casg cost principles

An amended version commenced on 1 March 2017. SeeCost Considerations-The Cost Principlesfor additional details. However, even with higher rates of availability, improved fleet serviceability and Repairable Item (RI) turnaround time, flying hours are still lower than expected. The report assessed the maturity level of asset management policy and supporting guidance documentation only. apply to all NIH award instruments, award mechanisms, and special programs and authorities, including modular awards and awards under SNAP with one exception: they do not apply to Kirschstein-NRSA individual fellowship awards. FCF = Net Income + Non-Cash Expenses - Incrase in Working Capital - Capital Expenditures. 49 of 51. To address these problems, Support Command Australia, the Defence Acquisition Organisation and part of National Support were merged to form the DMO. The web tables are accessible through the on-line version of the Annual Report on Defences website, specifically at the end of Chapter 8. address four tests to determine the allowability of costs. The application of these cost principles is based on the fundamental premises that: (a) The non-Federal entity is responsible for the efficient and effective administration of the Federal award through the application of sound management practices. In the longer term the system is to be expanded to cover acquisition. Figure 2.1:Simplified representation of organisational arrangements supporting Defence sustainment of specialist military equipment. There is no record of whether the intended savings to sustainment costs were achieved from DMOs 2008 initiative to identify efficiencies. On its face, this is arguably of wider applicability: [Acquisition and sustainment each have] a distinct character, but need to be carefully linked to ensure a smooth passage from acquisition (design, build, test and commission) to sustainment (maintain, operate, support logistically). 2.1The ANAO examined Defences governance and operational arrangements for managing the sustainment of specialist military equipment, with a particular focus on the clarity of: 2.2Defence has clear and long-standing arrangements for the management of materiel sustainment for specialist military equipment. [17], On 13 February 2012, Warren King (former Deputy CEO) was appointed CEO.[18]. Defence received the final report in December2015.145 In August2016, Defence re-engaged the same consulting firm to complete reviews of a further 53 Systems Program Offices. However, Defence continues to address specific operational shortcomings and there remains scope for Defence to improve its performance monitoring, reporting and evaluation activities to better support the management and external scrutiny of materiel sustainment. As part of the governance system, create a forum to bring together all suppliers to raise issues and identify opportunities. 279280. 92See Defence Portfolio Budget Statements 201516, p. 21, Table 6: Capability Sustainment Programme; Defence Portfolio Additional Estimates Statements 201516, p. 21, Table 10: Capability Sustainment Programme. CAS Compliance Financial Services - Capital Edge Consulting A performance measure under this Purpose is Military capability is sustained consistent with Government requirements. The 2015 First Principles Review was preceded by earlier major reform initiatives, notably the Strategic Reform Program (SRP) begun in 2009. The availability of appropriately skilled, qualified and authorised staff (Navy and Civilian) to fill positions in the Systems Program Office and Capability Manager Representative organisations is a key contributor to all three of the Materiel Sustainment Agreement outcomes and a key constraint to long term Materiel Confidence. In that later report the list was labelled sustainment products of interest rather than underperforming, though the items are still listed in order of concern. 87Department of Finance, Resource Management Guide No. Unclear lines of responsibilityMany key sustainment roles and responsibilities were not clearly defined or understood, from both an individual and organisational perspective. Although the document provides a description of the intended new organisational structure and the functions and responsibilities of its elements, it is not apparent that a fundamental rebuild of all Group processes has yet been delivered. The former focused on availability (aircraft made available to the squadron), while Air Force focused on serviceability (aircraft actually able to be flown). Defence advised the ANAO that it would have been difficult to implement the contract as a performance-based contract: Unlike standard Defence capability projects, Bechtel has been contracted to develop Defences capacity and capability to deliver rather than for Bechtel to deliver itself. 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. 4. 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. External Maintenance Period Demand Fill Rate. According to the DMO website, the executive team has considerable private and public sector experience, as well as extensive military domain knowledge. 