casg cost principles

Defence has continued a program offering its staff professional development options in asset management. Once fully implemented this system should be capable of systematically reporting against a suite of performance indicators settled in agreement with Capability Managers. Further, the ANAO understands that the adjustments related to the expected savings were not identified in the Commonwealths central budget management system. 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. Develop and implement a contracting strategy to improve performance based contracting [Management Recommendation. These activities are outside the scope of the audit. A Smart Buyer first and foremost achieves good outcomes for its Customers. examining each Systems Program Office to determine where each fits within the smart buyer function, and the most appropriate procurement model for delivering the capability and achieving value for money. 7Recent Parliamentary inquiries include: Joint Standing Committee on Foreign Affairs, Defence and Trade, Procurement procedures for Defence capital projects, August 2012, p. xxvii; Joint Standing Committee on Foreign Affairs, Defence and Trade, Review of the Defence Annual Report 201112, Canberra, June 2013, p.90; Joint Committee of Public Accounts and Audit, Report 442: Inquiry into the 201213 Defence Materiel Organisation Major Projects Report, Canberra, May 2014, and Report 448: Review of the 201314 Defence Materiel Organisation Major Projects Report, Canberra, May 2015, pp. 5.52The same risk has been highlighted in a number of internal Defence reviews including: 5.53A relevant finding also emerged in the recent Parker Review in the UK of the shipbuilding strategy for the Royal Navy. 1.5The Committee noted, however, that the final structure for sustainment reporting was as yet undecided. In practical terms, it would not make sense to calculate FCF all in one formula. The Commercial Division in Capability Acquisition and Sustainment Group expressed concern that Defence needed to articulate clearly its objective/end state before agreeing to contracts of this cost and magnitude. 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. The audit had found, among other things, that it was not generally used in the in-service (sustainment) stage. 4.4Defence informed the ANAO that it believed it had achieved a five per cent sustainment budget cut in 200809. However, Defence did not adequately assess the outcomes from the smart sustainment reforms. Contracts with the principal provider are not performance-based. 153Defence [DMO], CEO Roundtable Discussions [Note: Document dated 23 July 2008. In September 2015, Defence entered into a contract with Bechtel for $8.5 million, to conclude on 1 April 2016. The review was conducted by David Mortimer, who presented his findings in September 2008. Note b:This is part of a substantial project within Defence to improve both the recording of contracts and purchasing within Defence. A number of acquisition projects had been managed in project offices which are now counted as Systems Program Offices.20 Systems Program Offices do not endure indefinitely: for example, after the withdrawal from service of an asset and its disposal the relevant Systems Program Office may be dissolved or amalgamated with another. Source: NASA Cost Estimating Handbook, v.4.0, 2015, Appendix C: Cost Estimating Methodologies, available from [accessed 21 December 2016]. 53The 2008 Audit of the Defence Budget found that the lack of joint metrics for the serviceability of the FA-18 Hornets contributed to a silo mentality between the Systems Program Office and the Air Force squadron using the aircraft. 71 0 obj<> endobj Source: Defence, 2008 Audit of the Defence Budget, 2009, pp. 200.402 Composition of costs. The ANAO has recommended that Defence develop and implement an evaluation plan. %%EOF The Quarterly Performance Report is the primary way by which Defence provides information to government and senior Defence personnel about the status of major acquisition and sustainment activities. For example, Dr Davies211 noted that in his experience, having in-house expertise from public service engineers who could examine bids for work from external firms made him a much smarter buyer.212. 25Defence, Inspector Generals Group, Review of Support Provided to DMO Systems Program Offices by the DMO Operations Divisions, 2006, p. 16. This encourages managers to exercise judgement and discretion to trade within that operating budget (assessing their need for how many staff and what levels, skills and contracted expertise are required) to most efficiently and effectively deliver the outcomes required.81. 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. 