casg cost principles casg cost principles

3.27The ANAO recommends that Defence institutes a risk-based quality assurance process to ensure the accuracy, completeness and relevance of the information included in the Defence Quarterly Performance Report. Create a collaborative framework for the management of sustainment without diluting individuals responsibilities. 5.41The proposal to establish Centres of Expertise is reminiscent of the business improvement teams envisaged under the Sustainment Business Model project (Appendix 6), and a further similar proposal to establish a centre of procurement excellence recommended in 2000.157 The novel element is the adoption of a matrix management arrangement for the control and deployment of a range of areas of expertise. 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. 5.57A briefing to DMO Division Heads in September2011 summarised the shortcomings of Defences approach to sustainment in the absence of an asset management approach: 5.58In 2011, DMO set about developing a Sustainment Business Model drawing on generically applicable asset management principles.179 There is then little evidence of substantial progress of the project for some years. 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. 2732. 3.57Defence provides information about sustainment in its Portfolio Budget Statements (PBS), Portfolio Additional Estimates Statements (PAES) and Annual Reports. 143The First Principles Review (p. 36) states: The Capability Acquisition and Sustainment Group should outsource significant elements of the project management associated with sustainment contracts to an appropriate provider or providers We envisage efficient implementation would result in reductions in the public service workforce and the transfer of military personnel to other functions within Defence. It terminated upon the delisting of DMO. xref The second series, commencing in 201314, represents the reported totals for Defences capability sustainment program. Chapter 237 Principles of Antiviral Therapy. It provided no explanation of its inability to implement the recommendation in its advice to ministers on the matter. The women and men of the ADF through the capability managers (our customers). 13. a sustainment gate review of Air Forces Airborne Early Warning and Control fleet, which observed that all Systems Program Offices staff needed to be fully capable to deal with a complex platform and small fleet of aircraft. During the course of this audit the Joint Committee of Public Accounts and Audit (JCPAA) announced that it had commenced an inquiry into Defence sustainment expenditure. The ANAO examined the reforms to Defence sustainmentknown as smart sustainmentcarried out as part of the Strategic Reform Program from 2009 forward. Accountability and Transparency in procurement With the introduction of its Sustainment Performance Management System (SPMS), Defence continues to develop a basis for an effective monitoring system for sustainment. 73The ANAO examined nine Second Pass or Combined First and Second Pass approvals including submissions related to Army, Navy, and Air Force capital acquisitions. 3.35Defence major capability decisions have substantial longterm financial consequences for Defence and the Commonwealth budget. 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. The initiative was not prescriptive except that capability and safety should not be compromised by any savings proposal. The report is expected to be a direct acquittal of the performance measurement and reporting intentions identified in the corporate plan.87. For example, the Systems Program Office reviews are not yet complete and Defence has provided no evidence that decisions have been taken on changes to their structure and functioning. 137Defence, SMSIndec, Defence Materiel Organisation: Executive Summary, Future Operating Model, Work Streams 1 to 3, p. 17, 13 July 2015. <<964faa8c6ebb704a921f34cb193ed03f>]>> Asset management is not mentioned in the 2007 DMO Acquisition and Sustainment Manual. The Secretary of Defence and Chief of the Defence Force. 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. Also, it incurred related staff costs of $3.1million over six financial years (201112 to 201617). This Key Performance Indicator assesses conformance to Product operation within Statement of Operating Intent and the adherence to cyclical maintenance schedules. 202Defence, The Helmsman Sustainment Complexity Review [Helmsman Review], July 2010, p. 29. 113Defence, Smart Sustainment Reform Health Check, June 2011. Reform is expected to lead to greater outsourcing of functions currently performed in-house by Defences Systems Program Offices. Defence procurement guidance did not reflect some of the requirements of the Commonwealth Procurement Rules in place at the time of the review. 