2011).30 Rizzo was highly critical of existing performance indicators: Each current [MSA] Product Schedule has inadequate Key Performance Indicators They only include a small subset of the contractual measures that should be placed on each party and there are no consequences associated with noncompliance. In November 2016, the contract was amended and increased by $32 million. Following the change in government in 2013, it terminated work on the Strategic Reform Program. The 2015 First Principles Review was preceded by earlier major reform initiatives, notably the Strategic Reform Program (SRP) begun in 2009. address four tests to determine the allowability of costs. 8Joint Committee of Public Accounts and Audit, Report 442, pp. Key health indicators are, generally, lead indicators of factors contributing to future outcomes, for example, external maintenance backlog. 2.19Following the First Principles Review, Capability Acquisition and Sustainment Group is undertaking a project to reform and consolidate Systems Program Offices. 109Defence, Helmsman Sustainment Complexity Review, July 2010, p. 5. The Systems Program Office Director reviews the data and comments for each measure and provides comments for a set of key performance indicators and an additional set of key health indicators.35 Further comments can be added up the hierarchy to the relevant Capability Acquisition and Sustainment Group division head. The most appropriate procurement model for delivering the capability and achieving value for money. 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. 3.64Published estimates comprise of two separate data series. Those prices comprise only the costs incurred by the relevant Systems Program Office for goods and services supplied under contract. Recommendations with potential Defence-wide application: 3. SeeCost Considerations-The Cost Principlesfor additional details. FIFO: What the First In, First Out Method Is and How . 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. Box 3: Systemic issues identified by Defence in the reform of Systems Program Officesa. TheCASG Cost Principlesapply to all procurements. 442, Review of the 201213 Defence Materiel Organisation Major Projects Report. 71Defence, Rizzo Review, Chapter 4, p. 29. 4. 57Final operational capability is a milestone in a Defence major capability project that marks the point at which the Capability Manager agrees that final capability can be operationally employed. 19The capability manager for most assets is one of the three Service chiefs (Navy, Army or Air Force). The Defence Science and Technology Group had been helping individual Systems Program Offices with asset management but believed its real potential was at the enterprise level. 5.25The 2009 report from the Pappas Review identified opportunities for efficiencies in maintenance activities carried out by Systems Program Offices by consolidating maintenance facilities; restructuring outsourcing contracts to ensure the contractual conditions create the right incentives for performance improvements; and implementing lean techniques in workshop management.138 From the formation of DMO, Defence received similar external advice from different sources that substantial improvements in efficiency were possible in the Systems Program Offices. 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. It expressed concern that without such a feature Defence was exposed to risk. The outcome from this review is alignment of the SPO activity to Planning, Governance and Assurance roles, and enabling industry to undertake the management and delivery of sustainment activity, in particular the transactional functions required to maintain capability. Develop enterprise-wide IT strategy and information management strategy. Bechtel is now, with others, providing the UK with tailored private sector expertise and human resources, indicating relevant experience in the Defence procurement field. 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. There is no evidence of any decisions having been made.147. 2The MPR Guidelines, which are endorsed by the JCPAA, provide that data of a classified nature is to be prepared in such a way as to allow for unclassified publication (see ANAO Report No.40 201617, 201516 Major Projects Report, paragraph 1.16, p. 463). 38Defence, Navy/MSD [Maritime Systems Division of Capability Acquisition and Sustainment Group] Performance Framework Review, Summary of Issues and Recommendations, 4 March 2016. 5.59Defence paid $5.5million over four years (201112 to 201415) for consultancy services related to its sustainment business model. Raised / Open Priority 1 / Priority 2 Maintenance Deficiency Report (Urgent Defect). Lack of a performance based ethosDefence had failed to define performance targets for individuals and organisations and this had been a key driver of inefficiency and sub-optimal behaviours that affected sustainment performance. Antiviral chemotherapy typically involves a delicate interplay between host cellular functions and viral targets of action. Therefore, it is used to account for revenue when revenue streams from a sale cannot be accurately determined. Defence has clear and long-standing arrangements for managing the sustainment of specialist military equipment. 