AWD—Project of concern
When announcing the limited tender for the new supply ships, the
Minister for Defence made a direct link between the decision to restrict the
tender to two overseas shipbuilders and the productivity of local shipyards. Indeed,
he cited the 'current low productivity of shipbuilders involved in the AWD
program and value for money considerations' as two of three reasons for
proceeding with the limited tender.
At that time, he made his meaning clear when he said 'Australian industry must
be internationally competitive and meet international productivity benchmarks'.
References to poor productivity in Australian shipyards also cast a shadow over
an Australian build for the future submarine and, indeed, for the future of Australia's
naval shipbuilding industry.
There is no doubt that a number of Australia's major naval ship
acquisitions have experienced serious problems leading to cost and schedule
overruns, many of which should have been avoided, or at the very least anticipated
and managed better.
Indeed, both the sustainment of the Collins Class Submarines (added November
2008) and AWD (added June 2014) are on the projects of concern list. Projects
of concern are those acquisition projects or sustainment activities identified
as having very significant risks or issues relating to schedule, cost and
In this chapter, the committee's main focus is on the performance and
productivity of Australian naval shipyards in particular on the AWDs. But
firstly, the committee provides a brief update on productivity improvements in the
Collins Class submarine sustainment program.
In its second report, the committee noted the poor performance record of
the sustainment program for the Collins Class submarine but also the significant
improvements that have been made. Evidence taken since then confirms that
improvements in this program continue. According to Mr Andy Keough, ASC:
Prior to Coles [Mr John Coles undertook a review of the
sustainment of the Collins Class] there were concerns about productivity and
outcomes of submarine performance. Even before Coles came in there was a lot of
work done. We engaged with DMO to bring in an expert consultant to assist us.
It was jointly funded by ASC and the DMO. He shone a light on some of the
issues we had there, particularly in terms of low labour utilisation. From that
point of time seeing those problems, we then started addressing some of those
issues through clarifying the roles and responsibilities, and Coles then built
on the back of that through further changes to the roles and responsibilities
and setting up an enterprise arrangement where the Navy, ASC and DMO came
together under the submarine enterprise to improve the outcomes of the program.
Coles in his report in March 2014 noted the remarkable
turnaround. We are on track to obtain what he defined as being world-class
benchmark performance in the 2017 time frame. The major enabler for that was a
change to the maintenance routines for the submarines. We moved from a shorter
operating period to now a 10-year operating cycle with a two-year deep-level
maintenance activity. Prior to Coles those deep-level maintenance activities
had been greater than three years, and now we are halfway through delivering
the first submarine under that new operating regime for a two-year time line.
We are currently just ahead of schedule on that.
The committee also mentioned in its second report some of the changed
work practices and investment in infrastructure that has produced much improved
performances. Indeed, Mr Keough stated that much of the 'remarkable turnaround'
with the program being on track to achieve world-class benchmarks in 2017 had
been achieved through capital investment.
The construction of the maintenance tower was one of the most
significant innovations. This infrastructure has enabled the deep level maintenance
of the Collins to be done much more effectively and much more quickly.
According to Mr Keough the level of investment for the maintenance support
tower and the diesel test facility was in the order of $20 million.
ASC has also relied on engineering delegations, as Mr Keough explained:
We have done an engineering review of the maintenance
periodicity, which in some cases meant that we were doing a job every 12
months, and we have showed through analysis that we can safely extend the
period for those tasks from 12 months to 15 months. The 24-month tasks we have
shifted to 30 months. The 60-month tasks we have moved to 72 months. They are
things that do not relate to people's idea of productivity, but ultimately they
allow us to optimise the maintenance whilst maintaining the reliability and the
capability of the submarines and achieving better outcomes for the program.
Without doubt, these reforms have produced significant improvements in
productivity in the sustainment of the Collins Class submarine. In recent
months, however, attention has been on the performance of the AWD project. In
the following section, the committee provides some context taken from its first
report before considering recent developments with the AWDs.
The AWD project is being delivered through an alliance-based contracting
arrangement between ASC AWD Shipbuilder Pty Ltd, Raytheon Australia Pty Ltd and
the government, represented by the DMO. This project—to acquire three Hobart AWDs
and their support system—is one of the largest Defence procurement projects in
Australia and is intended to form a critical element of the ADF's joint air
warfare defence capability. It received first pass approval in 2005 and second
pass in 2007. The three ships are being built in Australia.
