24. The total budgeted costs for the Major Projects included in this year's MPR have increased by $7.8 billion (20 per cent) since these projects received Second Pass Approval. The $7.8 billion is comprised of price (materials and labour) variation increases of $7.6 billion16, real variation (such as scope changes and budget transfers between projects) increases of $3.7 billion, and foreign exchange rate movement decreases of $3.5 billion.17 Three projects have had a real budgeted cost increase since Second Pass Approval of greater than $500 million, namely the MRH90 Helicopters, the Hornet Refurb and Bushmaster Vehicles (additional quantities/upgrades).
25. Compared to 2009-10, the strengthening Australian dollar had less impact on project budgeted costs in 2010-11. In 2009-10, the budgeted cost of the 22 projects decreased by $3.8 billion (11 per cent) as a result of foreign exchange movements. In 2010-11, the reduction of the total budgeted cost for the 28 projects as a result of foreign exchange movements was $1.1 billion (three per cent), although this was offset by a $1.1 billion increase in the budgeted cost due to price indexation. In general, this again highlights the year-to-year volatility that can arise with projects exposed to foreign currency movements.18
26. In terms of forecast and actual expenditure, in total, the expenditure for the 28 projects at 30 June 2011 was $3.7 billion, against an initial forecast expenditure of $5.0 billion and half-year revised forecast of $4.0 billion. The main factors contributing to the variance were production/schedule delays, lower than anticipated Foreign Military Sales (FMS) disbursements, the transfer of funding of activities to sustainment, and foreign exchange fluctuations.
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16 Including $1.16 billion in out turning indexation as discussed in paragraphs 18 and 2.22.
17 An explanation of the definition of real budgeted cost variations is included in paragraph 2.18.
18 As Defence projects usually extend over a number of years, supplementation to project budgets to deal with labour and material price changes and foreign exchange variations is a standard budget feature. Out turned budgets include indexation that is provided at the inception of the project, based on the expected project completion date (see paragraph 18).