205See, in particular, D.F. 14For the great majority of Defences military assets, Capability Acquisition and Sustainment Group (CASG) is responsible for sustainment. The review considered the causes of this complexity, made comparisons with commercial organisations with similar operations and analysed the impact of this complexity on DMO. Defences view is that, once implemented, this initiative will improve Defences cost estimates for major capital equipment projects and will bring Defence practice into line with the approach adopted by capital intensive industries and Defence partner nations. The Australian National Audit Office (ANAO) is a specialist public sector practice providing a range of audit and assurance services to the Parliament and Commonwealth entities. 2.6As at February2017, Defence had some 64 Systems Program Offices, which manage the acquisition, sustainment and disposal of specialist military equipment. Develop and implement a strategy to address skills shortages in sustainment role. Encouraging Competition 6. 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. The First Principles Review recommended integration. 135These numbers are for 30 June 2016 and based on the pre-stocktake number of Systems Program Offices. 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. Further, Defences Capability Acquisition and Sustainment Group, is implementing reforms that will potentially increase reliance on industry to deliver these services. This chapter examines Defences governance and operational arrangements for managing the sustainment of specialist military equipment. 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). The DMO was given responsibility for purchasing, through-life support and disposal of military equipment assets, other than facilities and administrative assets. 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. 147A summary of the findings of the first tranche of Systems Program Offices reviews is set out in Chapter 2. Defence has clear and long-standing governance and organisational arrangements for managing the sustainment of specialist military equipment. 3. 3.57Defence provides information about sustainment in its Portfolio Budget Statements (PBS), Portfolio Additional Estimates Statements (PAES) and Annual Reports. Defence has had no central facility to maintain a register of contracts for sustainment (or, indeed, acquisition) until January2016. Honest and open behaviour which enables others to know exactly what Defence is doing and why. Defence has clear and long-standing arrangements for managing the sustainment of specialist military equipment. SeeCost Considerations-The Cost Principlesfor additional details. The implicit assumption is that future costs will be influenced by the same factors as past costs. 9Executive Minute on Joint Committee of Public Accounts and Audit Report No. 5.36Performance-based contracting was described in a chapter on managing sustainment in the DMOs 2007 Acquisition and Sustainment Manual, but not made a requirement or a priority.151 In 2008, a Defence internal audit evaluating the effectiveness of Defences use of performance-based contracting found that: the maturity of management systems for such contracts varied, there was inadequate central oversight and support, inconsistent contracting arrangements, and less effective outcomes in many cases. 5.3Otherwise, the report does not discuss sustainment as a topic separate from the acquisition stage of the equipment lifecycle. The first is a Defence internal review conducted in late 2015; the second comprises work done following the First Principles Review as part of the Systems Program Office reform and consolidation project. 47Defence, First Principles Review, p. 17. Defence has developed its own meaning for the term smart buyer, which does not clearly articulate the intent of the First Principles Review recommendation. This issue could be managed provided the scope of any sustainment review is appropriately selected. the experience, skills and competencies of Systems Program Office staff; [Systems Program Offices (SPOs)] not being able to manage to an effective asset management plan; Disrupted maintenance schedules, affecting availability and increasing costs; Shortened life of type, and increased whole-of-life cost; and. Therefore it was important to approach this from a Capability and Sustainment Group or Defence perspective.183. Defence had not established a strong case for value for money for the continual renewals of supplier contracts. 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. 187Defence Portfolio Budget Statements 201516, Table 94: Top 30 Sustainment Products by End of Financial Year Outcome 201516, p. 190, available from [accessed 20 April 2017]. 200This system was the Sustainment Performance Management System (SPMS). 1.1Defence materiel sustainment is about the maintenance and support of Defences fleets of specialist military equipment. 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 report of the Review, at various points, advocates outsourcing of work of a transactional nature but otherwise gives little guidance on criteria for outsourcing decisions. 6Defence Materiel Handbook (Sustainment Management) DMH (SUS) 4-0-001, September 2015, p. 1. These risks and issues are highlighted so that stakeholders can respond in a coordinated manner to guide the conduct of remediation actions. (These figures do not include DMO/Capability Acquisition and Sustainment Group staff costs. 