In 2010, signs of trouble surfaced in this key acquisition program. At
this time, difficulties were encountered in relation to the engineering and
construction of some of the first AWD hull blocks. To address this problem,
block work was reallocated between BAE, Forgacs and Navantia and the Alliance
Operational Schedule was amended. On 6 September 2012, following stakeholder
review and support for the time-line extension and resource considerations, the
then Minister for Defence announced that the AWD schedule would be
This measure would extend the period of work for the Alliance and its partners,
including the shipyards in Adelaide (ASC) and Newcastle (Forgacs). According to
the minister the revised project plan would:
reduce peak demand on project critical resources and facilities
and project risk;
not increase the cost of the project nor result in the loss of
any jobs; and
very importantly, help retain skills in the naval shipbuilding
The re-baselined construction schedule was intended to help the Navy
reduce the demands and risks associated with accepting into service two major
capabilities (LHDs and the AWD) at around the same time.
It is worth noting that at this time one of the challenges for the
contractor was starting production for the AWDs from a cold start and with a
reduced workforce. Further, the Melbourne BAE Systems shipyard was stretched,
working on two major projects at the same time—steel blocks for the AWDs and
the superstructure and integration of the LHDs.
Mr William Saltzer, BAE Systems, referred not only to the significant
challenge presented by the cold start, but problems with the drawings from
Navantia, which were produced to build ships in Spain. Firstly, he explained
what the cold start meant in practice:
...in Adelaide you had a brand new shipyard that was created to
produce AWDs and a workforce to be built. They had no previous history or
experience in building warships in Adelaide, so they had to go at it from a
cold start. In Williamstown, the last Anzac frigate was delivered in the early
2000s—I think it was 2004. We did not start building AWD blocks and LHD blocks
until 2010. In the interim, we had only a couple of small patrol boats to build
and our workforce went down to a very small number, so when it came to the
amount of work we had to do on AWD and LHD, we had to ramp back up to about
1,300 people. That was the cold start concept. It means you have to bring in
and rejuvenate a workforce, retrain people, get everybody used to working on
ships again, get your planning processes down and go through a whole
regeneration of the industry, essentially.
Secondly, Mr Saltzer pointed to the difficulties encountered with the
transfer of knowledge from the Spanish shipyard to Australia. He noted that drawings
in any shipbuilding program have to be customised, to be workable, according to
the build strategy, the equipment and the levels of training and knowledge of
the workforce that is going to actually build them. In his view:
One of the mistakes in AWD was that it was not built in to
the very front end of the program—to have that kind of transfer of technology,
that transfer of knowledge capability, built into the front end of the
contract. If you are not careful, you are going to do the same thing on
submarines and you are going to do the same thing on future frigate. You have
got to get the shipyards in Australia that are going to be involved with those
ships throughout their life involved from day one in the design, in the
production and into the in-service support.
Concerns about the project, however, did not abate.
On 18 December 2013, the Minister for Finance announced that, since the
Coalition had assumed government, he had received detailed briefings from key
stakeholders associated with the AWD program. In his assessment, there were 'clearly
issues associated with this important program' and he foreshadowed the
establishment of an independent review.
The review was intended to give government an independent perspective on all
the issues with the program and to make some recommendations on the best way to
On 25 February 2014, the Minister announced the appointment of former
United States Secretary of Navy, Professor Don Winter, and former
Transfield chief, Dr John White, to conduct jointly the independent review of
the AWD program.
While this review was underway, the Australian National Audit Office (ANAO)
released its performance audit report on 6 March 2014 on the AWDs. The
report, which was highly critical of the performance of the project, drew
widespread media and industry attention.
It noted cost overruns and delays in shipbuilding aspects of the program. In respect
of costs, the ANAO found that the current estimated cost in excess of the
Target Cost Estimate stood at $302 million. Moreover, the ANAO suggested that
this estimate should be treated with caution and the cost increase was 'likely
to be significantly greater'.
Turning to delays, the ANAO reported:
The delivery schedule for the three DDGs was revised in
September 2012 and is now some 15 to 21 months later than the original delivery
schedule (for ship 1 to 3).