3.13This broad focus is consistent with Defence advice to the ANAO that some sustainment services for some equipment items are also undertaken by Capability Managers and other enabling Groups, including Joint Logistics Command.45 The primary data source for the report is SPMSthe 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.46 The approach, as advised to the JCPAA, also reflects the First Principles Review recommendation that an end-to-end approach should be taken for accountability for capabilitythe One Defence model.47, Figure 3.1:Preparation of the Quarterly Performance Report, 3.14However, Defence advised the ANAO in June2017 that the Quarterly Performance Reports primary focus is on products and projects delivered by the Capability Acquisition and Sustainment Group, and does not encompass the complete sustainment enterprise. Provide high level advice to Defence Senior Leaders on reform, business improvement and change management initiatives; Support the design and implementation of the new Capability Acquisition and Sustainment Group business framework; Assist Capability Acquisition and Sustainment Group in strengthening the project controls discipline across the Group including monthly reporting, business process improvement and cost transparency, mentoring and coaching Defence leaders, and providing advice on international best practice; Assist with implementing the smart buyer function across Capability Acquisition and Sustainment Group, including conducting pilots in Chief Information Officer Group and Estate and Infrastructure Group; Assist Defence redesign and restructure Systems Program Offices to align with required reform activities, including but not limited to smart buyer function, business framework and capability life cycle reforms; Assist Capability Acquisition and Sustainment Group with the establishment of the Commercial Centre of Expertise including business process improvement, mentoring and coaching Defence leaders and providing advice on international best practice; Assist Capability Acquisition and Sustainment Group with the establishment of a Program Management Office at the Group level to support the Capability Acquisition and Sustainment Senior Leadership Group in managing the program; Assist Defence to measure the efficiency gained through the above reform activities (in terms of both cost and schedule); Other reform activities as required by Defence. 1.6The ANAOs observations on this aspect of the audit are reflected in the Summary and Recommendations section of this report (paragraph 32 forward). MRS and, to an increasing extent, SPMS, are now used to populate a Quarterly Performance Report on both acquisition and sustainment (see paragraph 3.11 forward). 3.43In developing this new approach to cost estimating, Defence sought information from Defence partner nations about the structures, data and approaches they use to develop cost estimates for major capital projects. This has been achieved while managing risks to national security.2. Further, performance summaries were highly variable and inconsistent between public planning documentsDefences Portfolio Budget Statements and Portfolio Additional Estimates Statementsand the Annual Report. Defence advised the ANAO in March2017 that it was looking into what became of the [unquantified] residual seed funds. Delivering what is required with processes, systems and tools being the means not the end. However, based on the ANAOs review of a Quarterly Performance Report produced during the audit, its contents are neither complete nor reliable, it takes two months to produce and its contents are sometimes difficult to understand. Efficient, Effective, Economical and Ethical Procurement 7. 110The report did, however, make 25 recommendations to increase the chances of success and decrease risks in the Smart Sustainment Stream. Source:Department of Defence, Annual Report 201516, Web Table8.11 available from [accessed 20April2017]. Defence had not established a strong case for value for money for the continual renewals of supplier contracts. According to that consultancy, most savings were expected to come from sustainment and support functions. 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. Learn why the cost principle is an important principle for your small business. 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. This was, strictly speaking, a previous initiative. Bechtels role is to support, train and transfer knowledge to Defence staff. A Smart Buyer collaborates with Industry and engages early and throughout the Capability Life Cycle. How Are Principles-Based and Rules-Based Accounting Different? The cash method provides an immediate recognition of revenue and expenses, while the accrual method focuses on anticipated revenue and expenses. 29. The Tiger fleet achieved a total of 312.0 flying hours in June against a planned 698 hours. 29Defence, Operational Concept Document for DMO Sustainment Reporting System (Version A, December 2004, Sponsored by Director General Standardisation). Box 3: Systemic issues identified by Defence in the reform of Systems Program Officesa. Source: Defence, 2008 Audit of the Defence Budget, 2009, pp. Defence expects full implementation to take a further two years. 3242. Source: NASA Cost Estimating Handbook, v.4.0, 2015, Appendix C: Cost Estimating Methodologies, available from [accessed 21 December 2016]. 