20In April 2016, Capability Acquisition and Sustainment Group defined a Systems Program Office as a business unit that works directly with Capability Managers and Suppliers as necessary to deliver agreed capability across the CLC [capability lifecycle], coordinating the FIC [fundamental-inputs-to-capability] elements required to achieve this objective. 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 201516 Defence Corporate Plan did not include an explicit reference to sustainment in the Purposes statement. As noted in Figure 3.2, Systems Program Office staff have numbered between three thousand and four thousand over the last decade. Develop and implement a strategy to address skills shortages in sustainment role. 3.42To provide the historical cost data to support analogous or parametric cost estimates, Defences Chief Finance Officer will build a database of historical costs and cost attributes. On 26 November 2010, the Minister for Defence, Stephen Smith, in adding project AIR 5418 Joint Air to Surface Stand-off Missile (JASSM) to the 'Projects of Concern' list, stated that the listing was because of "our poor management, our failure to keep government properly and fully informed about the project and its difficulties." Failure to pay sufficient attention to sustainment early on would increase the cost of ownership to Defence. Defence advised the ANAO in March2017 that it was looking into what became of the [unquantified] residual seed funds. Progress in implementing the quoted recommendation has not been explicitly tracked with the other recommendations such as 2.12 and 2.13 in regular reporting on progress of the First Principles Review. 5.3Otherwise, the report does not discuss sustainment as a topic separate from the acquisition stage of the equipment lifecycle. 38Defence, Navy/MSD [Maritime Systems Division of Capability Acquisition and Sustainment Group] Performance Framework Review, Summary of Issues and Recommendations, 4 March 2016. 207General Accounting Office, GAO/T-NSIAD-97-110 Defense Outsourcing: Challenges Facing DOD as It Attempts to Save Billions in Infrastructure Costs, 1997, pp. The second series, commencing in 201314, represents the reported totals for Defences capability sustainment program. 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). General Provisions for Selected Items of Cost: 200.420 - 200.476 200.420: Further, performance summaries were highly variable and inconsistent between public planning documentsDefences Portfolio Budget Statements and Portfolio Additional Estimates Statementsand the Annual Report. The report also includes an overview of projects of concern and underperforming acquisition projects and sustainment products. Free Cash Flow (FCF) Formula - Corporate Finance Institute Tiger is not currently deployed on operations. Defence should give sustainment much higher attention and priority during the initial phases of the assets life cycle (Needs, Requirements, and Acquisition). 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. 4.16Defence documents indicate that by June2013, it had determined that the Strategic Reform program targets were no longer valid and Defence was developing a revised approach to reform. 101Any savings in sustainment costs were to be retained by Defence for reinvestment primarily in operating costs for new equipment. This suggests that, where in-house expertise is not (or is no longer) available, expertise from industry could be bought in. See Defence Portfolio Budget Statements 201718, Table 68: Top 30 Sustainment Products by End of Financial Year Outcome 201718, pp. processes for documenting capability managers requirements around sustainment. 3.6SPMS was introduced, first, for Navy (MayJuly2015) following work to develop its sustainment performance framework with a standard suite of performance indicators.37 The system was being implemented in Air Force and Army from late 2015 through 2016. Kettl, Sharing Power, Brookings Institution, 1994; and GAO/GGD-92-11 Government Contractors: Are Service Contractors Performing Inherently Governmental Functions?, 1991. 3.64Published estimates comprise of two separate data series. Defence expects that all sustainment products will be reporting in SPMS by the end of June2017. The effectiveness of Defences internal reporting system for sustainment could be improved in several areas. When implemented, the system will be renamed the Program Performance Management System.42 In the long term, Defence intends to build an enterprise solution to encompass both sustainment and acquisition management and reporting using SAP software. Table94: Top 30 Sustainment Products by End of Financial Year Outcome, Under the heading Top 30 Sustainment Product Descriptions, Defence provides a description for each of the Top 30 sustainment products. 115Raytheon Australia, Smart Sustainment Solutions, March 2013. 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. The ANAOs analysis found that the report may not include additional information available to Defence that is critical to the readers ability to understand the status of significant military platforms. 0000001615 00000 n Asset management is not mentioned in the 2007 DMO Acquisition and Sustainment Manual. 5. 