casg cost principles

199In its 200809 Annual Report, Defence stated that to implement this recommendation, it had created the Sustainment Reinvestment Office to co-ordinate DMOs role in achieving the $5.5 billion in savings expected from Smart Sustainment under the Strategic Reform Program. 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. 120Defence, First Principles Review, p. 36. 93See Defence Annual Report 201516, Web Table 8.11, available from [accessed 24 April 2017]. The management of sustainment arises mainly in the discussion leading to First Principles Review Key Recommendation 2: Establish a single end-to-end capability development function within the department to maximise the efficient, effective and professional delivery of military capability.122. 2.9Agreements, internal to Defence, between the Capability Acquisition and Sustainment Group and each capability manager, set out the level of performance and support required by the capability manager.21 These are Materiel Sustainment Agreements (MSAs). requirements as long as they meet the standards prescribed in 2 CFR Part200.302 and 45 CFR Part 75.302 for financial management systems. 3.44The Mortimer Review (2008) observed that through-life maintenance and support account for more than half of the DMO annual budget and involve about two-thirds of its workforce. There is no record of target for these objectives. 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. The assessment method is to be Assessment of sustainment against capability manager requirements. An output measure, which directly contributes to the Material Availability and Materiel Confidence outcome. Its goal was to deliver projects and sustainment on time, on budget and to the required capability, safety and quality. This recommendation was not included in the summary of First Principles Review recommendations at the front of the report of the review, whereas the recommendations set out in the preceding and subsequent paragraphs of the report are included in that summary (recommendations 2.12 and 2.13 respectively). 157Defence, Report on Defence Governance, Acquisition and Support, (KPMG), April 2000, p. 51. That review found sustainment is still being treated as a poor relation compared to the generally higher-profile acquisition work.27 The Sustainment Complexity Review (2010), which found 50 plus sustainment business models in DMOs Systems Program Offices, explained this diversity by reference to the greater attention Defence had given acquisition. Based on Austender records, Defence also engaged two other companies, Cordelta and Eveille Consulting, to assist with the Business Framework. Procurement Framework 3. Defence materiel sustainment is about the maintenance and support of Defences fleets of specialist military equipment: the provision of in-service support for naval, military and air platforms, fleets and systems operated by Defence. Defence is not easily able to identify the effort, in terms of staff numbers, expended on each. Poor planningDefence lacked a clearly stated long-term strategic plan. SPOs prevented from engaging industry using optimised outcome-based performance contracts. Defence has recently improved its whole-of-life costing of proposals to acquire major capital equipment but remains unable to measure or report reliably the total cost of ownership. What Is the Cost Principle and Why Is It Important? - The Motley Fool The cash method provides an immediate recognition of revenue and expenses, while the accrual method focuses on anticipated revenue and expenses. Shared services: do not provide what is needed by SPOs, resulting in significant use of SPO staff on Financial Management and HR tasks. How to Prepare a Cash Flow Statement | HBS Online 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. For example, the category listed in the PBS Helicopters, Tactical Unmanned Aerial Systems and Guided Weapons no longer appears and the items are distributed among other categories. The Defence Audit and Risk Committee will therefore require appropriate information on sustainment reporting to enable it to provide this advice and assurance to the Secretary. 210In the latter case, this is in relation to having the technical knowledge to build the future submarine. Figures for 201516 are based on Defence advice with one-third of Capability Acquisition and Sustainment Group staff costs allocated to acquisition and two-thirds to sustainment. Defence planned to reallocate the $20.6billion to other areas of Defence capability and contribute to the governments 2009 Defence White Paper, Defending Australia in the Asia Pacific century: Force 2030. A key step in the MPR process is the preparation of a Project Data Summary Sheet for each project being reviewed. Sustainment costs can exceed those of the original procurement and the challenges can be more complex.26. SeeCost Considerations-The Cost Principlesfor additional details. 78The analogy estimating method uses actual costs from a similar asset/system and then relies heavily on expert judgement to adjust these costs to account for differences between the similar asset/system and the new asset/system to develop an estimated cost for the new asset/system. 107The Pappas Review examined a sample of equipment fleets and interviewed senior Defence personnel. Improvements are still being seen in Rate of Effort (ROE) generation, since the implementation of the renegotiated ARH Sustainment contract arrangement. 200.404 Reasonable costs. 176The Helmsman Sustainment Complexity Review [Helmsman Review], July 2010; Plan to Reform Support Ship Repair and Management Practices [Rizzo Review], July 2011; and Study into the Business of Sustaining Australias Strategic Collins Class Submarine Capability [Coles Review], November 2012. To form a conclusion against the audit objective, the ANAO adopted the following high-level criteria: 1.8The scope of this performance audit is the management of sustainment of specialist military equipment. 