5.1The most recent major review of Defence, the 2015 First Principles Review, was a comprehensive examination with a suite of recommendations for reform. 3.16One potentially useful feature is a list of underperforming sustainment products.48 This is based on information provided through MRS, SPMS and gate reviews. 4. Note c:Defence, Current e-Procurement Projects, June2016. Information sharing about asset management was inconsistent and fractured. 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 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. 9. Defence subsequently provided the Committee with an in camera briefing (November2015), consistent with an option in the paper put forward by the ANAO. However, a September2015 assessment by external consultants of Capability and Sustainment Group policy and guidance against the requirements of the Asset Management Standards concluded180: While the organisation can demonstrate clear leadership and commitment to delivering and sustaining asset capabilities that meet its strategic business and operational intent, its ability to uniformly translate this intent into actions that demonstrate the consistent delivery of the business outcomes from its assets, is hindered by incomplete process documentation and [the absence of] an integrated Business Management System for its assets.181, 5.61The report noted that it is impossible to compare different operational business processes within the organisation, in order to determine which process is the most effective for the entire organisation, until the organisation has determined the base policies (rules) by which it will conduct the comparisons.182, 5.62The same view was reflected in advice received by Capability and Sustainment Group from the Chief Defence Scientist, also in September2015. The Defence Annual Report 201516 provides information relating to the PBS and PAES tables, referred to above, in online web tables. 3.62In summary, the ANAOs review of public reporting on sustainment activity indicates that: 3.63Defence has not published program level estimate data on a consistent basis over time, and no time series analysis is published by Defence to assist with external scrutiny of sustainment expenditure. 83Defence, FPR Implementation Committee paper, SPO Reform ImplementationAvoiding Cost Transfers, February 2017. These estimates, based on the latest available figures each year (generally from the Portfolio Additional Estimates Statements) are set out below (in Figure3.3) for the period 200506 to 202021 (the end of the current forward estimates period as at May2017). Decision-makers are empowered and held responsible for delivering on strategies and plans within agreed resourcing. 170This view is supported by a Defence Lessons Learned Report on the Tiger project (8 April 2015), which stated that The Commonwealth did not adequately enforce the provisions of the TLS [through-life support] Contract and if it had, then some of the dispute around sustainment performance may have been avoided. Tiger sustainment is continuing to mature. Defence analysed these targets and developed overall targets to finalise the Defence White Paper and design of the Strategic Reform Program. 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. 3.31To develop sound measures of efficiency, Defence also needs to understand the cost of ownership of its assets (see paragraph 3.34 forward) and to take account of staff costs in assessing the total cost of its activities (see paragraph 3.44 forward). Defences 201516 public reporting of sustainment activity included expenditure information and other descriptive material. 6. 122Defence, First Principles Review, pp. 178British Standards Institution, Publicly Available Specification for the optimal management of physical assets PAS 55-1:2008: Asset Management, cited in Defence, Defence Asset Management Landscape Document, May 2012, p. 1. In October2015, some four years after the Sustainment Business Model project started, Defences First Principles Review Implementation Team decided that work on developing the Sustainment Business Model, along with other reform within Capability and Sustainment Group at that time, would cease and the relevant elements were to be incorporated into the new Capability Life Cycle initiative. 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 examining why contracting out work to the private sector had not worked well during the Reagan administration, these studies find that government has often not proved to be an intelligent consumer of the goods and services it has purchased. We recommend this process cease immediately. 28. Note a:Navy Allowance (NAVALLOW) is the Navy logistics system. A performance measure under this Purpose is Military capability is sustained consistent with Government requirements. 5.2The report of the First Principles Review refers to sustainment in the discussion of its recommendation that Systems Program Offices each be examined and analysed: In some cases it would be appropriate to outsource completely the acquisition and sustainment functions conducted by a Systems Program Office. Failure to pay sufficient attention to sustainment early on will increase the cost of ownership to Defence. 