2.17In late 2015, Defences Audit and Fraud Control Division reviewed the contracted service arrangements within three Systems Program Offices in response to a request by Defences Chief Finance Officer Group. [13], In March 2009, the Corporate general manager of the DMO, Jane Wolfe, was dismissed for unsatisfactory performance. 200.407 Prior written approval (prior approval). The Defence Annual Report 201516 provides information relating to the PBS and PAES tables, referred to above, in online web tables. FIFO: What the First In, First Out Method Is and How . Defence subsequently provided the Committee with an in camera briefing (November2015), consistent with an option in the paper put forward by the ANAO. Defence's Management of Materiel Sustainment 153Defence [DMO], CEO Roundtable Discussions [Note: Document dated 23 July 2008. The system supporting the current AusTender site is described by Defence as in a state of decay as it is over a decade old and no longer viable to upgrade and sustain. 52Defence, Houston Review into Army Aviation, November 2016. In November 2016, the contract was amended and increased by $32 million. Defence has summarised Bechtels tasks under the contract as follows: The contract is fee-based with no performance measures. 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. Correct date believed to be July 2009.] This stream of activity is likely to take much longer than the two years expected for implementation. Defence has engaged Bechtel to assist [the] Deputy Secretary of Capability Acquisition and Sustainment, on an as required basis, to design and implement First Principles Review deliverables that relate to Capability Acquisition and Sustainment Group and its functions. They identify, in general, the allowable and allocable items (see Section 2.0) of cost normally associated with MCC-financed contracts. Develop enterprise-wide IT strategy and information management strategy. SPO overhead has increased through a number of avenues: i. 4.7Defences 2010 publication The Strategic Reform ProgramMaking It Happen stated: Defences budget to 2019 has already been adjusted to take account of the $20.6billion in reinvestment required for Force 2030this requires us to think less in terms of adding up savings and more in terms of living within our means.108. 200This system was the Sustainment Performance Management System (SPMS). In its 201415 Annual Report, Defence claimed to have achieved $2billion of savings from the initiative in its first five years. The term includes small and large businesses and is used interchangeably with "for-profit organization. [15][16] The case is said to have "significant implications" for the Senior Executive Service of the Australian Public Service, where legal challenges to performance decisions have been rare. 3.34Achieving value for money is the core rule of the Commonwealth Procurement Rules. Source: NASA Cost Estimating Handbook, v.4.0, 2015, Appendix C: Cost Estimating Methodologies, available from [accessed 21 December 2016]. The ANAO found that, 18months after implementation commenced, there had been limited progress. 175ISO 55000 is an international standard for management of physical assets. Defence further advised that approximately 850 contractors were employed in the Group in March 2017. 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. Poor outcomes in this Key Health Indicator will also have an impact upon the Sustainment Efficiency outcomes, as rework will require additional funding and stores to remedy. 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. 442, Review of the 201213 Defence Materiel Organisation Major Projects Report. However, they are not conducted according to any auditing standard. 99Some of those attempts are examined later (paragraph 5.54 forward). 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]. 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. The capability management role needs to be resourced appropriately to be able to take the lead roles of the asset owner and the sustainment customer. 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. From 1July2005 until the DMO was delisted on 30June2015, Defence reported its sustainment expenditure estimates in its Portfolio Budget Statements (and Portfolio Additional Estimates Statements). 205See, in particular, D.F. This was funding to be spent by DMO on sustainment on behalf of Defence.95 From 201314 forward, Defence also reported the estimated cost of capability sustainment for the whole of Defence. The ANAO has made a recommendation aimed at evaluation of the reforms now underway. Reporting and compliance was devoted to soft governance rather than to hard asset management decisions, based on sound financials, across the whole capability lifecycle. 3.11The 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.43 The report was developed in 2015 in consultation with the office of the Minister for Defence. An alternative approach is to manage a total project budget that includes employee expenses. Cash Management - Overview, How It Works, Problems When conducting procurement, an official must consider the relevant financial and non-financial costs and benefits including, among other things, whole-of-life-costs.63 Sustainment expenditure is a major contributor to whole-of-life costsin some cases, the largest contributor. 