Background

1. The Army contributes to the achievement of the Government's defence objectives through the provision of capabilities for land and special operations. A major part of this capability is delivered through the Army Minors Program. In recognition of the importance of this program to Army as a source of real capability, in March 2006 it was retitled within the Defence Materiel Organisation (DMO) as the Army Capability Acquisition Program. The Program is one of the primary means of enhancing, replacing current, or introducing new combat capability within Army, and is designed to facilitate the relatively quick procurement of defined capability. Minor projects involve the upgrade or acquisition of equipment at a cost of between $0.5 million and $20 million, and are generally of less strategic significance and single Service or single Group in nature. Defence advised that Minor projects are still extremely important in terms of deploying capability.

2. Army Minor projects are diverse, including developmental projects, equipment replacement or upgrade projects, and minor low value procurement. In 2005–06, Army received 39 per cent of total Defence funding for the procurement of Minor Capital Equipment. The annual allocation provides the Chief of Army (CA) with discretionary funding. Unlike the Major Capital Equipment Program, Army Minor projects have not been managed through a global update process. The total allocation to the Army Minors Program is adjusted annually for inflation, while price variations due to the passage of time are managed on a project by project basis within that total Program allocation.

3. The submissions supporting a Minor project approval generally include the projected spend for the project across a five year timeframe. Procurement is generally scheduled to occur in the first two to three years, and expenditure in the subsequent years is to cover the first three years of in-service support. The expenditure forecasts do not factor in projected movement in price over time. In practice, many of the larger Army Minor projects have undergone a longer procurement process.

4. A more robust process for progressing Army Minor project proposals through to approval came into effect in November 2003. The process requires Army Minor capability proposals to be considered in a two stage process prior to project approval.¹ This process represents a more rigorous approach to that previously in place and, together with the requirement for Materiel Acquisition Agreements (MAAs)² between Defence and the DMO from 2005–06, will facilitate improved delivery of capability.

5. Following prescription of the DMO on 1 July 2005, the annual allocation for the Army Minors Program for 2005–06 of $64 million was prepaid to DMO. Land Systems Division (LSD) within DMO provides financial management services for the Program and, at the time of the audit, managed 82 per cent of the projects by value. The remaining projects in the Program are managed by other Divisions in DMO or by Army Headquarters (AHQ). The Army Minors Program included 85 projects as at 1 July 2005 at a total cost of $505 million.

6. The objective of the audit was to examine the effectiveness of Defence's management of the procurement of Minor capital equipment for Army capability. In particular, the audit focussed on the identification and approval of capability requirements; the management of Army Minors Program funding and expenditure; and DMO management of procurement processes for Army Minor projects. The audit focused on projects included in the Program as at 1 July 2005. As at that date, 85 projects were listed. Case studies illustrating particular issues in the management of the Program are profiled throughout the report in the relevant section.

Overall audit conclusions

7. The Army Minors Program is an important means of delivering enhanced, replacement, or new capability to Army. Capability delivered through the Program has included combat training simulation systems, combat clothing and protective equipment, tractors, trailers and other plant and equipment. As might be expected for a Program involving a large number of diverse projects with differing values and complexity of procurement processes, there was variability in the management of the projects.

8. The Program has experienced delays in progressing projects, and in the delivery of capability to schedule, in a large proportion of the top 20 projects by value. Those 20 projects received approval over the period 1992 to 2005. ANAO review indicates that three-quarters of those projects had either delivered capability later than the forecast date contained in the original project submissions, or revised the expected in-service delivery date where delivery had not yet occurred (see Table 1). In some cases delays have ran into many years, impacting on the quality or functionality of equipment available to Army. The cost for eight of the 10 projects for which capability had been delivered had increased due to time or changes in scope. Four of the current ongoing projects have experienced cost increases; each for the passage of time.

9. While some of the projects are late in terms of delivering the items sought, this does not always translate to a loss of capability. Defence considers that there are contingency plans to enable the rapid acquisition of items in the event of high priority need, and alternate commercial arrangements can generally be entered into for the interim provision of equipment.

10. Slippage in project schedules has impacted the ability to spend the annual allocation for the Program and at times has resulted in projects being progressed before capability requirements have been adequately specified. The principal factors identified by ANAO as contributing to project slippage, and consequent in¬year underspending against projected expenditure, included:

• unrealistic or over optimistic and unchallenged baseline schedules and budgets;
• programming of projects based on underdeveloped or poorly specified capability requirements;
• inadequate project management methodology, particularly scheduling and risk management, and poor project management discipline;
• inadequate staff allocation to projects;
• poor performance by, and inadequate supervision of, contractors; and
• project reviews focused only on budgets.

11. Since 2004, DMO and Army have put in place a number of initiatives to develop and align the management practices in the Army Minors Program with those of the Major Capital Equipment Procurement Program. The initiatives also address the broad reforms stemming from the Defence Procurement Review including prescription of the DMO and raising the profile and improving the management oversight of the Program. These are positive developments in the Program, and the successful implementation of these initiatives, together with the update of procedural guidance to reflect acceptable practice, will improve the overall management of the Army Minors Program and increase the likelihood of projects being delivered to the expected quality, cost and schedule.

