Chapter 5 Defence Materiel Organisation
This chapter of the report focuses on reform and procurement, projects
of concerns and selected major projects. In addition to this, the Committee
notes the large contribution that the Defence Materiel Organisation (DMO) makes
to force protection measures for ADF members on active service. Given current
pressures due to ADF operations in the Middle East DMO’s force protection role
is perhaps higher now than at any other point in its history and the Committee
commends DMO for this work.
The Committee also notes the following statement from the ANAO’s 2009 –
2010 Major Projects Report:
The large portfolio of projects that the DMO manages is also
one of the most complex and technically difficult in the country. Benchmarking
undertaken by the Helmsman Institute in 2009, comparing DMO and industry
project levels of complexity, indicates that the DMO projects are more complex
than the average of other industries such as IT, construction,
telecommunications, engineering and finance sector projects.
The Committee also notes the resignation on 7 July 2011 of Dr Stephen
Gumley the Chief Executive Officer of the DMO.
Reform and Procurement
Defence procurement has been the topic of much discussion, with
performance of the DMO being an issue of particular interest. This discussion
generally arises from failure to achieve Government expectations for timely and
cost-effective delivery of the capabilities needed to equip the Australian
Defence Force (ADF).
The responsibility for delivering this capability extends further than
DMO, with Government providing strategic and resource guidance, Capability
Development Group (within Defence, separate to DMO) guiding the future
acquisition process, the Services themselves as Capability Managers, and
Defence industry providing materiel and services.
The Kinnaird Review
The Kinnaird Review in 2003 commenced a process of cultural change and
organisational renewal, based on the following assessment:
As the body responsible for the management of major projects,
the Defence Materiel Organisation (DMO) needs to become more business-like and
outcome driven. But reform must extend beyond the DMO. It is clear that change
is needed at each stage of the cycle of acquisition and whole-of-life management
of the equipment that comprises the core of defence capability.
The Kinnaird Review’s recommendations were largely accepted by
Government, and a significant change process implemented. The key objectives
were as follows:
n A more systematic
approach to Government guidance and better clarity in advice to Government,
including enhancements to the Two Pass approval process.
n Early investment to
ensure quality advice to Government and better set the conditions for ultimate
project success (including: needs definition, enhanced cost estimation,
identification of whole-of-life costs, and project delivery considerations for
n Better oversight and
coordination within Defence of all capability and procurement activities (which
resulted in appointment of a three star officer as Chief of Capability
n Establishment of DMO
as “an executive agency within the Defence portfolio.”
n Greater control by
CEO DMO over military staff appointments, to ensure appropriate skill sets and
tenure in key project management roles.
n Measures by DMO to
enhance project management as a profession and invaluable skill set for Defence
The Mortimer Review
The Mortimer Review in 2008 assessed progress to date and made further
recommendations. These continued in the same direction as the Kinnaird Review,
and were aimed at addressing the five principal areas of concern identified by
n Inadequate project
management resources in the Capability Development Group
n The inefficiency of
the process leading to Government approvals for new projects
n Shortages in DMO
n Delays due to
inadequate industry capacity and
n Difficulties in the
introduction of equipment into full service.
The Review also noted that “greater business acumen and commercial
discipline” are required by the DMO. The Mortimer Review’s 46
recommendations were largely accepted by Government (42 agreed, three agreed in
part and one not agreed (DMO to become an “executive agency”), and
implementation is underway.
On 6 May 2011, the Hon Stephen Smith MP, Minister for Defence and the
Hon Jason Clare MP, Minister for Defence Materiel announced the “implementation
of all outstanding agreed recommendations made by Mortimer as a matter of
priority.” These include:
n Project directives
issued by the Secretary of the Department of Defence and the Chief of the
Defence Force to ensure Defence acquisitions progress according to Government
n Benchmarking all
acquisition proposals against off-the-shelf options where available.
Further to this, the Government also announced “a small number of
reforms that build on the recommendations of Kinnaird and Mortimer” to improve
project management and identifying problems early. They include:
n The introduction of a
two-pass approval system for minor capital projects valued between $8 million
and $20 million;
n Implementation of an
Early Indicators and Warning system;
n The expansion of the
Gate Review system; and
n The introduction of
Quarterly Accountability Reports.