On 4 June 2014, the Minister for Finance and the Minister for Defence released
a one-page summary of the findings of the Winter report, which listed the
causes for cost and schedule growth, identified options for improvement and one
In the joint media release accompanying the publication of this summary,
the Minister for Finance referred to the Auditor General's finding of a $300
million cost overrun with the AWD project. The minister announced that the
government would implement remedial action over the coming months designed to
get the AWD program back on track. In the minister's words, the implementation
of the proposed reform strategy would ensure that the AWD program 'delivers
this vital defence capability effectively and efficiently'.
The findings of the Winter report initiated a second round of reforms to
The Winter report
In its first report, the committee recommended that the government make the
Winter report public but the government disagreed, arguing that the release of
...could damage the commercial interests of the Commonwealth,
as its contents relate to a range of sensitive commercial negotiations that are
currently underway. The Government considers the report is highly sensitive in
relation to current and future shipbuilding tenders and negotiations.
The committee also wrote to the minister on 27 October 2014
requesting access to the report. The committee explained to the minister that
it believed the Winter report would assist it in its inquiry into the future of
Australia's naval shipbuilding industry. Indeed, as spelt out in the
committee's first report, although the information on the Winter report
released by the minister was sketchy in detail, it was used to damage the reputation
of ASC and, overall, Australia's naval shipbuilding industry. A thorough understanding
of the findings would not only have helped the committee in its deliberations
but have provided industry with a vital source of information. In this regard,
Mr Christopher Burns, Defence Teaming Centre, stated:
Until the report is released and the statistics are tested,
it has no validity and should not be used by the government as a means to
question the productivity of Australia's shipbuilding industry. The industry is
keen to understand and address the issues raised in the White-Winter review.
The government should release the report as a matter of priority.
Apparently the White-Winter review claims massive cost
blow-outs in the project. The most reliable figure quoted—a guesstimate—in the
media is $360 million over budget in an $8.5 billion project. That is a little
over four per cent. As the minister has highlighted, well-established shipyards
overseas regularly experience cost blow-outs of 50 to 60 per cent on first of
class construction of new designs.
Mr Burns noted that the bulk of the AWD's productivity issues were 'directly
attributable to the government's involvement in establishing the project and
imposing delays on the project'. He then observed that while overseas
colleagues were bemused by the Australian government's public criticism of the
shipbuilding industry, the comments did 'nothing to enhance the morale of the
workforce or the credibility of our industry in the global marketplace'.
The committee's request for access to the Winter report was not a whim. This
report appeared to be a crucial factor shaping the government's decisions on
the future of a number of major naval acquisitions. Understandably, the report
may well contain commercial-in-confidence or other sensitive material.
Appreciating the sensitivity of this information, the committee, when
requesting access to the document, suggested that if the government were
unwilling to provide a full and complete copy of the report, that the minister
consider providing a copy of the report with classified information removed.
The minister has not engaged with the committee to reach agreement on making
an abridged version available. It is also worth noting that a committee member,
Senator Nick Xenophon, has made a number of requests, through the Senate, for
the minister to produce the document but, again, to no avail.
Given the weight that the government attached to this report,
particularly its implications for the future of naval ship building in
Australia, the committee was staunchly of the view that defence industry
deserved to know more about the details of, and analysis underpinning, the
Winter report's findings. The committee again requests that the government
provide the committee with a copy of this document.
When announcing the findings of the Winter report, the government
indicated that it would adopt its recommendations in principle.
Accordingly, the government intended to engage commercial and legal advisers immediately
to assist in implementing the reform strategy, indicating further that:
We are committed to working collaboratively and
constructively with all stakeholders to ensure we realise both the national
security benefits as well as the long term benefits of this program for the
Australian shipbuilding industry in the most cost-effective and efficient way
Within two weeks of this announcement, the Minister for Finance
announced that, following a competitive procurement process, the government had
appointed key expert advisers to assist with the implementation of a reform strategy.
They were Greenhill & Co Australia Pty Ltd as commercial adviser and
Ashurst Australia as legal adviser. They were to start without delay to ensure
that the government's objectives for the AWD reform strategy were achieved.