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. DMO's stated vision was to become the leading program management and engineering services organisation in Australia. inefficiencies in the processes leading to government approvals for new projects. An ANAO performance audit in 2013 found that, in most cases, submissions to government included whole-of-life cost estimates. 111The ANAO has not verified the reported savings in the three cases quoted here. Defence has also been developing its approach to asset management over many years, having obtained substantial advice from internal and external sources to adopt a Defence-wide asset management strategy to underpin a sustainment business mode for specialist military equipment. Defence should base its selection of systems/equipment on systems sourced from credible/proven suppliers. 30Defence, Going to the Next Level, the report of the Defence Procurement and Sustainment Review [Mortimer Review], 2008, p. 49, Recommendation 4.2; Defence, Plan to Reform Support Ship Repair and Management Practices, [Rizzo Review] July 2011, p. 46. Foreword Introduction 2. Box 1: The origin of Systems Program Offices. 43The Quarterly Performance Report, introduced in late 2015, has evolved from earlier management reporting designed to identify potential problems in the formative stages of the project life cycle (Defence advice of March 2017). In 201516, Defence spent about $6.3billion21percent of its total departmental expenditureon sustainment of specialist military equipment. Once fully implemented this system should be capable of systematically reporting against a suite of performance indicators settled in agreement with Capability Managers. 181Defence, ISO55000 Gap Assessment, Capability Acquisition and Sustainment Group, September 2015, p. 6. As noted in paragraph 5.14, in July2016, a former senior Bechtel executive was seconded to the position of First Assistant Secretary Program Performance in Capability Acquisition and Sustainment Group, under the day-to-day direction of the senior Capability Acquisition and Sustainment Group leadership. This is especially so, given the recent observation by Defence that, in some cases, [Systems Program Offices] have been spending more money on salaries than they were on actual acquisitions or sustainment.84, Figure 3.2:Numbers of staff in DMO/Capability Acquisition and Sustainment Group Systems Program Offices, 200416. 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. Care would need to be taken to avoid any conflict of interest among vendors in these circumstances.173, 5.54Defence has long aspired to introduce a systematic approach to asset management for its specialist military equipment (see Appendix 6 of this audit report). 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. 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. 2732. Defence should give proper attention to asset management, logistic support and engineering requirements. 67ANAO Report No. The ANAO examined first, a 2008 DMO initiative to cut sustainment costs and, second, Smart Sustainment to identify what became of those reforms. 5.22In May2016, Defence completed a stocktake of its Systems Program Offices to determine how many existed, and which were candidates for further reform. Develop and implement a contracting strategy to improve performance based contracting [Management Recommendation. 74In all cases Defence included estimates for Net Personnel and Operating costs, even though the First Principles Review (p. 40) had recommended that Defence stop using this concept: Net Personnel and Operating Cost is Defences current estimate of the [additional] personnel, operating and sustainment cost of a proposed capability. 1.1Defence materiel sustainment is about the maintenance and support of Defences fleets of specialist military equipment. 24Navys Fleet Screening instructions state that the focus of Navys review has evolved beyond a financial emphasis in light of the Rizzo Review to include consideration of how Navy and Capability Acquisition and Sustainment Group are meeting their obligations for whole of life sustainment of Navy capability. This was the case with the earlier Smart Sustainment reforms. 34Defence, Decision BriefSustainment Performance Management System Development, 8 August 2011. Defence published a final, complete edition, comprising 18 pages plus appendices with a date of 12December2016. 3.28Defence will institute a Quality Assurance process covering the Defence Quarterly Performance Report. Further detail is provided in Appendix 4. This indicates that any actual adjustments, if made, were to internal Defence allocations. Defence informed the ANAO that it had updated its procurement guidance in April2017 and intends to address the other concerns raised in the 2015 review over the next 18months. How Are Principles-Based and Rules-Based Accounting Different? 'Some Economic Aspects of the Weapons Systems Acquisition Process' (2003); available from, This page was last edited on 19 February 2023, at 03:28.

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