Establishment of Independent Project Performance Office to oversee major
The Mortimer Review into Defence Procurement and Sustainment recommended
the establishment of an Independent Project Performance Office (IPPO). On 29
June 2011 the Minister for Defence and the Minister for Defence Materiel
announced the Independent Project Performance Office would begin operating from
The IPPO will be established within the Defence Materiel Organisation
n Conduct annual full
diagnostic reviews (Gate Reviews) of all major Defence capital acquisition
n Implement the new
Early Indicator and Warning system announced by Mr Smith and Mr Clare on 6 May;
n Implement the reforms
announced today to the Project of Concern process and oversee the remediation
of all Projects of Concern;
n Implement a ‘lessons
learned’ process as recommended by the Mortimer Review to improve the way projects
are delivered by learning from past mistakes and successes; and
n Assist project teams
to develop more robust cost and schedule information to improve the accuracy of
this information when it is provided to the Government.
To ensure there are at least two external members on every significant
Gate Review board an additional 14 independent experts with significant project
management and commercial experience will be contracted by Defence to act as
board members on Gate Reviews.
The Committee notes that, according to the ANAO’s 2009 – 2010 Major
. . .while projects have been managed within approved
budgets, schedule performance remains the key issue for delivery of projects.
The Committee is heartened by the establishment of the Independent
Project Performance office, however, it is concerned with how programs are
monitored and reported.
Projects of Concern
The Projects of Concern list was established in 2008 to focus the
attention of Defence and industry senior management on solving the issues
required to remediate listed projects. Projects are put on the list when there
are significant challenges with scheduling, cost, capability delivery or
The total number of projects placed on the list since 2008 is 18, with
seven removed. Six due to remediation and two due to cancellation.
From 2011, the DMO Annual Report will also provide an update on the
Projects of Concern list, including work being undertaken to remediate these
The current list as released by the Hon Stephen Smith MP, Minister for
Defence and the Hon Jason Clare MP, Minister for Defence Materiel on 1 February
2011 is as follows:
n CN10: Collins Class
Submarine Sustainment and Projects;
n AIR 5077: Phase 3 ‘Wedgetail’
Airborne Early Warning and Control aircraft;
n SEA 1448: Phase 2B
Anti-Ship Missile Defence radar upgrades for ANZAC Class;
n JOINT 2043: Phase 3A
High Frequency Modernisation (HFMOD) – communications and data exchange
capability for sea, air and land forces;
n AIR 5333: ‘Vigilare’
– Aerospace surveillance and command and control system;
n JOINT 129: Phase 2
Tactical Unmanned Aerial Vehicles – airborne surveillance for land forces;
n LAND 121: Phase 3 ‘Overlander’
replacement field vehicles, trailers and modules for land forces (‘Medium Heavy’
class of vehicles only);
n JOINT 2070: Lightweight
torpedo replacement for ANZAC and ADELAIDE Class Frigates;
n AIR 5402: Multi-Role
Tanker Transport aircraft – Air to Air Refuelling Capability;
n JOINT 2048: Phase 1A
LCM2000 Watercraft for Landing Platform Amphibious ships;
n AIR 5276: Phase 8B
Electronic Support Measures upgrade for AP-3C Orion aircraft; and
n AIR 5418 Phase 1:
Joint Air to Surface Standoff Missiles
The Hon Jason Clare, Minister for Defence Materiel also indicated that
meetings between Government, Defence and Industry would be held twice a year in
an effort to address remediation of these projects with the ultimate goal of
taking them off the list.
Reforms to Projects of Concern
On 29 June 2011 the Minister for Defence and the Minister for Defence
Materiel announced reforms to the Project of Concern process:
n The reforms include
incentives for companies to fix projects that are on the list.
n The performance of
companies in addressing Projects of Concern will be considered when evaluating
their tenders for other projects.
n If companies are not
satisfactorily remediating the project this will result in a negative weighting
against them and in extreme circumstances could result in exclusion from
further tenders until the project is fixed.
Other reforms to the Projects of Concern process include:
n The establishment of
a more formal process for adding projects to the list;
n The establishment of
a formal process for removing projects from the list;
n The development of agreed
remediation plans, including formal milestones for the removal of a project
from the list; and
n Increased Ministerial
involvement and oversight of the process.