To improve shipbuilding productivity at the shipbuilder ASC and its
subcontractors BAE Systems, Forgacs and Navantia, measures under the reform strategy
insert an experienced shipbuilding management team into ASC urgently;
after augmented shipbuilding capacity has been put in place,
pursue the reallocation of blocks between shipyards to make the AWD program
The Minister for Defence noted that this proposed remedial action was the
third remediation cycle for this program.
In the minister's words, the implementation of the reform strategy would 'ensure
that the Air Warfare Destroyer Program delivers this vital defence capability
effectively and efficiently'.
On 9 December 2014, the minister also announced that BAE Systems,
Navantia SA and Raytheon Australia would take on increased roles in the AWD
program for an interim period. Their increased involvement was intended to 'drive
immediate improvements in shipbuilding performance'. The minister explained
This focus on resolving outstanding productivity issues will
ensure opportunities to improve performance for the duration of the project are
The outcomes of this interim period will also inform the
Government's considerations on the Australian naval shipbuilding industry in
the context of the 2015 Defence White Paper.
This interim period marks a turning point in the performance
of ASC and its partners on this important project and will help renew
confidence in the future of Australia's shipbuilding industry.
The AWD Alliance Industry Participants—ASC Shipbuilder and
Raytheon—would continue to be responsible for the construction and delivery of
the three destroyers. According to the ministers, they were:
...committed to working collaboratively and constructively with
all stakeholders to ensure we realise both the critically important national
security benefits of this program as well as its long term benefits for the
Australian shipbuilding industry in the most efficient and effective way
Ms Jane Halton, Secretary, Department of Finance, explained that the
interim arrangements were to gain an understanding of the extent of financial
exposure and to allow a re-baselining of the project.
As part of that reform process, the ASC board recruited Mr Mark Lamarre,
as Interim Chief Executive Officer, ASC Shipbuilding. According to the
minister, Mr Lamarre brought significant shipbuilding experience to
Australia. He came from the United States naval shipbuilder Bath Iron Works and
had 25 years of shipbuilding experience, in several senior management roles. In
addition, contributors from BAE Systems, Navantia and Raytheon augmented the
capability of the ASC. In the minster's view these measures have produced some
improvements, 'in productivity and across various other indicators'.
In May 2015, Mr Lamarre referred to a five-point plan for improving
shipbuilding in South Australia, which included increasing shipbuilding
experience and some changes in senior management at ASC. He noted in particular
the experience brought in from Navantia and BAE to provide 'specific short-term
support, especially in the areas of engineering, planning, production,
implementation and tests'.
Recognising the importance of having the right people in the right places, he
We currently have the former director of planning from Bath
Iron Works, who has 33 years' experience. The former vice president of
operations is joining us in two weeks. He was at Bath for over 40 years. We
have a gentleman who was the former VP of support systems at HII Ingalls, who
is the other Egis shipbuilder in the United States. So we are really building
the largest team of Egis experience shipbuilders that we have here in
As noted in the committee's first report, the government drew a
connection between the findings of the Winter review and the decision to
undertake a limited tender for the supply ships, which excluded Australian
companies from tendering. It also used this report to warn Australian shipyards
of the need to improve their performance.
In its first report, the committee detailed at length the significant
problems experienced during the construction the first AWD, which demonstrated
the challenges building a first-of-class vessel especially starting with a depleted
workforce. Two major reports—ANAO and the Winter report—as well as assessments
of the then CEO of DMO, Mr Warren King, identified major failings with this
project. Indeed, this project highlighted the complexity of building a
first-of-class naval combat vessel, the over optimistic assumptions about the
preparedness of the Australian shipyards to take on the project and
unanticipated complications in knowledge transfer. As Mr Martin Edwards, ASC
Shipbuilding Chief Operating Officer, explained:
It is fair to say that there were some ambitious elements of
the program, and, as to the translation of the design, we have found that
taking it from a European shipyard which had not exported a design before into
a new environment has had its challenges. The impact of that was underestimated
from the beginning, and it has been the source of a number of challenges for us
in a program sense. So it has been a contributing factor to the outcomes we see
The reform strategy had only started in earnest by the time the
committee was preparing its first report in August 2014. Even so, by that time,
productivity improvements were already evident. Evidence provided since then
continues to show significant improvements.
