Overview

17.  The management of projects' budgeted cost has been, to a significant degree, assisted by routine budget supplementation to deal with both price changes (via price indexation) and foreign exchange movement (via a whole- of-government 'no win/no loss' policy9); and the coverage of certain operating costs, such as staffing, from outside projects' budgeted cost. In this context, while projects' budgeted cost requires careful management by the DMO, this dimension of project performance has not been a major issue to date.10

18.  From 1 July 2010, all projects' approved budgets include the total price indexation, adjusted for the Specialist Military Equipment Weighted Average (SMEWA)11 or other appropriate index, to the point of the project's forecast Final Operational Capability (FOC). This is defined as the budget being 'out turned'.12 In 2010-11, this indexation adjustment resulted in a one-off variation to projects' total approved budgets of $1.16 billion. Under this model of price indexation, projects will only receive further indexation for fluctuations in the agreed index, or by Government approved real cost increase, where contingency funding has been exhausted or cannot be sourced internally by the DMO. Once the forecast FOC has passed, projects will be expected to manage price increases beyond the agreed index within their existing budget. This will require close management by the DMO to avoid project budget deficits, particularly in an environment of regular project slippage.

19.  While none of the Major Projects in this report has exceeded its approved budgeted cost13, the ANAO's analysis identified that the DMO had received a total of $295 million in price indexation, between the forecast FOC and the year ending 30 June 2011, for projects in the MPR sample, which are yet to achieve FOC.

20.  Maintaining Major Projects on schedule, the second major dimension of project performance, remains the most significant challenge for the DMO and industry contractors; in turn affecting when the capability is made available for operational release and deployment. The DMO data indicates that at 30 June 2011, the total time for the 28 Major Projects to achieve their FOC date is expected to be almost one-third longer than was originally planned.14

21.  In relation to the third major dimension of project performance, capability, the DMO expects to deliver almost all capabilities associated with the Major Projects in this report.15 This assessment by the DMO was outside the scope of the ANAO's review as explained in paragraph 10. Nevertheless, the ANAO continues to engage with the DMO on developments regarding materiel capability measures and the revised Materiel Acquisition Agreement (MAA) framework in order to enhance our understanding of the DMO's assessment of its own performance in the delivery of the materiel element of key capabilities.

22.  There are some indications that the assessment of capability is overly optimistic in some cases. Analysis of the information available indicates that some critical capabilities have been unavailable or are expected to be delivered below that initially approved. For example, numerous recent issues in the sustainment of the submarine capability have gained significant public and political attention, and have limited the availability of this capability to the Navy. Similarly, in respect of the MRH90 Helicopters, ARH Tiger Helicopters and Air to Air Refuel projects, the DMO's assessment of the capability expected to be delivered has declined in 2010-11 as compared to the original planned key capabilities for these platforms (refer to PDSSs in Part 3).

23.  Table 2 provides aggregate DMO data on the approved budgeted cost, schedule performance and progress toward delivering capabilities for the Major Projects covered in this year's report.

Table 2
Longitudinal analysis of schedule performance

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9  Defence Portfolio Budget Statements 2010-11, p. 26.

10  In the 2010-11 MPR, the DMO is reporting less than one per cent negative variation in the total approved budgeted cost and the total current budgeted cost for the 28 Major Projects. The net variation involves budgeted cost movements between Second Pass Approval to 30 June 2011 that are not due to price indexation, foreign exchange, government approved scope changes and transfers to other areas of Defence. See 2010-11 MPR, Part 2, DMO Executive Summary, Table 1, p. 106.

11  Australian National Audit Office, 2010-11 Major Projects Report, Part 2, paragraph 2.9, p. 148.

12  Australian National Audit Office, 2010-11 Major Projects Report, Part 2, paragraph 1.79, p. 136.

13  See Table 4, p. 51.

14  FOC is the point in time at which the final subset of a capability system that can be operationally employed is realised. FOC is a capability state endorsed by the government at Second Pass Approval and reported as having been reached by Defence's capability manager (usually the Service Chief). Major capital equipment can be in Defence service use before formally achieving FOC, such as in the case of Bushmaster Vehicles which are in active use by the ADF but have not achieved FOC.

15  This is discussed further in paragraphs 37 to 39.