3.19In this case, the Quarterly Performance Reports usefulness is reduced by the following: 3.20The contrasting information identified in this case indicates that the Quarterly Performance Report would benefit from the application of a quality assurance process to ensure that government and senior Defence personnel are presented with a frank and balanced assessment of performance (see paragraph 3.27 below). This requires visibility of the total cost of ownership of major equipment. Final Operational Capability was declared with caveats by Chief of Army (CA) on 14April2016. 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. There has long been a strong internal perception in Defence that sustainment attracts less management attention than acquisition. Defences comments, and suggested editorial amendments, have been provided to the ANAO. This chapter examines Defences governance and operational arrangements for managing the sustainment of specialist military equipment. Specifically, the review identified instances where: 2.18Defence makes extensive use of external service providers and contractors to deliver acquisition and sustainment services. Such visibility would enhance Defences ability to benchmark its sustainment performance against allied countries with similar equipment. 13. 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. 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. Set realistic performance targets and document them in the Materiel Sustainment Agreements. We recommend this process cease immediately. However, they are in a different order, which may reflect changes in organisation following the delisting of DMO. During the course of this audit (9January2017) the Committee announced that it had commenced an inquiry into Defence Sustainment Expenditure. This method produces a rough order-of-magnitude estimate, and is generally used early in the life cycle of a new asset/system when technical definition is immature and insufficient cost data is available. 191Defence Portfolio Additional Estimates Statements 201516, Table 10: Capability Sustainment Programme, p. 21, available from [accessed 20 April 2017]. 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. Similarly, a new Systems Program Office may be created for a major acquisition project. To facilitate equitable distribution of indirect expenses to the cost objectives served, it may be necessary to establish a number of pools of F&A (indirect) costs. No estimates of the reduction are stated. 200.410 Collection of unallowable costs. 5.59Defence paid $5.5million over four years (201112 to 201415) for consultancy services related to its sustainment business model. 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. Appendix 5 of this audit report sets out both the root causes and those of the Coles Reviews consequential recommendations that have wider applicability in Defence sustainment. Cost Recovery Method - Definition, When to Use It, and Examples 212Senate Foreign Affairs, Defence and Trade References Committee, Capability of Defences physical science and engineering workforce, April 2016, paragraph 3.16. http://www.defence.gov.au/annualreports/15-16/Chapters/chapter-8.asp, http://www.defence.gov.au/casg/AboutCASG/Accountability/, https://www.nasa.gov/offices/ocfo/nasa-cost-estimating-handbook-ceh, http://www.finance.gov.au/resource-management/performance/, http://www.defence.gov.au/Budget/17-18/PBS.asp, http://www.defence.gov.au/AnnualReports/15-16/Chapters/chapter-8.asp, https://www.aspistrategist.org.au/graphs-week-finally-getting-collins-class-paid/, http://www.defence.gov.au/ADC/publications.asp#Geddes, http://www.defence.gov.au/Budget/15-16/PBS.asp, http://www.defence.gov.au/annualreports/15-16/Chapters/Chapter8-WebTable8.11.xls, http://www.defence.gov.au/annualreports/15-16/Chapters/Chapter8-WebTable8.2.pdf, Auditor-General's responses to requests for audit, Systems Assurance and Data Analytics Group, Professional Services and Relationships Group, http://www.defence.gov.au/Budget/15-16/PAES.asp, http://www.gao.gov/products/T-NSIAD-97-110, Defences Management of Materiel Sustainment. The audit had found, among other things, that it was not generally used in the in-service (sustainment) stage. 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. 2. 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. 200.409 Special considerations. SeeCost Considerations-The Cost Principlesfor additional details. Ruth L. Kirschstein National Research Service Awards, Cost Considerations-Allocation of Costs and Closely Related Work, Cost Considerations-Allowability of Costs/Activities. 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. As noted in Figure 3.2, Systems Program Office staff have numbered between three thousand and four thousand over the last decade. It is now planning to implement a new model, which seeks to capture the full cost of ownership throughout the life of an asset, with implementation planned for completion in July2018. An output measure, which directly reflects achievement against the Materiel Availability outcome. 95Since 201314, Defence has also reported estimates for sustainment by Defence Group/Service. Closure of the Materiel Acquisition Agreement and project closure will be completed during 2016. It also agreed that deviation from the endorsed approach will be permitted only in exceptional circumstances, and with the approval of Defences costing authorityits Chief Finance Officer. 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. 14 and 40). As an executive agency, the DMO would receive its own acquisition funding stream as a government appropriation, and would be headed by a chief executive with "significant private sector and commercial experience". 