Indeed, as construction on ship 02 has proceeded, the experiences gained
from the first ship have been applied to improve productivity performance on
this second ship. For example, ASC now have a number of Navantia people working
with personnel in the shipyard to help in the translation process. Mr Edwards
explained further that was not just language translation:
...it is actually methods of work, processes and inferred
knowledge they have in their shipyard and bringing that to the Australian
context. So it has been one facet of the program. It is something we have had
to deal with and overcome.
In this regard, ASC brought in consultants to work out ways to ensure
that tradespeople working on the ship have the right materials in the right
configuration when they need them. According to Mr Edwards, with ship 01 ASC
went through all the learning processes accompanying a first-of-class vessel—transitioning
the design, mobilising shipyards around Australia, mobilising all the supply
chain support elements and the workforce and learning the process of building
these ships. He accepted that this learning process had taken a toll on
productivity. With ship 02, however:
...we are seeing the improvement; we are seeing greater than 30
per cent cost performance improvement on the same stage of construction, and
similarly we are seeing up to 15 per cent improvement on ship 3 when we compare
the same stage of construction.
Applying the lessons and experience from ship 01, ASC was now bringing
work forward in the construction phase—doing things earlier. Mr Edwards
explained that ASC's engineering organisation was 'learning to make materials
more available at the right stage of construction, supporting all the things
earlier on—not dissimilar to how the automotive industry would work'. He
We are focusing on some productivity work in our shipyard
similar to what we did on Collins, which is supported by Denkin. We look at our
workforce utilisation—improving that, improving our work pack fill rate, which
is the supply of materials to the construction areas and all those elements
that feed all the work to be done. We are seeing the benefits of those...we are
working closely with the team, the alliance, and the reform team to try and
improve that situation and to give greater certainty and outcome from a cost
and schedule perspective.
Mr Edwards detailed further the improved productivity with ship 02 and
the changed work practices that are producing better performances:
...we install all the fittings, we install as much cabling and
pipe as early as possible in the production process...getting to that earlier and
in fact pushing that back to other areas of our supply chain in BAE and
Forgacs. If that work is finished there it can be more efficient and effective.
ASC was employing a simple metric called 135 or 138, which, when applied
in practice, means if an hour of work is delayed until later in a production
process it ends up costing more. Mr Edwards stated:
An hour of work in the fabrication facility, if it is translated
to the common user facility, could cost you three times that, and if you
eventually do that work in the water, it is up to five times that. That is the
challenge. For the shipyards and the mature shipyards we try and bring that
work forward to early in the construction process. The comment about outfitting
on ship 2 earlier all relates to that—getting the work done as early as
possible so it can be more productive and more efficient, and to reduce cost,
Employing such improved work practices is paying dividends. Mr Edwards
again referred to the boost in productivity, comparing work on ship 02 to ship 01
at the same stage of construction. Not only was ASC seeing a greater than 30
per cent improvement from a cost perspective with ship 02 but on top of that 'improvements
in the order of 15 per cent at the same stage of construction' for ship 03.
Added to that, we are getting the higher outfit levels which
will give us benefit later on to actually see consistent performance and improvements
in costs going forward. When we add to that the utilisation improvements we are
making with our workforce which are about material availability, we now have
that at greater than 85 per cent; our workforce utilisation has improved from
around 30 per cent to 60 per cent; so we are seeing a doubling in those basic
measures that demonstrate our workforce's capability to do the work. That is
the benefit we see on ship 2, and now proceeding to ship 3.
According to Mr Edwards, ASC had undertaken its own benchmarking in an
endeavour to compare first-of-class for AWD with, for example, the Arleigh
Burke program in the US. He informed the committee that:
We see a lot of similarities in cost profiles and the
challenges on the program. So I am not entirely sure from where the source data
comes for any comment about a premium or a 30 to 40 per cent premium. We are
happy to work with DMO to compare that information. Invariably, there are
start-up costs and mobilisation costs, and they are the things we see at the
start of a program.
Mr Saltzer, BAE Systems, similarly acknowledged that there was room for
improvement when it came to productivity with the AWD program. He insisted,
however, that BAE had demonstrated 'a significant amount of improvement'.