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. 48This is separate from the long-established Projects of Concern, which generally include acquisition projects rather than sustainment products. 3.36Numerous reviews and audits have urged greater focus on whole-of-life costs and better knowledge of the total costs of ownership of military assets, including sustainment, but have found that Defence has struggled to establish the skills, systems and data for this activity66: 3.37In recent years, Defence has generally estimated whole-of-life costs when seeking government agreement to a proposed acquisition. This is potentially useful information though not always written in clear language. In the Defence Annual Report 200405 (p. 242), DSTO nominated ensuring Australia is a smart buyer of defence equipment as one of the ways in which it supports Australias defence. 80An example of a potential comparator database is the US Navys Visibility and Management of Operating and Support Costs (VAMOSC) database. The ANAO has recommended that Defence institute a risk-based quality assurance process for information included in the Quarterly Performance Report. 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. Unclear sustainment requirementsDefence lacked a clear unclassified top-level operational requirement for the platform. 132Defence considered not using the term Systems Program Office as this could be confused with the use of the same term in the USA, where Systems Program Offices were said to be concerned only with acquisition and not sustainment. The PBS also contains broader commitments on sustainment management for example, the DMO will continue the implementation of a more standardised Sustainment Model to promote better and more consistent practice. For example, the Systems Program Office reviews are not yet complete and Defence has provided no evidence that decisions have been taken on any changes to their structure and functioning. The Defence PAES 201516 provides revised estimates for the 201516 financial year, the variation between the 201516 estimate from the PBS, and, for the Top 30 sustainment products, some explanation of the variation, plus a project performance update. 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. 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. 144The First Principles Review (p. 36) states: We consider that it would be possible to rationalise and reduce the Systems Program Office structure and staffing levels as more sophisticated contracting models are established and their individual support functions are consolidated as part of the service delivery reform. Note b:Man-marking is where Defence staff in the Systems Program Office supervise the performance of one or a small number of contractor personnel. Defence established Support Command Australia in August1997 to coordinate materiel support to Navy, Army and Air Force, and to help Defence do more with less. This prevents accurate lower level plans and targets (for example, for maintenance and operations) being established and achieved. 9Executive Minute on Joint Committee of Public Accounts and Audit Report No. 28The same issue continues to arise. 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. SeeCost Considerations-The Cost Principlesfor additional details. 2.19Following the First Principles Review, Capability Acquisition and Sustainment Group is undertaking a project to reform and consolidate Systems Program Offices. 4.4Defence informed the ANAO that it believed it had achieved a five per cent sustainment budget cut in 200809. There is a risk that insights into a very substantial reform process could be lost. Defence notes that the audit was conducted at a strategic level, and acknowledges the opportunities for improvement identified by the ANAO. Recipients may use their own accounting systems, policies, and procedures to implement the cost principle 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. For commodities, the maintenance component of the budget is comparatively small with replacement or replenishment being the dominant activity. 5.37Defence undertook substantial work in 2009 and 2010 to explore greater use of the technique so as to enhance Defences ability to meet capability preparedness requirements, and reduce the total cost of ownership.152 DMO advised industry CEOs at a meeting in July2009 that For greenfield sustainment and other new contracts there will be a greater focus on contracting for availability.153 Defence established a Performance-Based Contracting Centre of Excellence at that time and produced a new Defence contracting template with performance-based contracting integrated into it.154 Defence has claimed that almost all projects since 2011 have used a performance-based contracting template for materiel support services and have enjoyed the support of the Performance-Based Contracting Centre of Excellence.155 It has not been able to substantiate this claim (Box 6).

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