Joint Strike Fighter
AIR 6000 will deliver a new air combat capability comprising around 100
Conventional Take Off & Landing (CTOL) F-35 Joint Strike Fighters (JSF) and
all necessary support, infrastructure and integration to form four operational
squadrons and a training squadron.
Australia joined the System Development and Demonstration phase of the
JSF Program in October 2002 and, through project AIR 6000 Phase 1B (approved),
undertook a program of detailed definition and analysis activities leading up
to Government second pass (Acquisition) approval for Phase 2A/2B Stage 1 in
Phase 2A/B will acquire no fewer than 72 CTOL JSF to form three
operational squadrons and a training squadron, with first deliveries in 2014 to
achieve Initial Operational Capability (IOC) in 2018 and Final Operational Capability
(FOC) in 2021.
Phase 2C (unapproved) is the acquisition of a fourth operational JSF
squadron to bring the total number of aircraft to around 100. The decision to
acquire the fourth operational JSF squadron will be considered in conjunction
with a decision on the withdrawal of the Super Hornet. A decision on this final
batch of JSF is not expected before 2015.
The first 14 Joint Strike Fighters, with infrastructure and support
required for initial training and testing, will be acquired at an estimated
cost of $3.2 billion. However, it should be noted that this figure is in ‘Then
Year’ dollars, i.e. it takes inflation into account, is based on a
Australia/United States exchange rate of US$0.84, includes a considerable
amount of contingency, and the proportion of the funds for aircraft is
considerably less for this phase than for the overall project because of the
higher proportion of broader project support elements for this first stage of
On current plans:
n Australia’s first two
aircraft will be delivered in 2014 in the United States. Australia’s first 10
aircraft will be based in the United States for a number of years for pilot and
maintainer training and operational testing. The next four aircraft will be
delivered in Australia in 2017.
n The first aircraft to
arrive in Australia in 2017 will have completed Block 3 developmental and
operational test and evaluation activities and will, therefore, be fully
capable of meeting endorsed Australian New Air Combat Capability requirements.
operational testing - primarily to ensure effective integration with other
Australian Defence Force air and ground systems - will take place during 2017
and 2018, leading to Initial Operational Capability in 2018.
n Subsequent aircraft
deliveries (leading to a total of no fewer than 72 aircraft) will lead to Full
Operational Capability of the first three operational squadrons being achieved
n In broad terms, the
operational cost of each aircraft as a component of a mature fleet of three
squadrons would be in the order of $200-250 million (using a reasonably
conservative exchange rate) over a 30 year life at the currently expected rate
of effort, or about $2.8-3.5 billion for the 14 aircraft currently approved.
The Committee enquired as to the provision for the New Air Combat
Capability – AIR 6000:
As advised to the Committee by Dr Gumley in July 2008, the
Defence Capability Plan (DCP) provision for our procurement of around 100 Joint
Strike Fighters was approximately $12-14 billion. The provision has not needed
to have been changed other than for adjustments for exchange rate and
Following the period of this review there have been many announcements and
issues relating to the JSF.
In an April 2011 report the United States Government Accountability
Office was critical of the JSF. It made statements as follows:
Expectations Are Challenged as JSF Acquisition Costs Rise and Schedules Slip
n Program Has Still Not
Fully Demonstrated a Stable Design and Mature Manufacturing Processes as It
Enters Its Fifth Year of Production.
Processes are Not Yet Mature Enough for Efficient Production at Increased Rates
n Aircraft Are Not
Meeting Early Reliability Growth Plans
n Testing Has Been Slow
and Has Not Demonstrated That the Aircraft Will Work in Its Intended
In his May 2011 paper for the Australian Strategic Policy Institute
(ASPI) entitled What’s Plan B?—Australia’s air combat capability in the balance
Andrew Davies outlined some of the issues of concern and indicators of future
cost effectiveness as follows:
The result is a schedule and cost estimate that is probably
still workable for Australia—but with margins for error that are much reduced.