Key findings

Funding and expenditure

12. Annual funding available for the Army Minors Program is based on an historic allocation with an annual adjustment for price indexation. The allocation is not based on planned individual project expenditure for the year. Funding allocated to Army is advanced to DMO as a prepayment, supported by a program of approved projects. Forecast project expenditure for 2005–06 exceeded available funds by $23.2 million. Over-programming of planned expenditure is a risk management technique applied by Defence in anticipation that, for a range of reasons, not all projects will achieve planned expenditure in the year. This acknowledges the complexity of some of these acquisitions, the fact that some risks are outside DMO control, and a history of project slippage. Prudently managed, over-programming in such circumstances is an appropriate response by Defence.

13. ANAO review of planned expenditure for the Program identified a pattern of downward revision throughout the financial years. For example, two months after the prepayment to DMO for 2005–06, planned expenditure had dropped by 29 per cent to a figure $2 million less than the prepayment. Against the background of significant changes in planned expenditure, over-programming has only been partially effective in managing slippage in the Program. This is principally due to the lead times to progress projects from finalisation of the specifications to procurement, and to the competing demands for DMO staff resources required for the procurement process.

14. In the financial years 2000–01 to 2004–05, expenditure was concentrated in the last quarter of the financial year, with an average of approximately 25 per cent of expenditure occurring in June. Defence advised that this expenditure spike is largely attributable to an annual procurement cycle that, by design, culminates with the delivery of a significant proportion of orders in the last quarter of the financial year. DMO advised that anticipated results for 2005–06 reflect a downward trend in the volume of expenditure occurring in June. This is a positive development resulting from changed work practices.

Program Management

15. In the cases where delays were experienced in progressing project submissions, the estimated project costs for older projects were not generally revisited prior to seeking project approval. ANAO identified recent instances of updates to cost estimates to take account of the passage of time for projects experiencing approval delays. This improved approach will better align approved costs with expected project costs.

16. The Defence Instruction for the Army Minors Program was issued in November 2003 and is no longer consistent with current practices. There is a need for that Instruction to be updated to reflect outcomes of the Defence Procurement Review of 2003, changed practices following prescription of the DMO in 2005, and improved governance arrangements implemented for the Program. The effective update of that instruction will require input from Army Headquarters, DMO and the Capability Development Group (CDG).

17. ANAO identified a high incidence of slippage in the actual and anticipated delivery of capability from original in-service dates for the top 20 Army Minor projects (by value) as at 1 July 2005 as detailed in Table 1.3 These projects received approval between 1992 and 2005, and collectively have an approved cost of $292.8 million. A number of the projects remained in the Program despite the capability having been delivered. Slippage can impact on the quality or functionality of equipment available to the Army, particularly where the delayed project is seeking to deliver enhancements to or replacement of existing equipment.

Table 1: Top 20 Army Minor Projects (by value) as at 1 July 2005

Notes: See Table 3.3 for relevant notes.
Source: ANAO analysis of Defence and DMO project documentation.

18. Five of the top 20 projects by value listed in Table 1 have been approved since the introduction in 2003 of the two pass endorsement process. The anticipated in-service date for three of these projects has slipped from the original proposed date, one of the projects is progressing to schedule, and DMO has advised that the other project is likely to deliver capability a year ahead of schedule. The cost for eight of the 10 delivered projects had increased due to the passage of time or changes in scope while four of the current ongoing projects have experienced cost increases; each for the passage of time.

19. An issue in compiling detail on the top 20 projects was access to approval documentation providing the mandate for projects. A repository of submissions has not been maintained. ANAO noted that this generally related to older projects and that AHQ now manages documentation supporting project approval in the corporate electronic document management system.

Procurement management

20. Staffing levels in LSD have been recognised as contributing to the difficulty in managing Army Minor projects to schedule. Issues that have impacted DMO's responsiveness to adequately staff projects include: the high concentration of projects in specific System Project Offices (SPOs); competing priorities to staff Major projects; the elapsed time in completing project approval; turnover and availability of project managers; and the actual duration of Minor projects.

21. Staff resource constraints are in the process of being addressed in LSD through the identification of additional positions required to effectively manage the projects, and recruitment to fill those positions. ANAO review of selected projects has highlighted the need to better identify and match project resource requirements with DMO staff availability in the approval stage.

22. Army Minor projects have generally been staffed with a single project manager within a SPO. Given the breadth of skills that can be required to manage a procurement process, the staff levels and skills set required to effectively undertake a project should be assessed. ANAO considers that the breadth of responsibilities assumed for Minor procurement projects generally warrants the allocation of experienced project managers to Army Minor projects. DMO acknowledged the value from allocating experienced project managers, subject to availability, but also the need to create opportunities to ‘grow' project managers.