He stated that, based on independent assessments, BAE had achieved 76 man
hours on the AWD blocks and even better on the LHD. He explained further:
It is about 70 right now. And that is just one metric, by the
way. There are many metrics for productivity in shipbuilding. The compensated
gross tonnage is really a very high-level gross metric, and it is an
indication, but it is not the whole story. Any good shipbuilder will be
tracking a whole number of metrics: how many metres of cables that we pull and
how many man-hours it takes to pull those cables; how many metres we are
installing on this ship and how many man-hours it takes to do that. A whole
basket of measures exist that we measure all the time to monitor and identify
areas where productivity is not what it should be, so that is where we need to
go, act and adjust our processes and improve our procedures to make that
...we are where we should be according to predictions of
productivity experts that have been brought in to analyse programs like AWD and
LHD with regard to where we are in terms of continuous production, with regard
to where we are in terms of having first-class builds and with regard to where
we are in the future outlook for the industry that we have at the moment.
In its first report, the committee referred to compensated growth
tonnage as an indicator of the performance of Australian shipyards. It also
noted the then Defence Minister's observation in June 2014 that the
international benchmark was 60 man-hours per tonne, that Defence had set the
benchmark for the AWD program at 80 man-hours per tonne, but it was running at
150 man-hours per tonne...'
Importantly, based on First Marine International's (FMI) report, the
committee noted in August 2014 that BAE had made substantial improvements; ASC had
shown no demonstrable or noticeable improvement despite its efforts; and
Forgacs had deteriorated.
Evidence shows that BAE has continued on its course of performance
improvement. Indeed, in April 2015, Mr Saltzer explained that FMI, which had
provided reports to the AWD Alliance every year on productivity, suggested that
by the time BAE got to ship No. 3, it should be producing blocks somewhere in
the range of 80 man hours per compensated gross tonne. Mr Saltzer informed the
committee that, by BAE's calculations, it was operating below 80; and further,
the last time he checked, BAE was at 76, 'which is better than where we should
be on ship No. 3'. In his words:
Is it as good as they are in the US at the moment? No. Why?
Because the US has been in a mode of continuous production for more than 30
years...Ever since Ronald Reagan was president, that shipyard has had a
continuous flow of activity on submarines and aircraft carriers without one day
of gap. Here in Australia, our shipyard in Williamstown right now is facing
three or more years of gap. It is not viable.
Mr Saltzer also referred to the most recent FMI report on the AWD
program which showed a 'drastic improvement' in productivity on pipe work going
through the pipe shop. He explained that in this area and through a concentrated
effort, BAE had improved productivity about five times over. He explained:
...by going into the pipe shop, completely reorganising it,
revising all the processes that go through it, buying some new equipment so
that we could have more efficiency out of the equipment that we were using, and
training some of our people. We did a whole range of things, and it paid off in
improvements in pipe productivity, to the point where we now are actually
winning more pipe work on the AWD program, bidding it competitively to ASC and
winning that work.
There can be no doubt that BAE Systems through a concerted effort has
lifted its productivity significantly. More generally, it should also be noted,
as made absolutely clear in its first report, that a ship build becomes
increasingly more productive with economies of scale: that performance improves
as construction moves from ship 01 through subsequent builds.
Witnesses took the opportunity to again impress on the committee the
importance of taking this steady improvement into account. For example, the South
Australian Minister for Defence Industries highlighted the fact that a build
becomes more and more productive for the second and third ship. He informed the
Those who would criticise the ASC and Australian industry and
say that they are not sufficiently productive need to take into account that
they were tooling up and gearing up to produce an air-warfare destroyer when we
had not done something similar for a considerable period of time and we were,
if you like, starting all over again, having closed the show up significantly
many years before.
Mr Lamarre, Interim CEO, ASC Shipbuilding, also drew attention to the
improvements that had already been achieved between AWD ship 01 and ship 02,
which was better than a 30 per cent improvement. He explained that progress on
ship 02 was better than 40 per cent along. In his words:
Those are real savings in the bank. We have a trajectory that
is heading in the right direction. I am very optimistic about what is going on
there—that the plan that we are implementing is having an effect. We have seen
this sort of separation between ship one and two since about June of last year
, and we are now building on that to ensure that we can continue to bank
those savings and build on that for the future.
Ship three, in the block stage, the early stage of
construction is coming in at 15 per cent below ship two. We are really starting
to see some very significant separation of costs that are consistent and I
would say comparable against any other major service combatant shipyard here
that I have been exposed to.
