40. Consideration of the DMO's governance and business processes is fundamental in both gaining the necessary understanding of the operations of the entity, and designing and implementing a test program for the ANAO's review. This test program includes the examination of the DMO's financial control framework, enterprise risk management arrangements and formal assurance mechanisms. Additionally, this year's report continues to monitor the effectiveness of Earned Value Management Systems (EVMS) data in the interest of improving the accountability and transparency of the management of Major Projects as highlighted by the JCPAA.28
41. Other relevant governance and business process areas covered in the ANAO's review included:
• the Gate Review process, which is designed to provide the Chief Executive Officer (CEO) of the DMO with assurance that all identified risks for a project are manageable, and that costs and schedule are likely to be under control prior to a project passing various stages of its life cycle;
• the Ministers' Projects of Concern process, which is designed to address project issues of concern to the DMO and the Government relating to cost, schedule and capability29;
• the DMO's business systems rationalisation, which is aimed at consolidating processes and systems in order to provide a more manageable system environment; and
• the project skills professionalisation and development program in the DMO and industry, which is directed at enhancing the skill sets available to manage the DMO's Major Projects.
42. During the 2010-11 MPR review, the ANAO continued to observe a lack of consistency at a project level in the application of various policies, practices and systems that are relevant to the provision of assurance over the information contained in the PDSSs. This extends to areas such as financial management, where some projects adopted a variety of financial management policies and plans; and to risk management, where a diversity of approaches at a project level impact on a consistent and strategic risk management approach at the whole of the DMO level.30
43. The ANAO also identified that, for some projects, there are issues with the accuracy and completeness of information in the current DMO systems for reporting on project status to senior management. This was highlighted in the case of reporting on Measures of Materiel Capability Performance, where indicators in the DMO's Monthly Reporting System did not always correspond with those presented in Acquisition Overview Reports (AORs) provided to the relevant Ministers.31
44. Nevertheless, there are a range of enterprise and project-level acquisition governance initiatives underway, although some, such as the inclusion of project level Gate Reviews in the DMO's risk control framework, are still in their formative stages. It is expected to take a number of years for the results of the Gate Review process to flow through across the portfolio of the DMO's Major Projects. An initial assessment of these governance initiatives and the outcomes they have been able to achieve, from the results made available, are outlined in Chapter 3.
45. From 1 July 2010, all projects' approved budgets include the total price indexation, adjusted for the SMEWA32 or other appropriate index, to the point of the project's forecast FOC. This is defined as the budget being 'out turned'.33 In 2010-11, this indexation adjustment resulted in a one-off variation to projects' total approved budgets of $1.16 billion. Previously, periodic34 price updates to budgets reflected movements in the Non-Farm Gross Domestic Product (NFGDP) implicit price deflator.35 As this new indexation measure has only recently been implemented, the ANAO has also reviewed how indexation is being managed at a project level, and the impact in areas such as the use of contingency budgets and general contract management, as part of its review for the 2010-11 MPR.
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28 Joint Committee of Public Accounts and Audit, Report 422, Review of the 2009-10 Defence Materiel Organisation Major Projects Report, April 2011, p. 36.
29 The Minister for Defence and the Minister for Defence Materiel maintain a process by which an increased focus on projects and industry is implemented in order to address project issues seen as significant by the CEO DMO and the Government.
30 Aspects of risk management in DMO Major Projects were also examined in ANAO Audit Report No.57 2010-11, Acceptance into Service of Navy Capability, pp. 114-117.
31 Source 1: The need for the enhancement of the DMO's project reporting and monitoring mechanisms has been highlighted in previous ANAO reports (see for example, ANAO Audit Report No.37 2009-10, Lightweight Torpedo Replacement Project, p. 20).
Source 2: The DMO has advised that, from the beginning of 2011, it has changed its monthly project reporting template to be more key metric focused and less narrative. The results of this enhancement have not yet been provided for review.
32 Australian National Audit Office, 2010-11 Major Projects Report, Part 2, paragraph 2.9, p. 148.
33 Australian National Audit Office, 2010-11 Major Projects Report, Part 2, paragraph 1.79, p. 136.
34 Australian National Audit Office, 2010-11 Major Projects Report, Part 3, PDSS, Section 2.1.
35 In the five-year period 2004-05 to 2008-09, the NFGDP implicit price deflator's average annual increase was 4.8 per cent (Australian Bureau of Statistics, Australian System of National Accounts, Cat. no. 5204.0, 2008-09, Table 26).