23. The Bridge Erection and Propulsion Boat project was identified by ANAO as a recent example of an effectively managed Army Minor project. The capability was delivered to cost and revised schedule, and was accepted as consistent with the endorsed requirement. A high level of user involvement was evident and the project closure process was well managed.

24. ANAO identified a number of common issues in the review of several combat clothing projects funded from the Army Minors Program. The clothing acquisition projects had been managed as straight procurement rather than as projects. In each project reviewed, the contractual commitments exceeded the approved project costs and sustainment funding was utilised to cover the difference. At the project closure stage, quantities procured were not reconciled against approved capability requirements for the projects. Defence advised in June 2006 that, for items that have ongoing sustainment requirements, contracts are often raised that exceed project approval and that this is due to several funding sources being utilised to acquire the item and to allow ongoing support of the new or revised capability.

25. ANAO review of the combat clothing projects initiated in 2002–03 identified that the timing for their inclusion in the Program was driven by the perceived need to address anticipated under-expenditure against the allocation for the Army Minors Program. While approval documentation for the projects anticipated that expenditure would be realised within the year, only 35 per cent of approved funds for the projects reviewed were expended in 2002–03.

26. Closure for many projects in the Army Minors Program, as at 1 July 2005, was outstanding due to incomplete administrative action. Projects identified for closure represented nearly half of the projects included in the Program. The ANAO notes that an initiative in 2003 to table project closure reports at Review Committee meetings did not become standard practice, and that procedural guidance for Army Minor projects does not adequately detail the process or requirements for removing a project from the Program on satisfactory delivery of the capability.

27. In the case of the older projects in the Program, the ability to prepare project closure documentation is impacted by the delay following the delivery phase of the projects. This delay can result in a loss of corporate memory of the project and poor access to documentation supporting project management. The project closure documentation supporting the Land Sniping System Project is considered by ANAO to represent effective administrative practice.

Improved administrative practice

28. DMO and Army have put in place a number of initiatives to improve the management and governance of the Army Minors Program. The initiatives seek to raise the profile of Army Minor projects, to better align business processes with those of Major Capital Equipment projects, and to shift management focus from financial year spending to Program and project performance. Recent initiatives include the following:

• to better manage projects to schedule, the Improved Project Scheduling and Status Reporting (IPSSR) methodology has been progressively implemented for Army Minor projects during 2005. Timely use of this tool will aid in the programming of projects to realistic and well-founded schedules;
• to improve the management and timing of expenditure on low value procurement, programmed expenditure on miscellaneous serials from 2005–06 will be based on requirements identified by the June preceding the financial year in which expenditure is proposed. This will facilitate expenditure on a requirements basis as opposed to an allocation basis;
• to improve DMO capacity to deliver capability through the Army Minors Program, staff resource numbers have been increased. Finalisation of the recruitment exercise in 2006, to more than double previous staffing levels for Minor projects within LSD, will assist in improving performance against planned schedules for projects going forward; and
• to raise the profile of the Army Minors Program in DMO, in March 2005 Head of Land Systems (HLS) assumed the position of Chair at Review Committee meetings held three times a year.⁴ The format of these meetings also changed in March 2006 to strengthen management oversight of individual projects within the approved Program. All projects are now subject to a review by the LSD Executive prior to each Review Committee meeting.

29. ANAO considers that successful implementation of these initiatives will improve the management of current and proposed Minor projects, and thereby the effective delivery of capability through the Army Minors Program.

Defence and DMO response

30. Defence and DMO agreed with the relevant recommendations and provided the ANAO with the following response to this audit:

The Army Minor Capital Program is an important contributor to the delivery of new and replacement equipment that will enhance the performance of land forces, both in training and on operations. Many of these Minor Capital acquisitions are developmental and complex in nature, and demand appropriate project management skills. Army is reliant on the DMO and various supporting Defence Groups for successful delivery of the Program, and on the capacity and skill of industry to deliver on time, to budget, and to the requisite outcome.

Army and the DMO have taken significant steps in the last few years to improve governance, business processes, capability delivery, and financial performance of Army Minors. Some of these changes have already resulted in improvement to the management and timely progression of projects.

Footnotes

^{1 This contrasts with the process for progressing Major projects, where actual project approval is delivered in two stages and termed first and second pass approval.}

^{2 To support the capability development and equipment acquisition services for projects, MAAs were put in place in June 2005. The MAAs provide a high level agreement to commitments by Army as customer and DMO as supplier of procurement services.}

^{3 ANAO analysis used original in-service dates sourced from capability submissions as those documents supported the requirement for the capability and higher delegate submissions or approvals did not consistently include proposed in-service dates. Defence considered the use of the original date to be misleading indicating that, until recently, Minor capital projects were managed by endorsement of the original project submission and then fitting this into the program when funding and staff capacity were available. ANAO has included project approval dates for the top 20 projects by value in Table 3.3.}

^{4 The Army Minors Program has also been renamed the Army Capability Acquisition Program in a further effort to raise the profile of the Program.}