In his view, productivity on ship 03 was heading in the direction that
would be comparable to other world-leading ships in the sense of costs.
He gave practical examples of where productivity gains had been made:
While we have a very keen and energised workforce who are
driving for improvements, early on in the measurements we were finding that
they were doing things that were compensating for management. So they were
spending a lower percentage of their time basically doing productive work that
is going to sail down the river with the ship. We have seen a 140 per cent
improvement in that metric between July of last year  to now.
We also measure discipline and performance to our plan of the
week. What we found early on in the process is that only seven per cent of the
time we were working the plan. For a variety of reasons you might work around
the plan, because of availability of all those things that you need and you
have to make an on-field call. Now that performance—actually working the plan
that has been laid out—is up to 80 per cent, there is significant improvement
in that metric as well. With work readiness, when it is time for tradesmen to
conduct the work—do they have the correct paperwork, do they have everything
that they need, is the ship in the position, is it ready for that work, has the
predecessor work been done, and so on—we have gone from 48 per cent to 90 per
cent on that metric. These are indicators that show that we are utilising our
employees and supporting our employees much better than we have been in the
past and as a result we are getting significant improvements.
Likewise, Mr Wardell used the LHDs to underline the
'enormous' productivity gains made with subsequent builds:
...on the LHDs from ship 1 to ship 2, just in two ships...there
has been a dramatic improvement in the quality and cost of the second ship...and
the benefit of it has been huge.
Mr Burns reminded the committee that the chosen AWD design had never
been exported or built outside its home shipyard and then, to oversee the construction,
an alliance was established that did not include the original
Mr Lamarre also noted that the business at ASC had been split into two
separate business units to allow the organisation to 'focus solely on the
submarine business and have specific leadership for that and broad oversight—as
well as the same for shipbuilding'.
On 14 April 2015, Mr Edwards, ASC, provided an update on progress with
the AWDs. The first ship was more than 70 per cent complete, being prepared for
launch and to undertake the final completion of its systems in readiness for
sea trials. Seventeen of the 31 blocks for Ship 02 have been consolidated on
the hardstand at the Common User Facility in Adelaide. Once ship 01 was
launched, ship 02 would take its place to finalise its consolidation.
Preparations were underway for the keel laying for ship 03.
On 22 May 2015, ship 01 was launched, which marked a major milestone and
provided an opportunity for the government to issue an update on the progress
toward removing the AWD from the project of concern list. On this day, however,
the Minister for Finance released the results of the 'forensic audit' on
the AWDs. The minister's media release was titled 'Air Warfare Destroyer
program still fixing serious legacy issues' and gave prominence to cost and
The committee now considers this cost review of the AWD program.
Comprehensive cost review or forensic audit
On 15 November 2014, the government decided that a comprehensive cost
review process would be undertaken by the AWD Alliance but also including BAE
and Navantia that were already participating in the interim arrangements for the
AWDs. During the second week in February 2015, the audit into the cost and
schedule overruns of the AWD project got underway. It should be noted that the
audit was conducted in the context of the reform process whereby interim
arrangements were in place to help lift productivity and performance at the ASC
shipbuilding business. According to the Minister for Finance, pending the
findings of this audit the government could then 'make appropriate arrangements
on a more permanent basis'.
The minister wanted to make 'absolutely perfectly crystal clear' that:
...the outcomes of the forensic audit were fully understood by
ASC, because they have been an integral part of the process of putting that
forensic audit together.
The minister indicated that the AWD Alliance conducted the forensic
audit in accordance with the appropriate standard, AS4817, on project
performance measurement using earned value.
Mr Lamarre explained that ASC participated with other members of the alliance
and with Navantia and BAE in the comprehensive cost review of the project. The
audit looked at where the project stood to date with costs. It also considered
what was left to be done and the risks and opportunities facing the completion
of the project. He explained that the review was an alliance-generated document
containing information confidential to some of the other parties. The review included:
...a more traditional cost-type scope view of the world that
also took advantage of other shipbuilders who have activated ships, because we
had only demonstrated so far in this program to the point where we were beginning to test the ship.