2.12Navy, Army and Air Force policy requires six-monthly reviews of MSAs. The idea is to establish a managed resource pool that provides skilled personnel for CASG activities. Defence has engaged industry expertise to guide and help it with the First Principles reforms relating to acquisition and sustainment, including $107million with a single company where the contract for services is not performance-based. 181Defence, ISO55000 Gap Assessment, Capability Acquisition and Sustainment Group, September 2015, p. 6. It is an output measure, which directly reflects achievement against the Sustainment Efficiency outcome. 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. SeeCost Considerations-The Cost Principlesfor additional details. Please direct enquiries relating to reports through our contact page. 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. Foreword Introduction 2. 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. Retrofitting the necessary sustainment arrangements is more challenging than getting them right at the outset. 192Defence Portfolio Additional Estimates Statements 201516, Table 77: Top 30 Sustainment Products by End of Financial Year Outcome 201516, Appendix F, pp. Fuel and lubricants, combat clothing and explosive ordnance fall into this category, which makes up about 20percent of sustainment expenditure. 82In the case of the Smart Sustainment program (discussed later) Defence calculated any savings from the program on the basis of changes to MSA costs. 4.4Defence informed the ANAO that it believed it had achieved a five per cent sustainment budget cut in 200809. The real growth rate for the then recommended force structure option was 4.2 per cent. SPOs with a preponderance of contractor activity in acquisition include Submarines and those SPOs designated Project Offices., Table A.2:Navy Materiel Sustainment Agreement Performance Framework Core Key Performance Indicators. SeeCost Considerations-The Cost Principlesfor additional details. Although this largely represents the absorption and re-badging of the former DMO, other subsidiary recommendations are directed at substantial restructuring and reformulating the business practices in this part of Defence. 85Deputy Secretary, Capability Acquisition and Sustainment Group, 5 July 2016, email Message [to CASG staff]. The plan must include the purposes and activities that the entity will pursue, the results it expects to achieve and planned performance measures. These two positions make up the Defences leadership diarchy. Cost principle is the accounting practice of recording the original purchase price of an asset on all financial statements. It has the agility to refine those strategies as new information becomes available. Reviews have consistently emphasised the need for Defence to improve the efficiency of its operations, including in sustainment. 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. The Committee considers sustainment expenditure to be an area requiring further parliamentary scrutiny on the adequacy and performance of Defence involving billions of dollars in the future.10. Implementation is incremental and subject to feedback and review. The CAJWG has agreed on basic principles where by the standards should be based on work already performed and should reflect future best market practices(rather than solutions currently applied in most markets) that, once implemented, should dismantle the operational part of Barrier 3 as concerns the categories of C orporate Actions addressed. Coles also draws an insightful distinction between acquisition and sustainment work in relation to submarines. 157Defence, Report on Defence Governance, Acquisition and Support, (KPMG), April 2000, p. 51. 0000001107 00000 n 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. Defence advised the ANAO that Capability Acquisition and Sustainment Groups expenses on all employees in 201516 were $490.4million. 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. Such visibility would enhance Defences ability to benchmark its sustainment performance against allied countries with similar equipment. 68The Defence qualification was that The amount and type of LCC [life cycle costing] information presented to committees will vary according to the issues being considered and only pertinent information should be included. 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. 33. The cost principle may not take into account any increases in market value to the assets, nor can it report on the depreciation of the asset over time. The DMO was a half-way house with a separate chief executive and badging, but staff and funds continued to be provided by the department. The lack of understanding of whole-of-life costings and poor management of sustainment funding within Defence meant that the increasing levels of future cost reductions expected were at risk (the review estimated a shortfall of $1.8billion could increase to a $3billion shortfall).