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. CASG employs more than 7000 military, civilian and contracted staff in more than 70 locations around Australia and internationally. This has been achieved while managing risks to national security.2. Similarly, the new Capability Acquisition and Sustainment Group Business Framework is expected to take many years to fully implement. Poor planning, poor compliance with External Maintenance Period Planning Milestones, transference of Organic maintenance tasks to External Maintenance Period due to poor Organic Maintenance Completion rates or failure to undertake reliable Pre Refit Condition Assessment will result in increased External Maintenance Period cost. In one case, whole-of-life cost estimates were not prominent with only the acquisition cost and net personnel and operating costs referred to in recommendations to government.74. Defence comprises the Department of Defence and the Australian Defence Force. In general, NIH grant awards provide for reimbursement of actual, allowable costs incurred and are subject to Federal 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. In other cases it may be appropriate to outsource sustainment and partner with industry for the acquisition phase.120. 171Defence, Airborne Early Warning and Control Sustainment Performance Gate Review, 30 July 2015. ), Figure 3.4:Estimates of Service sustainment costs, 200607 to 202021. The use of the traffic light indicators Green (acceptable performance) or Amber (early signs of underperformance). Key Takeaways Accrual accounting records revenue and. 5.13Senior Bechtel representatives met with Defence officials again in December2015 and subsequently presented a new paper Delivering CASG Transformation. 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. 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. This Key Health Indicator serves to measure the quality and appropriateness of the work undertaken during maintenance periods. The cost of that workforce is not included in the internal price paid by Defence capability managers for the sustainment services provided by DMO/Capability Acquisition and Sustainment Group through MSAs. In particular, the other recommendations with substantial implications for the management of sustainment are as follows: 2.3 developing a new organisational design and structure as part of the implementation process for the Capability Acquisition and Sustainment Group with reduced management layers; 2.4 examining [and analysing] each Systems Program Office to determine where each fits within the smart buyer function, [and] the most appropriate procurement model [for delivering the capability] and achieving value for money; and, 2.11 significant investment to develop an operational framework which comprehensively explains how the organisation operates and the roles and responsibilities within it; a detailed set of life cycle management processes which provide project and engineering discipline to manage complex materiel procurement from initiation to disposal; and reviewing architecture to reinforce accountability at all levels and bringing together information upon which good management decisions can be made.123. 3.22In 2009 Defence commenced gate reviews for capital acquisition projects as an internal assurance process.55 They have provided insight into a projects progress and an opportunity for project staff to discuss difficult issues with senior management and seek guidance. Defence notes that the audit was conducted at a strategic level, and acknowledges the opportunities for improvement identified by the ANAO. A list of Systems Program Offices (including staff numbers, assets under sustainment and contracts) is at Appendix 1. Note a:In compiling the data underlying this table PMKeys Reporting is not able to identify all those organisational units now recognised by Capability Acquisition and Sustainment Group as Systems Program Offices. Ruth L. Kirschstein National Research Service Awards, Cost Considerations-Allocation of Costs and Closely Related Work, Cost Considerations-Allowability of Costs/Activities. 4.6The Strategic Reform Program comprised 15 separate streams of reform, several of which were intended to reduce costs.106 Overall, Defence expected the program to yield $20.6billion, to be reallocated within Defence over the following decade, with Smart Sustainment contributing $5.5billion of that figure.107 This would make sustainment savings the largest single source of funds under the Strategic Reform Program. 10Joint Committee of Public Accounts and Audit, Report 448, p. 30. 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. The government must be a smart buyer when purchasing assistance services and be able to make independent judgments about policy recommendations.206. The review recommended that the Defence Materiel Organisation should be disbanded and the transfer of its core responsibilities in relation to capability delivery to a new Capability Acquisition and Sustainment Group,[1] which took effect from 1 July 2015.[10]. For example, a commercial organization 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. Figure 3.3:Defence estimates of the cost of its capability sustainment program, 200506 to 202021. Outcome orientation Delivering what is required with processes, systems and tools being the 'means not the end'. Part of the context for this audit is to inform the Parliament as to whether Defence has developed its management reporting sufficiently to facilitate a program of ANAO assurance reviews of selected sustainment activities. 