On 2 April 2015, Commonwealth departments received a briefing on the comprehensive
cost review and within the fortnight a report was provided to government. Just
over a month later, on 19 May 2015, the National Security Committee met and
considered the outcomes of the forensic audit, along with recommendations on how
to proceed as part of the reform strategy of the AWD.
Three days later, the government released information drawn from the audit and
advice on how it would proceed.
Findings of forensic audit
The primary findings of the audit showed that as of 22 May 2015, the
project was at least $1.2 billion more expensive than its original budget and was
running about 30 to 33 months behind for each of the three ships being built.
The Minister for Finance announced that the additional $1.2 billion would have
to be funded at the expense of other Defence acquisitions. Also noting the
significant delays, he produced the following revised delivery dates for the
Ship 1: Original delivery: December 2014—revised estimate: June
Ship 2: Original delivery: March 2016—revised estimate: September
Ship 3: Original delivery: June 2017—revised estimate: March 2020.
As with the Winter report, the government has not released this
comprehensive cost audit, even in an abridged form, to assist industry and
subject matter experts understand and learn from its findings.
The Minister for Finance announced that the 'forensic audit' had been
able to define the new baseline for the AWD project. Acknowledging the advances
in capability that had been made under the interim arrangement at ASC, the minister
explained that, given the cost and schedule overruns, the government would be
seeking to enter into a more permanent arrangement, to further build on these
To this end, the government would begin a limited tender process on 29 May 2015
that would seek 'proposals to either insert a managing contractor into ASC for
the remainder of the AWD build or to further enhance ASC capability through a
The work on the AWDs, however, would continue under the arrangement whereby
personnel from BAE Systems, Navantia and Raytheon would keep going with their efforts to improve performance.
The committee is disappointed with the overall tone of the announcement
on 22 May 2015, which chose to focus on the cost and schedule overruns and
failed to acknowledge or give due recognition to:
the source of the AWD's problems including starting production
from a cold start and with a reduced workforce and unanticipated complications
in knowledge transfer;
the well-recognised lower productivity performance on ship 01—a first-of-class;
the dramatic improvements in productivity as construction has
proceeded on ship 02 and 03; and
the broader economic benefits that have derived from this
At this point in the report, the committee believes it is important to
take particular note of the main findings of the Winter report relating to the
fundamental causes of the AWD's problems. In the review's assessment there were
two direct causes for cost and schedule growth:
the initial program plan for AWD development and production was
unrealistic in its cost and schedule estimates; and
the Alliance, as structured, composed and staffed, had been
unable to effectively manage the AWD Program.
It also identified the following contributing causes:
systems engineering on the AWD Program had been of limited
the AWD Alliance and ASC were unable to effectively manage the
AWD block subcontractors; and
the oversight provided by the Commonwealth of Australia has been
of limited effect.
Importantly, and relevant to this committee's inquiry, the review also
considered systemic issues that could affect any other naval shipbuilding
programs in Australia, and identified the following:
the limited base of shipbuilding activity in Australia materially
impacted the AWD Program; and
the Commonwealth of Australia has not developed a long-term
shipbuilding plan that can cost-effectively support the needs of the RAN, while
sustaining the Australian industrial shipbuilding base.
It is clear from the evidence presented to the committee that the source
of the AWD project's problems can be attributed to a poor understanding and
inadequate analysis of cost and schedule, and poor or inadequate management at
the Alliance and Commonwealth level. From the beginning, decision-makers failed
to appreciate the difficulties in transferring the design work to Australia,
where industry was trying to meet demands created by fitting out the LHDs and
starting on a 'first-of-class' vessel. There are clear lessons to be learned
from the AWD project. It is important to note that a number of factors that affected
productivity were outside the control of the people working on the ships. Two
systemic issues identified by experts such as Dr John White are that the
project was starting from scratch, and the lack of long term strategic
The committee is deeply concerned that the government has not released
either the Winter Report, or the more recently conducted comprehensive cost
audit of the AWD, even in an abridged form. The committee calls on the
government to release these documents as a matter of urgency to assist industry
and subject matter experts to understand and learn from the findings.
The committee recommends that the government provide the
committee with a copy of the 'forensic audit' of the AWD program.
The committee also repeats its recommendation contained in its
first report that the government release the report of the independent review of
the AWD program (also known as the Winter Report).
The committee understands that it may be appropriate for a public
version of both documents to be released with classified material removed.
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