Defence and Industry Study Course | Capability Acquisition and Sustainment
the relationship between Defence and industry for defence exports. . ▫ DMO procurement expenditure is the largest among government agencies. Improving opportunities for Australian defence industry through increased market diversification and leverage of Australia`s diplomatic relationships. within the Defence Materiel Organisation (DMO), to facilitate AMSO. On the other hand, Defence industry must also accept some responsibility for the problems. The DMO combined the Defence Acquisition Organisation, Support and relationships with stakeholders, including Defence staff and industry.
The government, however, did not agree with such recommendations. When the issue was raised during committee hearings, DMO representatives argued that there were no significant advantages in DMO operating under an executive agency model.
Changes have been made to templates and policies to reflect this requirement. The Joint PD is issued by the Secretary of Defence and CDF following second pass approval and it covers the time from that approval to the closure of the acquisition business case.
Before handing over leadership to the CM, changes made to a project's scope, schedule and budget at Second Pass must be reflected in the Joint PD and other relevant project documents. Once these changes are made, the acquisition agency assumes responsibility for managing the CDD and associated documents.
The draft MAA is finalised and approved by government after second pass. The DMO Acquisition and Sustainment Manual recognises that the responsibility, authority and accountability for management of the acquisition phase is vested in the DMO's line management, the 'focal point of which is the designated Project Manager for the acquisition project'. Furthermore, Mortimer highlighted that there can be gaps between what a project delivers and the expectations of the Capability Manager at the point of acceptance into service.
The MAA specifies the scope, schedule, price, milestone completion criteria and customer for work assigned to DMO for an individual project as approved by government. Where we are now, after the Mortimer review, is that the project directive, which is the enunciation of what governments agreed, is now formalised.
Again, all three signed to it. Pappas emphasised the importance of contractual conditions creating the right incentives for performance improvements and recommended that contracts should be structured to retain competitive tension at prime, second and third tier contractor levels, and ensure contracts include incentives for annual improvements.
The DMO Acquisition and Sustainment Manual notes that contract milestones are a requirement under the Statement of Work which details the work undertaken by the contractor with completion of a milestone triggering a milestone payment under the Conditions of Contract. Critical milestones, if not achieved, are intended to allow Defence to stop all contract payments until the milestone is achieved.
The ANAO's audit of the Super Seasprite project found that although critical milestones were included in the original contract for some design reviews, these protections were not preserved. Capability Development Group 6. CDG is responsible, therefore, for ensuring that performance meets cost, schedule and capability requirements approved by government.
Air Marshal Harvey continued: We will be involved in any discussions on clarification of exactly what the scope was and what the risks will be. We work on behalf of the capability manager and with the capability manager to see what was required and what the mitigation strategies are on the way ahead, how you might address the risk as you go through. So we keep involved throughout the process.
He noted that it was inappropriate to 'arbitrarily apply project contingency funding to facilitate changes in scope as the application of contingency would 'depend on a thorough analysis of the original project scope and the scope change envisaged'.
Capability Acquisition and Sustainment Group
The DCDH allows for any changes within the project parameters agreed by government to be considered and approved by authorised Defence officials. Such approvals are exercised providing the Capability Manager has concurred and 'there is no additional workforce requirement, or any adverse change to the risk profile of the project, or the whole of life costs to the capability system'. Whether a project baseline change is approved by Defence or government will depend on the Project Approval threshold and the accumulation rule.
CDG will provide information on whether a project will cost more and whether funds are available within the DCP to draw on. If it [the remediation plan] has a knock-on effect, for example, on other capabilities that are also being introduced under the DCP that are dependent on it or interrelated with it then the CDG look at those dependencies and the impact on the broader capability program we are introducing, to make sure we understand all the consequences of that remediation.
We need all three parties [CDG, DMO and Capability Managers] coming up [with] the solution, understanding the impacts of that solution and then implementing it.
The committee's proposed model presented in the following chapter addresses this concern. The committee recommends further that Defence ensure that such engagement with industry is a genuine two-way exchange of ideas and of information; and continue to support training programs such as Skilling Australia's Defence Industry SADI.
Defence Materiel Organisation's negotiations with industry Mr Coles could not help but gain the impression of 'highly-charged, difficult and often hostile relationships between the parties'.
In the past, some projects that ended badly such as the Super Seasprite, also demonstrated a breakdown in the relationship between Defence and the contractor.
They held that the relationship was often difficult or unproductive which could lead to project failures. It stated that the industry does not experience this adversarial approach when dealing with other areas of Defence such as the DSG.
It noted that capability managers, DMO and industry must together engage in the 'end to end analysis' of a capability 'to identify all opportunities for reform and hence efficiency'. For example, he said that industry needs to know whether there is going to be a tender out on time But if it is a moving feast then, after a while, industry will say no.