79Parametric cost estimates are based on historical cost data and mathematical relationships between those costs and other variables or cost drivers (for example, weight, area, volume). Fleet Screenings comprise a meeting or series of meetings between the Services and Capability Acquisition and Sustainment Group. the project was approved in March1999 with a budget of $1.58billion (December1999 prices). The women and men of the ADF through the capability managers (our customers). 19. Please direct enquiries relating to reports through our contact page. By July2011, the Rizzo Review stated that The Team recognises that Defence has a policy instruction on lifecycle costing However, it is considerably outofdate and compliance is inadequate. The real growth rate for the then recommended force structure option was 4.2 per cent. The reports traffic lights, in particular, focus attention on the measures contained in contractual and intra-Defence agreements (for example, aircraft availability) and not the measures that matter to Army, the end-user (aircraft actually able to be flown). Will future rises in fuel prices be subtracted from savings? (The Cost of Defence: ASPI Defence Budget Brief 201213, 2012, p. 138). Defence would benefit from evaluating future major change programs. An amended version commenced on 1 March 2017. According to generally accepted accounting principles (GAAP), manufacturing overhead must be included in the cost of Work in Process Inventory and Finished Goods Inventory on a manufacturer's balance sheet, as well as in the Cost of Goods Sold on its income statement. Further, performance summaries were highly variable and inconsistent between public planning documentsDefences Portfolio Budget Statements and Portfolio Additional Estimates Statementsand the Annual Report. Defence later recognised that gate reviews also have potential value for sustainment, especially where it allows management to become aware of maintenance problems that might otherwise remain hidden. endstream endobj 72 0 obj<> endobj 74 0 obj<> endobj 75 0 obj<>/ProcSet[/PDF/Text]/ExtGState<>>> endobj 76 0 obj<> endobj 77 0 obj<> endobj 78 0 obj<> endobj 79 0 obj<> endobj 80 0 obj<> endobj 81 0 obj<>stream The Materiel Ready Days measure is applicable to Platform related products only. 323. 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 Urgent Defect. 3.2The reporting system relied upon by Capability Acquisition and Sustainment Group and, before it, the DMO, to track major acquisition projects since mid-2004 has been its web-based Monthly Reporting System (MRS). Ten such products are listed in the report for the subsequent quarter (July September2016). Defects post Maintenance Period. Note b:These figures include Australian Public Service and Australian Defence Force staff. The Business Review Cycle provides for monthly Project/Product Performance Reviews (PPRs) and, at increasing levels of aggregation, Branch monthly reviews and Domain monthly reviews. The nature of the contracts provides an inherent disincentive for contractors to improve platform supportability of their own accord as the quantum of their financial reward is often directly linked to the volume of repairs conducted.150. The documentation does not specify which elements remained relevant. Materiel Ready Days Achievement, measured as a percentage achieved against planned reflects the reliability of the Mission System and the Support System. In a submission to the Joint Committee of Public Accounts and Audit inquiry into contract management in the Australian Public Service in 2000, Defence, through the then Under Secretary for Defence Acquisitionalmost a direct counterpart position to the current Deputy Secretary, Capability Acquisition and Sustainment Group stated that: Defence must see that it has available the technical, financial and managerial expertise to be a smart buyer. 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). 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. 0000001107 00000 n 14 of 51. . 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. The absence of asset management strategy resulted in poor obsolescence and a lack of reliability management and, consequently, a bow wave of reliability defects and obsolescence. 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. 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. 4.15Defence records show that the department made substantial efforts to keep track of the large number of diverse initiatives identified across the department under Smart Sustainment, including internal reporting to management. Chemical, Biological, Radiological, Nuclear and Explosive Equipment, Personal Field Equipment, Aerial Delivery and Adventurous Training Equipment and Combat Protective Equipment, and Special Forces equipment and needs. That data showed the performance of the Collins Class submarines fell well below that of international comparator submarine fleets.b The review also found the cost effectiveness (cost per materiel ready day)c of the international navies fleets was at least twice that of the Collins Class sustainment program. 59Defence Materiel Organisation, Zero-Based ReviewPhase 2, Final Report, 9 December 2003. 