The biggest risks are:
n The approved funding
for the initial buy of fourteen F-35s for the RAAF beginning in 2014 is
becoming very marginal. Additional cost increases could see those aircraft
become more expensive than budgeted. Planned later buys probably remain
affordable within the existing budget.
n On current plans the
full warfighting capability of the F-35 won’t be delivered until 2016 and the
US Air Force have moved their in-service date to some time after that—perhaps
2017. Australia may find itself moving to initial operating capability only
slightly later than the USAF. Additional slippages could further compress the
The fall-back options for the RAAF to manage these
n Costs: slip at least
some of the fourteen initial aircraft to later years— with the downside risk of
slowing the working up of capability.
n Schedule: for modest
further schedule slippage, keep the Hornet in service a year or two longer than
is currently planned—albeit at a higher cost and reduced comparative
capability. (‘Plan B’). For slippages of more than two years the most credible
option is a purchase of more Super Hornets. (‘Plan C’).
Neither of those options needs to be implemented now. But a
close eye has to be kept on the F-35 program over the next two years. The two
most important indicators are:
n the price of the
fourth and fifth production batches of F-35 compared to respective contracted
and estimated prices; and,
n the delivery of
software increments according to schedule and with the planned functionality.
RAAF officials told the Committee that:
n The JSF is
strategically the right aircraft for Australia; and,
n Despite cost and time
slippages the2017 delivery date has been confirmed.
Air Warfare Destroyer
SEA 4000 is a multi-phased project to acquire a multi-role surface
combatant with a strong emphasis on above water warfare. The Air Warfare
Destroyer (AWD) will incorporate an integrated Australianised Combat System,
which uses the USN Aegis Combat System, and a platform system based upon the
design of the Spanish Armada’s F-104 warship with specified changes from the
Previous phases were:
n Phase 0: Capability
studies undertaken between 2001 and 2002 (Complete)
n Phase 1: Project
definition between 2002 and 2005 (Complete)
n Phase 2: Project
design phase from 2005 to 2007 (Complete)
n Phase 3: Acquisition
and build of three HOBART Class AWDs and logistic support.
Construction of the lead ship commenced in March 2010 and the forecast IOC
Phase 4 provides for the acquisition of a maritime-based land-attack
cruise missile capability for the AWD that will provide the Government with
additional options to conduct long-range precision strike operations against
hardened, defended and difficult access targets, while minimising the exposure
of ADF platforms and personnel to attack by enemy forces.
Amphibious Deployment and Sustainment Program
JP 2048 is a multi-phase project to introduce an Amphibious Deployment
and Sustainment (ADAS) capability to replace and enhance the current amphibious
capability provided by two KANIMBLA Class Amphibious Transport Ships (LPA), the
Heavy Landing Ship HMAS Tobruk, the six BALIKPAPAN Class Heavy Landing Craft,
and associated Army landing craft.
The phases of this project are:
n Phase 1A – LPA
Watercraft (now cancelled);
n Phase 2 – Project
definition study (Completed);
n Phase 3 – LHD
Watercraft (not yet approved);
n Phase 4 A/B –
Amphibious Assault Ships - LHD (Approved);
n Phase 4C – Strategic
Sealift Ship (not yet approved); and,
n Phase 5 – Replacement
Heavy Landing Craft (not yet approved).
Bushmaster Protected Mobility Vehicle
A total of 737 Bushmaster Protected Mobility Vehicles are being acquired
in seven different variants (troop, command, mortar, assault pioneer, direct
fire weapon, ambulance and air defence).
All 300 Bushmaster Protected Mobility Vehicles included in the original
acquisition contract and all 144 Enhanced Land Force vehicles have been
Delivery of the 293 vehicles being acquired under LAND 121 Overlander
Phase 3 (Overlander) is on schedule, with 136 vehicles delivered as at 30 July
The development of the seventh and final variant of the Bushmaster
Protected Mobility Vehicle, the Air Defence variant, is progressing on
schedule. The prototype of this variant is due to be delivered to Defence in
The project has also delivered enhanced capability in support of
Operations in the Middle East Area of Operations, approved by the Government in
2007 as rapid acquisitions.
These initiatives have delivered 72 protected weapon stations, 116
automatic fire suppression systems and 116 purpose designed spall curtains.
Additional acquisitions in support of operations are being managed
through the Bushmaster sustainment area.
The project is currently working with the original equipment
manufacturer, Thales Australia, to certify the Bushmaster Protected Mobility
Vehicle for sustained towing.
Bushmaster Protected Mobility Vehicle sustained towing certification is
planned for completion in 2011.
Defence gave evidence to the Committee that the Bushmaster project was
currently on schedule and on budget.
The Committee has three main concerns regarding the JSF:
n schedule; and