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. Defence has entered into sole source contracts with suppliers outside of the Defence system established to manage such arrangements. 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. Gate reviews are conducted to provide high quality and reliable advice to Defence and Government regarding the health and outlook of both acquisition projects and sustainment products. Capability Acquisition and Sustainment Group - Wikipedia 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. 2 CFR 200.400 - Policy guide. | Electronic Code of Federal Obsolescence will result in increased Urgent Defect, Cannibalisations and reduced Demand Satisfaction Rates. 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. [6], Ministerial statements in 2010 and 2011 suggested that the Government believed new procurement reforms were needed. 1.7The objective of the audit was to assess whether Defence has a fit-for-purpose framework for the management of materiel sustainment. Defence expected that the comprehensive reform benefits and reporting for the revised reform model would be further refined in the near future.116 The government agreed that Defence could cease reporting savings from Smart Sustainment and Defence undertook to report to government annually, detailing achievements and benefits of the new reform approach across productivity, cultural and ADF Service-specific reforms. Defence decided to migrate only material, high-risk existing contracts onto its central register. 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. 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. 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). 83Defence, FPR Implementation Committee paper, SPO Reform ImplementationAvoiding Cost Transfers, February 2017. According to the online course Financial Accounting: "The purpose of the statement of cash flows is to provide a more detailed picture of what happened to a business's cash during an accounting period." This was the case with the earlier Smart Sustainment reforms. 356), items such as Super Hornet fighter aircraft (operating costs) and C-17 transport aircraft (operating costs) are shown as separate line items. The DMO was to be accountable for whole-of-life materiel management, with Systems Program Offices comprising multi-functional teams to undertake the work. Some $360million was allocated as seed funding to be invested in projects intended to yield savings under Smart Sustainment. The tests are as follows: These four tests apply regardless of whether the particular category of costs is one specified in 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. 5.12Bechtel had made contact with Defence in July2013 seeking an opportunity to help with reform of the DMO, presenting a paper Australian Defence OrganisationDMO Transformation Opportunities. In February2016, the Deputy Secretary, Capability Acquisition and Sustainment Group, informed the First Principles Review Implementation Committee that the business framework project has commenced and been resourced to deliver a fundamental rebuild of all Group processes.159 The completion date was extended to 1July2016 and the objective was to have a High-level business framework approved. that the aircraft has not met, and is unlikely ever to meet, the required level of capability expected by government. REVISED DECEMBER2022. This matter is also taken up in the next chapter. The Department of Defence welcomes the Australian National Audit Office (ANAO) performance audit on Defences management of materiel sustainment. It is an estimate of the differential cost above that of the current capability and is included in submissions to government for approval. In March 2016, Defence extended Bechtels contract until 30 June 2016, which increased the value to $9.7 million. 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. However, Defence did not adequately assess the outcomes from the smart sustainment reforms. Step 2develop a risk-based tailored project execution strategy, covering approvals, project management, and through life asset management, including a coherent approach to the acquisition and sustainment phases. The second series, commencing in 201314, represents the reported totals for Defences capability sustainment program. 3.4This led to the commencement of work on a new IT system, the Sustainment Performance Management System (SPMS), in mid-2011 to replace the sustainment module in MRS.32 Defence agreed in August2012 to the continuing refinement and implementation of a shared Sustainment Performance Management Framework and reporting system for use in the sustainment of all products jointly managed by Defence and DMO.33 An objective of developing SPMS is that the system should provide the 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.34 This was contrasted with the MRS, which reportedly required substantial work-arounds requiring double and triple handling. 3.57Defence provides information about sustainment in its Portfolio Budget Statements (PBS), Portfolio Additional Estimates Statements (PAES) and Annual Reports. Figure 1.1:Defence acquisition and sustainment expenditure. Generally, this comprises a description of the asset and an account of the focus of Defences sustainment effort during the prospective year. 18. 3.32The First Principles Review found no direct measures of productivity in the existing management information systems, though some cost and schedule information is included in MRS and SPMS. Manufacturing Overhead Costs | Explanation | AccountingCoach 9Executive Minute on Joint Committee of Public Accounts and Audit Report No. 