146Defence, Systems Program Office Design Guide, August 2016, p. 7. Contracts with the principal provider are not performance-based. The use of the traffic light indicators Green (acceptable performance) or Amber (early signs of underperformance). Coles also draws an insightful distinction between acquisition and sustainment work in relation to submarines. In early 2018, CASG, the Defence group that acquires and sustains military capability, established a panel through which the overwhelming majority of contracted and consulting services to Defence are delivered. Poor Demand Satisfaction outcomes will ordinarily be reflected in the increase of Urgency of Need Designators A and B demands or directly in Priority 1 stores related Urgent Defect. The Support and Operating Intent of the capability are not being adequately articulated by Capability Managers, which results in: Activities assigned to the Services that affect asset management and asset condition are not being completed, and limited feedback is being provided to the Capability Manager Representative regarding the impact of non-completion on cost and availability. Information sharing about asset management was inconsistent and fractured. It is now too late to revisit these events; nonetheless, Defence could benefit from evaluating future major change programs. CASG Cost Principles V2.0 I 9 October 2017 Foreword The CASG Cost Principles support the Defence objective to standardise applicability and transparency of the cost basis used in Defence contracts. In 2000, when the expected benefits were not being realised, Defence reviewed Support Command Australia and the Defence Acquisition Organisation, finding that serious problems persisted in capital acquisition and whole-of-life support. 183Defence, minute Effective implementation of asset management in Defence, 17 September 2015. 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. 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. ", while the university would be subject to 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. Defence informed the minister there was a significant risk that Defence would fall short of the cost reduction target for the Program ($20.6billion) by some $4billion, almost one quarter of the remaining target ($17.6billion). In its 201415 Annual Report, Defence claimed to have achieved $2billion of savings from the initiative in its first five years. 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). Defences devolved and fragmented leadership approach to the program meant that Defence had no holistic vision of what the reform program was setting out to achieve, and therefore no logical program of work designed to support it. Mortimer also recommended that a general manager Commercial[5] position be created to implement a business-like focus throughout the organisation. Improving the How 4. Note: Military units also undertake some operational-level sustainment activities. However, Defence did not adequately assess that their intended outcomes were realised or enduring. 19. 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. Kettl, Sharing Power, Brookings Institution, 1994; and GAO/GGD-92-11 Government Contractors: Are Service Contractors Performing Inherently Governmental Functions?, 1991. Again, this presentation is not consistent as in certain years, for example, individual product sustainment costs are identified as separate line items.96 Nevertheless, Navy, Army and Air Force sustainment costs can be traced to identify trends. 3.41Defence also decided that, in the absence of tender quality cost information it would mandate an analogous78 or a parametric79 approach to developing cost estimates for all Defence major capital equipment projects. 22. Recommendations with potential Defence-wide application: 3. Similarly, in an international seminar on Defence acquisition in July2000, an issue identified by Defence at the time was the challenge to be a smart buyer. The Rizzo Review into naval sustainment raised this problem in the following terms: To avoid being seen to fail personally, there is a danger (especially in the can do, make do environment) that staff will choose to not raise bad news. There was/were: In all, Mortimer made 46 recommendations, with 42 accepted in full by the Government and three accepted in part. In essence, this First Principles Review recommendation is very similar to the finding of the Defence Governance and Accountability Review of 2000 which advocated outsourcing provided sufficient inhouse competency is retained to allow [Defence] to be a smart customer and that [Defence] has sufficient contract management capability. The ANAO work program outlines potential and in-progress work across financial statement and performance audit. In July 2015, Defence issued a request for quote and tasking statement to Bechtel. 5At the strategic level, guidance is given by the Chief of the Defence Forces Preparedness Directive. Similarly, the new Capability Acquisition and Sustainment Group Business Framework is expected to take many years to fully implement. Other, related GAO work has used the term in relation to the management of sustainment: privatizing total support on new and future weapon systems can make it difficult for the organic depots [equivalent to Systems Program Offices] to acquire and sustain technical competence on new systems, leading edge technologies, and critical repair processes necessary to maintain future core capabilities, provide a credible competitive repair source, and be a smart buyer for those logistics activities that will be contracted out.207. From the perspective of the field review, there is some indication that the sustainment models continue to drift apart.202. Indirect fire support, radar and ground based air defence systems and associated simulation systems. Note d:In late 2016, Defence estimated that the Collins Class submarine sustainment program would achieve international benchmarks for cost per materiel ready day by 202223. 174Defence, Ship Zero Concept, (QL131 Report) 10 October 2016, p. 9. In 2011, a health check by external consultants found some early successes with cost reductions and changes in practice.

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