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. This was because of shortcomings in governance, program management, and Defences approach to reform.113 Its major findings include: 4.12A year later, in August2012, a Defence internal audit of Strategic Reform Program savings and performance reporting questioned the integrity of reporting and found it had focused mainly on reporting savings rather than achieving reform.114 A Defence update to Defence Ministers on the Smart Sustainment reform program (August2012) reported that: Currently more than 800 Smart Sustainment initiatives are either underway or planned; about half of these have quantified the estimated savings, equating to about $3.7b across the remaining years of SRP (against a residual target of about $4.6b). 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. The objective of the audit was to assess whether Defence has a fit-for-purpose framework for the management of materiel sustainment. depends on the type of organization (regardless whether domestic or foreign) making the expenditure. Table A.1:Key data for each of Defences Systems Program Offices: staff, assets and major contracts, Assets under sustainment/consumables supplied, Number of sustainment contracts with a value greater than $1million, Total value of contracts with a value greater than $1million ($m), Maritime domain (17 Systems Program Offices), Amphibious fleet (excluding LHD) and supply ships, Directorate, Maritime Operational Support, Maritime targets and ranges and Dock Management at Garden Island, Hydrographic fleet, minor fleet support vessels and Army amphibious fleet, Mine hunting and clearance diving materiel, Small, Medium, and heavy arms, and surveillance systems, All clothing and apparel for all ADF elements, Health materiel and combat rations for all ADF elements. 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. 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. A Smart Buyer collaborates with Industry and engages early and throughout the Capability Life Cycle. There had been limited progress on the 35 action items identified in the 2011 health check with seven action items implemented, five abandoned, and 23 outstanding (among which Defence intended to re-write 14). Navy, Army, Air Force units and Joint Logistic Command business units also conduct sustainment activities at a tactical level, inclusive of maintenance, inventory management and regulation of the technical integrity of materiel within units. The document details the Cost Principles that Defence Capability Acquisition and Sustainment Group (CASG) and industry will utilise as a framework towards contract costs and provides Defence and the CASG's expectations and clarity of what costs may be attributed to (cost-recovered from) the Commonwealth. This, it states, is to be measured tri-annually and reported annually for each year of the corporate plan. [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. 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. that the aircraft has not met, and is unlikely ever to meet, the required level of capability expected by government. Defence has advised that Collins Class sustainment cost per materiel ready day has decreased by approximately 40percent. The total spend was about $350000. Defence agreed to the recommendation that total cost information be provided to relevant Defence committees, with qualification. This is a risk in light of the systemic issue identified by Defence in its work towards reforming Systems Program Offices: SPO staff have limited experience, skills, and competencies needed to effectively establish, govern, and assure industry delivery of capability (see Box 3, p.23 of this audit report). 200.409 Special considerations. SeeCost Considerations-The Cost Principlesfor additional details. The First Principles Review observed that, at the project level, Defence treats staff as a free good (see paragraph 3.45), and the cost of those staff is a substantial omission from the apparent price of services facing the capability manager. The effectiveness of the reforms implemented following the 2003 Defence Procurement Review (the Kinnaird Review) were evaluated in 2008 by the Defence Procurement and Sustainment Review (the Mortimer Review).198 Mortimer made specific recommendations to improve sustainment, including that Defence create an independent Sustainment Efficiency Office to measure, benchmark, and find ways to improve the efficient delivery of sustainment. 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. 5.59Defence paid $5.5million over four years (201112 to 201415) for consultancy services related to its sustainment business model. Defence confirmed in March2017 that this risk remains. The idea is to establish a managed resource pool that provides skilled personnel for CASG activities. Defence does not yet have a completed register of its acquisition and sustainment contracts though, since January2016, it has had a facility in place and begun populating it. 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). SPOs vary widely in their shape, size, supplier relationships and services to Capability Managers.134. 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. Some terms are used in an unusual way, for example, expenditure of more funds than had been budgeted is referred to as an overachievement. 71Defence, Rizzo Review, Chapter 4, p. 29. 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.

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