Even so, it should be noted that industry remains frustrated with DMO's failure to appreciate the business environment. Mr Priestnall stated that some DMO personnel have no commercial awareness of matters to do with cash flow and how businesses work. He gave an example of the chopping and changing in proposed dates for the release of tender documents. In his experience, better business practice on the part of DMO would mean that he does not find himself in a situation where he has to pay 10 project engineers and a project manager to sit around 'twiddling their thumbs'.
For a large company with deeper pockets, even though they are hurting, they can ride that out. They have multiple business streams. An SME, which are our powerhouse of innovation and entrepreneurship, cannot. As discussed earlier, DMO acknowledges it needs to develop a range of business and contracting skills within the organisation and to upskill its staff in how they deal with industry. Industry has a responsibility to its shareholders, to its organisation, to maximise its returns; it is obliged to by law.
We have generally a community of people that are not from a business background Similarly, by the way, as both public servants and as military folk, we do not really understand the drivers of industry as well as we might—cash flow; indeed, the need to make a profit. Contracting and risk sharing between Defence and industry But a major defence acquisition project is a business arrangement where the customer and the contractor are each seeking to extract the best deal. The challenge is to establish a legal arrangement that satisfies and benefits all parties fairly.
In this area, GAO cited some fundamental lessons to guide future decisions: At the same time, a flawed competition or contract award process can delay or disrupt an otherwise sound acquisition. A sound acquisition and contract strategy is essential to executing the acquisition within time and funding budgets.
Currently, the majority of Defence's contracts with industry are in the form of fixed-price contracts.
Partly as a result of these contracting arrangements, Defence has been able to keep most projects—even many with significant problems—within budget: For example, the GAO indicated that once the early acquisition planning is complete, Department of Defence 'must select contracting instruments that match the needs of the acquisition and protect the government's interests'.
Of primary concern during this phase should be the proper allocation of risk between the government and contractor and ultimately what is in the best interests of the government. Fixed-price contracts are generally considered to be the lowest risk to government because the onus is on the contractor to provide the deliverable at the time, place, and price specified in the contract. The government must understand the relationships between desired performance and cost and set goals that should keep the program within cost constraints.
The government should also use the contracting structure to incentivize private-sector contractors to design and build the submarine in the most cost-effective manner. Although fixed-price contracts can reduce risks of cost growth to the government, they are most appropriate when there is little program risk and uncertainty and when few changes are anticipated.
With the risks and uncertainty of a new program, especially one that differs in some way from previous programs, a cost type of contract is probably most appropriate.
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Whatever type of contract is used, both the government and the private sector should develop realistic cost and schedule estimates. Any differences in the cost estimates of the government and the private sector should be understood and discussed between the two parties with the ultimate goal of agreeing on the estimates and schedules. The public sector should be prepared to fairly compensate the private sector for taking on risk sometimes, some of these costs are not immediately apparent in the public sector.
At the same time, we need to be alive to the possibility that the private sector may offer to take on risks that it is not able to control with potential consequential implications for the public sector, both at an operational level and in terms of the project's value-for-money assessment. This risk-adverse management approach may have a downside. The Australian Industry Group Defence Council noted the need to ensure a proper sharing of risk between the Commonwealth and industry, especially for complex acquisition and sustainment projects.
It was of the view that Defence had the fundamental structures about right but that further work was needed to improve tendering and contracting arrangements. The Council recommended that, early in the capability development process, Defence identify 'the actual level of risk associated with every new major equipment acquisition and sustainment project'.
It suggested further that Defence tailor acquisition strategies to match the risk, including a proper sharing of the risk, between the Commonwealth and industry'. According to the Council, 'attention should be given to more flexible contracting arrangements, including Cost-Plus provisions during development phases of complex projects'.
The risk has been shifted to industry. We now invest in the facilities at risk. When the programs run late, we have to hold that cash outflow problem. It was received positively by DMO but then criticised by the capability manager for not meeting the operational requirement—because it had been years since industry had been contracted to deliver the project.
Chapter 14 – Parliament of Australia
Hence DMO receives what it asks for in each contract, and no more, as the provider concentrates on delivering the specification only. With the Collins program, although there were a number of technical risks with unpredictable outcomes, the Australian government used a fixed-price contract that greatly limited the flexibility that both parties needed when problems emerged.
As with the Astute, the fixed-price contract for Collins led to an environment in which ASC had no motivation to provide more than what it interpreted were its obligations under a poorly defined contract.
At the same time, the Commonwealth, fearful that it might be held liable for contract changes it could not afford, paid no more than the original contract price.