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. Smart Sustainment had a ten-year savings target of $5.5billion. Note a:Defence, Smart BuyerDetail Design, approved 20October2016, p.1. This month closes out the Financial Year total at 3995.2 against the planned 5848 hours, a result of 68.32 percent. 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. 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. 37The performance framework was set out in some detail in ANAO Report No.30 201415, Materiel Sustainment Agreements, p. 103 forward. Simplicity 26. These two positions make up the Defences leadership diarchy. 0000002372 00000 n The Reviews terms of reference included one specific reference to sustainmenta requirement that Defence ensure a commercially astute, focused and accountable materiel acquisition and sustainment capability. In July 2005, DMO became a Prescribed Agency under Australian Financial Management and Accountability legislation, meaning that although it remains a part of the Department of Defence, it was separately accountable to the Minister of Defence for its budget and performance. They identify, in general, the allowable and allocable items (see Section 2.0) of cost normally associated with MCC-financed contracts. Source: Defence, 2008 Audit of the Defence Budget, 2009, pp. 147A summary of the findings of the first tranche of Systems Program Offices reviews is set out in Chapter 2. 200This system was the Sustainment Performance Management System (SPMS). Smart Sustainment had a ten-year savings target of $5.5billion. This issue could be managed provided the scope of any sustainment review is appropriately selected. or one governed by other terms and conditions of an award. He described the areas where he expected they could make cost reductions, including by: reducing spares; more performance-based contracting; discouraging end-of-year spending to meet budget; travel efficiencies; and improved maintenance philosophies. 3.24Gate reviews can draw management attention to sustainment risks in individual fleets. 923. Platforms represent a large and complex capability such as frigates, tanks or aircraft. Poor product reliability has contributed to weak serviceability at the 1st Aviation Regiment in Darwin. 8Joint Committee of Public Accounts and Audit, Report 442, pp. It is now not clear whether Defence will continue with this work. 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. The Committee expressed the view, in May2015, that: Sustainment expenditure is currently at approximately $5billion per annum and predicted to increase significantly over time. Poor outcomes in the Key Health Indicator result in primary risk to Material Confidence outcomes (supportability) and secondary risk to achieving Material Availability. reliance on a mix of public and private equipment and facilities for sustainment activity. See Defence Portfolio Budget Statements 201718, Table 68: Top 30 Sustainment Products by End of Financial Year Outcome 201718, pp. These letters of assurance provide no details of the specific initiatives or how the claimed savings were calculated. Our staff add value to public sector effectiveness and the independent assurance of public sector administration and accountability, applying our professional and technical leadership to have a real impact on real issues. 41Defence was able to provide a report from SPMS for February 2017 showing Capability Acquisition and Sustainment Group cost per materiel ready day for five fleets within Maritime Systems Divisions responsibility. Defence defines sustainment as involving the provision of in-service support for specialist military equipment, including platforms, fleets and systems operated by Defence. Defence's Management of Materiel Sustainment Bechtels role is to support, train and transfer knowledge to Defence staff. Encouraging Competition 6. Further detail is provided in Appendix 4. These competencies include: specifying requirements independent of suppliers, working out where best to obtain those requirements; and knowing how to assess what they have received on behalf of the Commonwealth. Develop an Asset Management Strategy for sustainment. Note c:Defence defines a materiel ready day as a day in which a submarine is not in planned maintenance or does not have defects that prevent it from being at sea. Part of the context for this audit is to inform the Parliament regarding Defences approach to managing sustainment expenditure, including in the context of the current JCPAA inquiry, and to inform the ANAOs future program in this area. Funding Adequacy over the Defence Management Finance Plan. There remains potential to improve some core key performance indicators used within the systemfor example to more usefully determine the total cost of the capability to Defence. 145According to AusTender records, the cost of the review and resulting report was $613 000. It is also seen as needed to streamline and consolidate the Systems Program Offices. This Key Health Indicator relates to the Engineering Change Proposal action, which is yet to be finalised - either raised and not actioned or incomplete. 71Defence, Rizzo Review, Chapter 4, p. 29. Such cost reductions may be required to re-invest into inventory, obsolescence remedies, new infrastructure to manage an ageing fleet and the transition to future submarines. Notwithstanding these concerns, Defence adopted the term Systems Program Office where Systems Program Offices perform both functions. Defence has summarised Bechtels tasks under the contract as follows: The contract is fee-based with no performance measures. Significantly, the Coles review recommended that Defence develop an asset management strategy for sustainment (see Appendix 5 of this audit report) and Chief of Navy subsequently expressed a strong desire for a total asset management framework.174.

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